cumulative quizzes and cases

Question 1

our client, Alice, owns the following four different diversified mutual funds:

Growth fund $45,000
Emerging market fund$14,000
Government bond fund $50,000
Corporate bond fund$35,000

Alice is concerned about overall portfolio risk. She is concerned about standard deviation and other factors. Due to a recent inheritance, she has additional money to invest. To which among her currently held mutual funds do you suggest she add money?

Answer 1

The emerging market fund currently represents is the smallest percentage of the portfolio allocation and likely has the lowest correlation coefficient relative to the other funds. Reducing correlation coefficient would reduce the portfolio’s overall risk. The correlation coefficient to be highly important for the exam. (Somewhat subjective.)

Question 2

When, if ever, can a corporation that issues qualified stock options (ISOs) receive a tax deduction for the ISOs?

A.Never
B. Always
C. Yes, if the ISO is disqualified
D. Yes, if the ISO is qualified
E. Yes, if no more than $100,000 worth of ISO stock is granted that vests in a specific year

Answer 2

Yes, if the ISO is disqualified

The correct answer is C.

If the stock that was acquired under the option (right to buy) is sold before the two year /one year holding period, the excess of the fair market value of the shares at the time of exercise over the exercise price is treated as compensation to the option holder. That creates a corresponding deduction for the issuing corporation

Question 3

ou are a CFP ® certificant. Your client, Sam Watson is confused by the menu of “K plan” alternatives [401(k) type plans] offered by his employer, Fleopatra Medicated Dog Shampoos, Inc. Which of the following can you accurately share with Sam about differences between these plans?

I. For traditional and safe harbor 401(k) plans, elective deferral contributions are limited to $20,500 in 2022; for SIMPLE 401(k) arrangement, the maximum elective deferral is $14,000.

II. Traditional 401(k) plans must pass both the ADP and ACP tests; Alternatively, SIMPLE or safe harbor 401(k) plans require contributions at a level that is deemed to satisfy the nondiscrimination requirement.

III. In Traditional 401(k) plans the employer has the option of not providing matching contributions; safe harbor 401(k) plans are generally required to provide a matching contribution that is equivalent to 4% of participant compensation; SIMPLE 401(k) plans can satisfy requirements with a 3% match.

IV. Traditional 401(k) plans can permit a vesting schedule for matching contributions; SIMPLE and safe harbor plans must provide 100 % immediately.

Answer 3

All the statements are true. Where does the 4% safe harbor come from? The statutory contribution using a match is $1/$1 on the first 3% employee deferral and $.50/$1 on the next 2% employee deferral 3% + 1/2 of 2% is 4%. Please reference the prestudy for information. It’s a picky question - answer.

Question 4

Following the death of the grantor (trustmaker) which of the following strategies should be the most effective to reduce GSTT?

A. An irrevocable trust
B. A revocable trust
C. A reverse QTIP
D. A dynasty trust

Answer 4

C

The decedent can still use the GSTT exemption when the reverse QTIP is elected by the executor (after death). The dynasty trust is generally implemented before death.

Question 5

The CFP Board urges certificants to avoid the practice of borrowing from or lending to clients. Which of the following factors would generally be considered by the Board of Professional Review?

I. Whether the CFP® certificant is a financial planning practitioner
II. Whether the client is a family member of the planner or a financial institution
III. Whether the terms and conditions of the loan are reasonable and fair to the client
IV. Whether the client lent from his/her own account

A. I, II, III
B. II, III, IV
C. II, III
D. III, IV
E. All of the above

Answer 5

B. II, III, IV

Borrowing and lending between the planner and clients who are not family members can compromise the financial planning relationship.

Question 6

Todd wants to defer the distributions from the money purchase plan in which he participates for as long as possible. He works for RJ, Inc. RJ wants him to continue working for it beyond the plan’s stated retirement age 65. If he continues to work beyond 72 and contribute to the plan, what is the latest time when he can take his first distribution and not be penalized?

A. When he attains age 72
B. By April 1st of the year after he turns 72
C. When he retires from his job with RJ, Inc.
D. By April 1st of the year following the year when he retires from his job with RJ, Inc.

Answer 6

D. By April 1st of the year following the year when he retires from his job with RJ, Inc.

Todd is a rank-and file-participant in the money purchase plan and clearly not a 5% owner. Thus, he may delay his required beginning date (RBD) from the plan until April 1 of the year following the year when he retires from service with this employer.

Question 7

When you met with John and Jodi Adams for your regular monitoring meeting, they provided you with information about new developments in their lives. After you congratulate them they ask you to help them prioritize the reasons for making changes to the original financial plan that you wrote for them. How would you rank the changes listed below in order of importance from highest to lowest?

1. They inherited money from Jody’s mother
2. Jody is expecting a second child in 2 months
3. John just received new job promotion which entails a move to an adjacent state (50 miles away).
4. The adjacent state has a high state income tax

Answer 7

They are already in order :)

Identify the most important and the least important reasons to modify the original plan. The Adams’s will need a plan for the inherited money. The state level income tax differential is likely to be small. If the Adams’s itemize, it may produce an itemized deduction. Because the new baby is a second child, they have already considered the financial planning that accompanies parenting. (In ranking questions, identifying the “most” and “least” generally leads you to the answer: The middle choices are often too similar to differentiate.

Question 8

John Jefferson has a current net worth of $10 million. When John’s wife died 5 years ago, on her death bed, she made John promise that he would cater to their son, John Jr.’s wants and needs under all circumstances. John is dismayed that Junior never made it past his sophomore year of college ultimately flunking out. Junior has not been able to keep a job. Now, at age 30, Junior has decided at to go back to that same college to complete his degree. Under its liberalized admissions policy, the school has agreed to his re-enrollment. At this point in time, which among the strategies below would you recommend that John Sr. implement for Junior’s education costs?

Answer 8

John Jefferson Sr. can l pay the full tuition (exempt gift) for Junior as long as the check is made out to the school. He may also gift $16,000 for other college expenses. John made a promise. There is not enough time to make the tax deferral associated with the 529 plan meaningful. The Coverdell ESA requires distribution when the beneficiary attains age 30 and Junior is already that age. A 2503(b) trust only distributes income, it may not be enough to cover Junior’s college costs.

Question 9

Dennis Hart explains to you that he wants a reasonable level of income but also some long-term growth. If you believe that he can address both of his investment objectives, which of the following securities would you suggest to Dennis?

A. Convertible bonds
B. Preferred stocks
C. Blue chip stocks
D. Corporate commercial paper

Answer 9

A. Convertible bonds

Most logical investors will accept a lower interest rate in exchange for the potential price appreciation from converting the bond if the prices of the issuers’ stocks rise above the bond’s conversion price. Preferred stock is regarded as a fixed income investment with little growth potential. Many blue-chip stocks distribute small dividends and they can be skipped in a profit-less year.

Question 10

Smokestack Inc. voluntarily terminated its defined benefit plan. Your client, Homer Connors, age 61, has been a long-time employee of Smokestack, Inc. and a participant in this pension. The “termination” has made Homer quite anxious. What might you tell Homer that may make him feel less anxious?

A. The 10% penalty (59½ year rule) will not apply to distributions.
B. The account balance must be rolled over into an IRA account.
C. Homer is 100% vested.
D. The plan is fully funded. There is no need to worry.

Answer 10

The correct answer is C.

The 10% penalty will not be imposed on Homer because he is over age 59½ and is a possible answer. The plan is fully funded at normal retirement age, not necessarily at a premature termination. Homer would get the account balance that is attributable to him and be fully vested.

Question 11

Mrs. Smith, age 80, is comparing different investment portfolios. The thought of losing principal makes her very uncomfortable. While she would appreciate some income from her investments, that is a secondary concern. After listening to her carefully, which of the following portfolios would you suggest?

A. 10% money market mutual funds, 10% blue chip common stocks, 80% long-term bonds
B. 50% bank issued CDs, 50% long-term investment grade corporate bonds
C. 10% money market mutual funds, 10% blue chip common stocks, 80% investment grade short-term bonds
D. 10% money market mutual funds, 40% bank issued CDs, 50% investment grade long-term bonds

Answer 11

C. 10% money market mutual funds, 10% blue chip common stocks, 80% investment grade short-term bonds

Due to their high durations, the long-term bonds carry significant principal risk if interest rates rise. The short-term bonds (80%) along with only 10% in quality common stock seems reasonable given her fear of principal loss and desire for income.

Question 12

Bill, a CPA, charges his clients a fee when he prepares their income tax returns. If the client is in a high tax bracket, he advises them to invest in municipal bonds and tax deferred annuities. Which of the following should Bill do?

A. Register as an investment advisor
B. Obtain a securities license (series 7)
C. Do both A and B
D. Continue to make investment suggestions when appropriate.

Answer 12

D. Continue to make investment suggestions when appropriate.

The advice is incidental to the CPA’s occupation. He isn’t selling any products (prepares taxes)

Question 13

Te following irrevocable trusts are producing annual income. From which of the trusts below will the income not be taxable to the grantor?

A. Trust income is retained to discharge a legal obligation of the grantor.
B. Trust income is retained then used to pay premiums on life insurance on the life of the grantor.
C. Trust income is distributed to the grantor for 5 years, and then distributed to another trust beneficiary.
D. Trust income is distributed to the grantor until death, and then distributed to the other trust beneficiary(s).
E. Trust income is accumulated for later distribution to the other trust beneficiary(s).

Answer 13

E. Trust income is accumulated for later distribution to the other trust beneficiary(s).

The income will be taxed to the trust. The grantor has no beneficial enjoyment. The other answers violate the grantor trust rules that make the income taxable to the grantor.

Question 14

CFP® certificant offers advice on specific mutual funds and charges a fee for this advice. Which of the following is true?

A. The CFP® certificant can distribute a business card printed with both CFP® and RIA following her name.

B. If the CFP® certificant is securities licensed (Series 7), the licensee will not have to register as a registered investment adviser.

C. If the CFP® certificant is an Investment Adviser Representative, then the licensee will not have to register individually.

D. The CFP® certificant will not have to complete additional registrations.

Answer 14

C. If the CFP® certificant is an Investment Adviser Representative, then the licensee will not have to register individually.

The CFP ®certificant will have to register individually as an adviser or as an Investment Adviser Associate through an advisory firm.

Question 15

Harry and Pat Nelson (highest tax bracket, married, filing jointly) have a daughter, Pam age 12. As of today they have failed to save for Pam to attend a 4-year university. Under the circumstances, which of the following investments makes the most sense and why?

A.
A series of taxable zero coupon bonds owned by Pam (UTMA account) because they can provide the right amount of money when it will be needed and would be taxed at Pam’s tax rate

B. A S&P 500 Index fund owned by Pam (UTMA account) because it generally provides the highest inflation-adjusted return and is taxed at long-term capital gains rates

C. A series of laddered CDs owned by Harry and Pat because they can provide appropriate funds at correct times and have virtually no principal risk.

D. A single premium variable life insurance policy on Pam’s life because growth is tax-deferred and Pam can remove funds as needed for college through policy loans.

Answer 15

B. A S&P 500 Index fund owned by Pam (UTMA account) because it generally provides the highest inflation-adjusted return and is taxed at long-term capital gains rates

Consider the relatively short time horizon. The time horizon for this question could be 6-10 years. Also consider the advantage to paying low taxes. The S&P 500 index fund will be tax efficient and probably grow. Yes, kiddie tax could apply, but the ultimate tax rate would be a maximum of 20% (dividends and capital gains) rather than as ordinary income.

Answer A is wrong because the zero coupon bonds produce phantom income. You may have picked A as an answer. NOTE: I think that if the time horizon to college was 4 years, then A or C could have worked. This is the best answer and somewhat subjective.

Answer C is wrong because the CD earnings will be taxed at parents rates rather than Pam’s over $2,200.
Answer D is wrong because distributions will be taxable (MEC) and subject to a 10% penalty.

Question 16

2:1 stock split

Answer 16

twice as many shares

Question 17

Sally donates several bags of old clothes to the Salvation Army. Which statement below best reflects the documentation that Sally would need in order to claim a charitable income tax deduction?

A. Deduction of up to $250 does not require a receipt.
B. Deduction of $250 but less than $1,000 must be documented.
C. The deduction is the lesser of fair market value or the donor’s basis (substantiated).
D. The deduction is limited to basis (unsubstantiated).

Answer 17

C. The deduction is the lesser of fair market value or the donor’s basis (substantiated).

For charitable gifts of less than $250, a dated receipt is proof for purposes of an income tax deduction. The receipt should c include a description of the property. A written receipt would list the items donated with a corresponding value. Sally should keep records showing the fair market value and her cost basis. For charitable gifts exceeding $250 Sally must substantiate the deduction by written acknowledgement from the charity. Cash donations up to $300 single/$600 joint do not have to be documented for 2021 if you take the standard deduction.

Question 18

IRA and AGI

Answer 18

deductible, but look at income phase out

Question 19

Paul Harding, CFP® has been traveling often to see his elderly mother whose health is failing. With each trip, he is not sure how long he will be away. He recently completed writing a plan for Mr. and Mrs. Walters, who are new clients. The Walters are very eager to get their plan underway and call often for a presentation/recommendation appointment. After briefing an intern on the plan he wrote for the Walters, Harding tells the intern to set up an appointment with the Walters and tells the intern to present the plan. In this situation, which action applies to Harding?

A. Harding violated the Duty of Confidentiality under the CFP® Code of Ethics.
B. Harding violated the Duty of Professionalism under the CFP® Code of Ethics.
C. Harding violated the Duty to comply with the law under the CFP® Code of Ethics.
D. Harding Adhered to the CFP ®Code of Ethics.

Answer 19

B. Harding violated the Duty of Professionalism under the CFP® Code of Ethics.

Allowing an intern to present a plan to clients without supervision clearly violates the Duty of Professionalism. Sharing information within a firm generally does not violate the Confidentiality Principle if it is necessary for a business reason and all parties understand that client confidentiality is still honored beyond that the firm. For example, a planner assigning an assistant to enter client data into financial planning software would not violate confidentiality.

Question 20

If a taxpayer is subject to AMT, which of the following could reduce the AMT payable?

I. Exercise nonqualified stock options
II. Take short-term capital gains
III. Delay until next year the payment of a property tax bill
IV. Exercise and sell an ISO in the year of exercise

Answer 20

all

Increasing taxable income (Answers I and II) for regular tax purposes until it reduces or eliminates AMT exposure. Delaying certain itemized deductions such as medical expenses, charitable gifts and local property tax creates more regular income. An ISO exercise adds to AMT income, but that addition is nullified by a disqualifying disposition such as a sale in the year of exercise).

Question 21

odd is the CFO for a 20 person insurance company, XYZ Inc. Due to two employees who had to go out on medical leave, XYZ Inc. is considering disability benefits. XYZ, Inc. received two proposals from a disability insurance carrier. The first is that each employee will have an individual policy with a maximum benefit of 50% of salary capping at or $5,000 per month. The second is a group policy. The insurance company provided an explanation of the difference to the employees. Because the individual policies have more liberal definitions of total disability and base premiums on the age of the insured, XYZ management has indicated that there is a maximum premium they will pay per month. Todd’s illustration indicates he would have to pay about 30% of the premium for the individual policy. How would you analyze his situation and help him make a recommendation for XYZ?

I. Under the individual plan if he was disabled, 30% of the benefits would be tax-free. Under the group, all the benefits would be taxable. Thus, he should elect an individual plan.

II. Under the group insurance, XYZ would pay the entire premium. Although the benefits would be taxable, he has a low probability of being disabled. He should choose the group plan.

III. Under the individual plan he would get a more liberal definition of total disability. This is the most important consideration when buying a disability policy. He should elect an individual plan.

IV. The group plan would entail simpler underwriting. The individual plan would subject Todd to financial and medical underwriting. He should elect the group plan.

Answer 21

I, III

Although the premium for the individual policy would come from Todd’s pocket, the individual policy would provide a more generous definition of total disability and produce partially tax-free benefits.

Question 22

Brad and Gloria Prior are married. Brad, age 71, and Gloria, age 69, have retired on his pension of $48,000 per year and their Social Security retirement payments. Brad is an adjunct instructor at the local community college and is paid $10,000 per year. How much can the Priors contribute to Roth IRAs in the current year?

A. $ -0-
B. $5,500
C. $6,500
D. $10,000
E. $13,000

Answer 22

D. $10,000

Question 23

Dr. McGillicutty, a 50-year-old divorced dentist, has incorporated his practice as a personal service corporation. He is interested in increasing employee retention. He has approached you with the following for the new tax year. Dr. McGillicutty’s corporation currently provides a 401(k) plan. The practice only matches $.50 on a dollar of elective deferral up to 3% of eligible compensation. As a result of this formula and employee turnover, the doctor has been limited in the amount he can contribute as a key employee. If he elects to adopt a pension plan in lieu of the 401 (k), which of the statements is true regarding his benefits?

A. He will be able to contribute 25% of his salary if he elects a money purchase plan.
B. He will be able to deposit $230,000 (2021) if he elects a defined benefit pension plan.
C. The money purchase and defined benefit plan will be covered by the PBGC.
D. If he elects a defined benefit plan and becomes concerned about guaranteeing benefits, the practice could later switch to a cash balance plan.
E. Money purchase and profit-sharing plans are subject to the minimum funding standards.

Answer 23

D. If he elects a defined benefit plan and becomes concerned about guaranteeing benefits, the practice could later switch to a cash balance plan.

If the doctor adopts a defined benefit plan then has concerns about guaranteed benefits, the practice can switch to a cash balance plan. Profit sharing (401k) plans are not subject to the minimum funding standard. Money purchase has a contribution limit of $61,000 (2022). Without his salary being given this statement, this statement could be false. In answer B, the statement uses the word deposit rather than benefit. $245,000 is the maximum benefit (2022).

Question 24

George Hallas owns 80% and his daughter, Georgina 20% of Hallas, Inc. (a corporation). Hallas, Inc. grosses approximately $20 million in a typical year. George and his daughter also own a general partnership worth $5 million. George owns a $3 million life insurance policy outright under which he is the named insured. He wants to remove the life insurance policy from his estate. What do you recommend?

A. Sell the policy to the corporation for buy-sell purposes.
B. Sell the policy to the partnership for buy-sell purposes.
C. Transfer the policy to the partnership for buy-sell purposes.
D. Gift the policy to his daughter.

Answer 24

D. Gift the policy to his daughter.

If the corporation owns the policy, the proceeds may be considered in valuing the decedent’s interest for federal estate tax purposes unless there is valid agreement fixing the price that would reflect an arms-length sale to an unrelated party (questionable because the buyer and seller are daughter and father, respectively. Answers B and C create a similar problem. When George dies the partnership dissolves. The ownership of the policy after that point would be uncertain and possibly flow through to George’s estate.

Question 25

Coverdell Education Saving Plans permit tax free withdrawals for which of the following qualified education expenses (including elementary and secondary education expenses) tax- free?

I. Academic tutoring
II. Special needs services
III. Books
IV. Room and board
V. Uniforms as required

A. None of the above
B. All of the above
C. II, III, IV
D. I, II
E. III

Answer 25

All these items are eligible for tax free withdrawals from Coverdell Education Savings Accounts. These expenses may reflect both elementary and secondary education.

Question 26

Childhood pals Stu and Lou had always wanted to spend time together, so shortly after graduating high school, they opened a hamburger joint called Good Guys Burgers. The business has been successful over the past forty some years and has grown into a chain of 33 stores. Stu and Lou estimate that the business is worth $9 million and plan to engage a business valuation specialist to peg an accurate fair market value for the business. Stu and Lou, now in their early sixties, recently had their first discussion about business succession planning. Although Stu has a son, Mark, in his late twenties, Mark tours with a rock band and has no interest in stepping into his father’s shoes. Lou has no children and his wife has serious health problems so she could not assume his business responsibilities if Lou dies. On the advice from their insurance agent, Lou and Stu decide to enter into an insurance-funded cross purchase death buy/ sell agreement. Each owner acquires life insurance on the other. If this agreement is executed and funded and Lou dies, who, if anyone, would experience a stepped-up basis relative to the buy/sell transaction?

Answer 26

Both Lou’s estate and surviving owner Stu both experience basis step up. Lou’s estate gets an increase in basis to date-of-death fair market value (unless the AVD was selected which is not indicated in the data) due to the postmortem sale. Stu receives basis step up due to contributing additional capital (the life insurance death benefit) to the business (Good Guys Burgers) to buy out Lou’s equity in the business.

Question 27

Pension contributions are based on compensation. Which of the following is generally considered to be compensation to an employee?

I. Salary
II. Bonus
III. Business expense reimbursement
IV. Incentive stock options
V. Contributions to a deferred compensation plan

A. All of the above
B. I, II, IV
C. I, II, III
D. I, II
E. I, IV

Answer 27

D. I, II

Salaries and bonuses are clearly compensation. A reimbursement pays the employee back for business expenses incurred but is not compensation. An ISO is a right to buy the employer’s stock and is not compensation. However, if the ISO becomes disqualified because the stock is exercised and sold in the same calendar year, the employee may be required to recognize any profits as compensation. Deferred compensation is not treated as compensation until it is constructively received. For tax purposes, compensation is considered current when it is paid no later than 2½ months after the year in which it is earned. For a more-than-50% owner, the compensation must be paid by year end. Deferred compensation is not compensation for tax purposes until it is constructively received.

Question 28

Holly, the daughter of Mr. and Mrs. Golightly, is going to college. She plans to get her Masters at a state university. Unfortunately, due to economic conditions, her parents never set up a 529 plan or other education related arrangement. Holly may qualify for some state merit scholarships. Her parents, both professionals, earn well over $80,000 each, but spend most of what they make. Which of the following college tax and funding strategies may generate federal income tax credits for undergraduate as well as graduate education?

A. American Opportunity Credit
B. Lifetime Learning Credit
C. Coverdell (ESA)
D.PLUS
E. None of the above

Answer 28

The correct answer is E.

The American Opportunity Credit may be available for the undergraduate years, but not for the graduate years. The Lifetime Learning Credit is subject to an AGI phaseout. The Coverdell ESA and PLUS loans do not generate federal income tax credits.

Question 29

Barry retired a few years ago from Belmont, Inc. at age 65. He is turning age 72 at the beginning of this year. He is planning to return to work at Belmont toward the end of the year on a full-time basis. Barry has the following types of retirement accounts not all of which come through his current employer. From which of the following accounts does Barry have to take a mandatory distribution by April 1st of next year?

I. Simple IRA
II. SEP IRA
III. Roth IRA
IV. Traditional IRA
V. Belmont 401(k) plan (account from retirement at age 65)

A. All of the above
B. I, II, IV, V
C. I, II, III
D. I, II, IV
E. I, II

Answer 29

The correct answer is B.

A minimum distribution is required for the year in which the participant attains age 72. Considering the way the question is worded, Barry still will be retired when he reaches age 72 (middle of the year). He will be back to work at the end of the year and may not be eligible to participate in the 401(k) until the following year.

Question 30

Sadly, doctors have diagnosed your client, Sam as being terminally ill with heart disease. He sold his $250,000 face value life insurance policy to a qualified viatical settlement company for $175,000 a year ago. In the past few weeks, Sam was invited to participate in a clinical trial of a new medicine that will prolong his life for 5-10 years. The medicine appears to be working effectively for Sam. How is the $175,000 that Sam received on the viatical sale affected?

A. Sam will now have to recognize taxable income of $175,000.
B. Sam will be required to return the $175,000 to the viatical settlement company within the next 90 days.
C. The viatical settlement company will regret this particular transaction.
D. The viatical settlement company can return the policy to Sam per the original settlement agreement.

Answer 30

C. The viatical settlement company will regret this particular transaction.

The viatical company’s return will suffer if Sam lives too long. Sam is not affected.

Question 31

Which of the following statements is true a regarding a QPRT if the grantor dies during the retained-interest term?

A. The value of the remaining term will return to the grantor’s gross estate.
B. It leaves the grantor’s estate with no greater tax liability than had the QPRT had not been established.
C. The applicable credit amount plus any gift tax actually paid on the original transfer are lost.
D. The present value of the retained income interest is brought back into the gross estate.

Answer 31

B. It leaves the grantor’s estate with no greater tax liability than had the QPRT had not been established.

The full value of the home generally reflecting date of death FMV is brought back into the gross estate. Let’s say you transferred a home worth $1 million under a 10-year QPRT. Had the QPRT never been established the estate would have the same tax exposure because the property would appear in the gross estate at FMV.

Question 32

Mr. Sims purchased a $500,000 life policy in 1987 paying a single premium of $50,000. The contract cash value has grown to $110,000. He has decided to surrender the contract this year. Which of the following is true?

A. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at ordinary income tax rates.

B. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at capital gains rate.

C. $60,000 will be subject to tax at ordinary income tax rates plus a 10% penalty.

D. $110,000 will be subject to tax at ordinary income tax rates.

Answer 32

A. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at ordinary income tax rates.

The policy is not a MEC; therefore, the cash value in excess of basis ($50,000) will be subject to tax at ordinary income tax rates, but not the 10% penalty. 2022 35-years is 1987. The policy was acquired before MEC rules took effect in 1988.

Question 33

John and Carol had their financial liabilities decrease from $250,000 of debt to $200,000. This occurred because of the following. They used cash flow to pay off $20,000 of credit card debt.They sold stock with a basis of $70,000 at a loss of $20,000 and used the proceeds to buy a new car. They paid off their $12,000 auto loan. Their only other debt has been their home mortgage. It was a $175,000 mortgage taken out some years ago (30-year / 8%). Based on the above information, how much principal reduction happened to the mortgage?

A. $12,000
B. $18,000
C. $20,000
D. $28,000
E. $30,000

Answer 33

B. $18,000

net change in liabilities 50
- less credit card payment 20
-less auto loan payments 12

The sale of the stock at a loss is a wash. The new car replaces the stock as an asset. Their Statement of Financial Position would have shown the stock at FMV, rather than at basis. The auto loan would have to be paid using cash flow. There is no other possibility. The loss would affect their taxes.

Question 34

Arthur, age 63 regrets retiring early. He’s single and bored. Arthur found a job at Walmart as a greeter. The job will pay $15,000 per year. Arthur doesn’t need the money because he is currently receiving $6,000 per month from his former employer’s money purchase pension plan plus early Social Security retirement benefits of $1,000 per month. Arthur lives in a comfortable apartment, has full medical coverage and makes no charitable contributions. He normally claims the standard deduction. Which of the following is true if he takes the job with Walmart?

A. He will remain in a 22-24% income tax bracket.
B. He should find a job that pays him more than the minimum wage ($15.00/hour).
C. The impact of the earned income will be a very marginal increase in income tax.
D. His Social Security Retirement benefits could be reduced because of his earned income.

Answer 34

A. He will remain in a 22-24% income tax bracket.

Arthur will be in the 22-24% bracket. If he works the same hours for better pay, Arthur will exceed the 1-2 rule ($19,560) which would reduce his current Social Security retirement benefits. For now, Arthur remains with Walmart.

Question 35

An U.S. investor owns German bonds. What will make the bonds increase in value?

A. A decrease in the value of the Euro
B. An increase in European interest rates
C. A stronger U.S. dollar
D. A decline in U.S. interest rates

Answer 35

D. A decline in U.S. interest rates

If a U.S. investor owns securities denominated in a foreign currency, that individual would profit if the dollar declined (devalued) or the value of the foreign currency rose (revalued). An increase in European interest rates would decrease the value of German bonds. If U.S. interest rates decline, the value of the dollar will decline.

Question 36

Terrie Cross and Brenda Davis have decided to close their business. They had entered into a cross-purchase buy sell agreement funded with life insurance policies. Both Terrie and Brenda are married. How should they handle the ownership of their policies at this point?

A. Each should purchase her own policy from the other owner.
B. They should maintain the current ownership arrangements of the insurance policies.
C. Terrie should sell Brenda’s policy to Brenda’s husband, and Brenda should sell Terrie’s policy to Terrie’s husband.
D. They should change to an entity buy sell agreement.

Answer 36

A. Each should purchase her own policy from the other owner.

After the business closes, it is reasonable that each owner then owns the policy on her own life. Because the business is closed, there is no reason to maintain the current arrangement of ownership of the policies. Answers C and D trigger “transfer for value”.

Question 37

Mr. Smith is subject to the AMT. Which of the following can reduce his AMT payable?

A. Exercising more nonqualified stock options
B. Assuming a larger mortgage
C. Purchasing more municipal bonds (private activity)
D. Buying an oil and gas partnership
E. Purchasing more public purpose bonds

Answer 37

A. Exercising more nonqualified stock options

Question 38

Mrs. Baker, age 72, establishes an irrevocable trust. She transfers $15 million into the trust with income to her daughter for life. Her daughter, Jane, is 30 years old. When Jane dies, the remainder will go to Jane’s two children, who are currently ages 6 and 7. Jane is divorced. Because she never received alimony payments, Jane depends on the income from the trust to pay her bills. When Jane dies who will be liable for the GSTT due?

A. Mrs. Baker
B. Jane
C. Jane’s two children
D. The trustee from trust property

Answer 38

D. The trustee from trust property

This situation reflects a taxable termination. The trustee must pay any GST tax owed on a transfer to a skip person or skip persons. Only the two grandchildren are skip persons.

Question 39

A few years ago John and Jim started a business J&J, Inc. as an S corp. Despite a sluggish economy, the company has grown at a rapid rate. J&J has focused on selling shoes to men with small feet. At the time the business was formalized they entered into an entity buy sell agreement funded with life insurance policies on each owner. However, with John produces more of the income than does his partner Jim. This reflects Jim’s personality; he is uncomfortable around most people. Therefore, Jim handles the administration of the business. John now believes that he can outsource the administrative work and decrease the overall expense of the business. Because of this John wants to and sever ties with J&J and start his own company with lower overhead and thus substantially higher revenues. He believes he can do this by selling all sizes of shoes rather than shoes only to men with small feet. His research shows that this will greatly increase the size of his market. Upon learning of John’s plans, Jim went into business with new co-owner Scott. They too will form an S corporation, J&S Inc. This time Scott and Jim will implement a cross purchase buy sell agreement. Jim does not want to manufacture shoes of all sizes due to the inherent cost of production.

Which of the following statements is/are correct regarding the situation if Jim is looking to use his current life insurance policy owned by J&J, Inc. to fund the new Cross Purchase Buy Sell with Scott?

I. Jim’s Policy Owned by J&J can be acquired by Scott to fund the Cross Purchase Agreement for J&S, Inc.

II. If Scott and Jim enter into an Entity purchase buy sell agreement J&S Inc. could buy Jim’s policy from J&J Inc. and there would not be a transfer for value tax exposure.

III. If J&S was established as a C corporation and the policy was transferred to Scott the death benefits would avoid federal income taxation if Jim lived for at least 3 years.

IV. Because the policy has only been in force for 2 years, Jim would have to wait 1 more year. Before he could remove the policy from J&J Inc. to avoid inclusion in his gross estate.

V. John could buy his policy from J&J Inc. and this would not trigger transfer for value rules.

Answer 39

I, II, V

Statement I is correct. It is permissible although it would create a transfer for value issue. Statement II is correct because a corporation in which the insured is a shareholder can purchase the policy without triggering transfer for value rules. Statement III is not correct, there will still be tax due to transfer for value regardless of how much longer Jim Lives. Statement IV confuses two different rules. Statement V is correct because John can buy his own policy.

Question 40

stock bonus and social secuity

Answer 40

can be intergrated!

only esops and 401ks with no matching contributions can’t

Question 41

Under an IRC Section 6166 election, which is the following is true?

I. It may only be elected if the client dies owning a business.
II. It cannot be elected if the business owned by the taxpayer was operated as a sole proprietorship.
III. During the first 4 years the estate is only required to pay interest on any estate tax owed due to the death of the client.
IV. The gross estate must include an interest classified as “closely held” business interest (s), the value of which exceeds 50% of the gross estate.
V. A Section 6166 election allows for installment payment of estate taxes over 10 equal installments beginning 4 years after the client’s death.

Answer 41

I, III, V

A Section 6166 election is available for deceased taxpayers who owned one or more sole-proprietorship business interests. The aggregate holdings in closely held business must represent 35% of the adjusted gross estate. The 2% interest rate only applies to a limited dollar amount of estate tax owed. While the remainder of the estate tax due also qualifies for interest only payments, the rate of interest may be higher than 2%.

Question 42

Your client, Byron Sheridan, died recently at the age of 83. He is married to Virginia, age 83. Byron enjoyed managing his investments and diversified his invested assets among several asset classes. When Byron died, he held the asset listed below. Which of them would be eligible for a step up in basis?

A. A $100,000 CD now worth $105,000 (acquired 5 years ago).
B. A municipal bond purchased at a discount ($95,000) two years ago now having a date of death FMV of $100,000
C. Stock purchased 6 months ago for $50,000 that created a $10,000 STCL.
D. An annuity purchased 10 years ago for $100,000 having a date of death FMV of $115,000.

Answer 42

A municipal bond purchased at a discount ($95,000) two years ago now having a date of death FMV of $100,000

The municipal bond was held for the long- term and is eligible for stepped up basis upon Byron’s death. The tax deferred accounts such as an annuity (and retirement accounts, generally do not step up in basis.) The CD is cash. There is no stepped up basis; a dollar is a dollar.

Question 43

Long-term capital gains and qualified dividends

Answer 43

are not considered
investment income unless the taxpayer makes an election to have these income
items taxed at ordinary rates.

Question 44

. An irrevocable life insurance trust does not create ownership;
therefore,

Answer 44

no inclusion in the gross estate.

Question 45

Bob wants to convert his IRA which today has an approximate FMV of $1,000,000, to a Roth IRA. Bob is age 72 and will be taking an RMD of $40,000 in the current tax year. Bob estimates his other taxable income for the year to be $70,000. Can he convert the IRA to a Roth IRA?

Answer 45

Yes, there is no limit on the dollar amount of the conversion.

There is no limit as to the dollar amount that may be converted from a traditional IRA to a ROTH. Bob is taking his RMD first, then he will convert the remainder of his balance in the traditional account. Answer C is true, but it does not answer the question which is about conversion

Question 46

Your client, Frank, age 44, believes that the business cycle is about to turn sharply and that an 8% inflation rate is a necessary assumption in the construction of his retirement plan. You, a CFP® certificant, strongly believe that inflation will continue to be substantially lower averaging between 3 and 4 percent in the long run. Which inflation rate from the choices below would you reject first?

Answer 46

Current year’s inflation rate

A one-year inflation rate does not constitute an inflation rate for a long-term goal achievement. Remember that client and planner must mutually agree on plan assumptions. While the client’s 8% assumption may not end up as the one used in the plan, it should be considered. It might make sense for the planner to run the numbers using both his personal inflation assumption and run them again using the client’s so the client can see that his assumption would probably be less workable.

Question 47

Your client Bob made an investment in a commercial property. Given the risk this investment carries, he had a required rate of return of 10%. He recently sold the property and has asked you whether the investment was profitable. Was it?

Answer 47

When, given the cash flows of an investment its NPV is zero, the investment met the buyer’s required rate of return. An investment can be profitable even its NPV is negative. A positive or a negative NPV tells whether the client achieved his required rate of return, but not the amount of the profit.

Question 48

Both of Rusty Whitman’s parents recently died in an auto accident. Rusty is 12 years old. Before their death, the Whitman’s had established various trusts including revocable living trusts (each parent), an irrevocable life insurance trust, and a 2503(c) minor’s trust. While Rusty is younger than age 21, the trust earnings will support his living needs. Into which of the following trusts will Rusty’s parents’ assets ultimately pass?

Answer 48

The revocable trust will become irrevocable and will operate as a family trust for Rusty’s benefit thereafter. It is rare that a revocable trust would name its beneficiary as a 2503(c) children’s trust. 2503(c) trusts generally terminate when the minor beneficiary turns age 21.

Question 49

The Wonder Widget Company operates as a C corporation. Its officers are concerned about their personal liability exposure on becoming appointed as trustees for the company’s pension plan. How should their concerns be minimized?

Answer 49

If a suitable investment manager has been appointed, generally the trustee will not be liable for the acts or omission of that investment manager. However, this relief does not totally excuse from liability the named fiduciary who appointed the investment manager

Question 50

Federal covered advisers must update their ADV forms no later than _____ days following the close of their fiscal year. Smaller advisers that have registered with states securities regulators will comply with state specific deadlines for annual updates to their ADVs or equivalents.

Answer 50

90

Question 51

insurance company size

Answer 51

The size of an insurance company is not necessarily an indicator of its financial strength.

Question 52

An employee contribution to which of the following plans is not subject to FICA and FUTA taxes?

A. Profit sharing 401(k)
B. SIMPLE IRA
C. SARSEP
D. 403(b)
E. Section 125 plan

Answer 52

E. Section 125 plan

A 125 is a flexible spending account (FSA) into which contributions are elected before the employee compensation is actually earned. All the other plans shown require FICA and FUTA tax on employee deferrals.

Question 53

qualifying for marital deduction

Answer 53

It appears that the gift will not qualify for the marital deduction. To qualify for the deduction, the donee spouse must be given the property outright or must have at least a right to the income from the property and a general power of appointment over the principal. The IRS would consider this to be a step transaction and thus a fraudulent transfer.

Question 54

recapture for IRA equal payments

Answer 54

The recapture amount will be 10% of the total annual payments received before Loretta attained age 59½, plus interest. The penalty only applies to distributions that were made to Loretta before she attained age 59½.

Question 55

Medicare skilled nursing facility rules

Answer 55

Medicare will pay for the first 20 days of rehabilitative skilled nursing home care in full

It will also cover (the difference of cost and Medicare coverage) for the next 80 days.

After 100 days, there is no Medicare coverage for extended care

Question 56

social security benefits reduction: working before and after FRA

Answer 56

f Hal works part-time, before the year in which he reaches his full retirement age (FRA) his benefits will be reduced $1 for every $2 he earns above a specific threshold. During his FRA year only he will lose $1 in benefits for every $3 by which his earned income exceeds that threshold. Hal’s Social Security retirement benefits will be subject to federal income tax if his AGI plus ½ of his benefits (provisional income) exceed $25,000+.

Question 57

Corporate annual reports would generally not include which of the following?

Answer 57

Profitability projections should not be included in corporate annual reports. The SEC believes that such projections could mislead shareholders and others.

Question 58

the most important exception to the general rule of exclusion of life insurance death proceeds from federal income taxation to the beneficiary is the

Answer 58

transfer of value rule

valuable consideration! usually:

1. corporation changes its buy sell agreement from a stock purchase (entity) agreement to a cross purchase plan and transfers company insurance policies to stockholders other than insured
2. corporate key person life insurance policy is transferred to the insured’s spouse, adult child, or irrevocable trust to keep proceeds out of the insured’s estate could trigger a transfer for value exposure

transferred to the insured does not create a transfer of value

Question 59

4 instances in which you can transfer for value

Answer 59

-transfer to the insured
-transfer to partner of the insured (partnership)
- transfer to a corporation in which the insured is a shareholder or an officer
- transfer pursuant to a divorce agreement

Question 60

selling my life insurance policy to my friend

Answer 60

$195,000 will be taxable to Linda for federal income tax purposes.
When Joan sold the life insurance policy to Linda, that sale triggered transfer for value rules making the death proceeds in excess of basis taxable to the beneficiary who is now Linda. Linda will receive the death proceeds subject to federal income tax. When Joan dies, nothing attributable to the life insurance policy will be included in her gross estate. The 3-year throwback rule does not apply when a life insurance policy is sold.

Question 61

Toby, age 72, has been taking distributions from his qualified plan. Now, to his dismay, he has been sued and lost in court. His only real asset is the qualified plan distributions. Can the plaintiff collect against his qualified plan distributions?

Answer 61

Yes, but only for a portion of the distributions

The anti-alienation provision only applies during the accumulation period, not after the account goes into pay status. Once the distributions are paid out, they become an asset of the participant, subject to any creditor’s claims that may be pending when the benefits are received.

Question 62

Mark Spout created an irrevocable trust for the benefit of his dependent children. Mark named the local bank as trustee of the trust and authorized it to invest in stocks, bonds, and negotiable certificates of deposit. Included in the investment authority is the right to use trust income to purchase insurance on Mark’s life. All funds are currently invested in high-yielding bonds paying 7% semiannual interest on a par value of $100,000. Twenty-five percent of the bond investment income is being used to pay the premium on a policy on Mark’s life. Which taxpayer must pay tax on the income of the trust and why?

Answer 62

Mark because of the grantor trust rules

If any portion of the trust income is, or may be, used to purchase insurance on the life of the grantor or grantor’s spouse, then the trust is a grantor trust. The trust is/was also used to benefit his dependent children (support). 25% is to purchase insurance and the remainder is used for support.

Question 63

Scott Harding died recently (at age 74), with a taxable estate of roughly $8 million. Some years ago, he had seen an estate tax attorney and completed an extensive estate plan with a variety of trusts. Among his assets is a stone-constructed New England farmhouse having a current fair market value of $2 million. Scott’s will bequeathed the home to Clarisse who, due to authoring a best-selling mystery novel, is worth approximately $20 million in her own right. Nevertheless, when Scott died, Clarisse, (under the guidance of her tax advisor), did not want to own the home outright, fearing it would become part of her already substantial gross estate. However, she wishes to live in the home where she can continue to write and enjoy her grandchildren for the rest of her life. The home had been in the Harding family since its arrival in America in 1789. At the time of his death, it was owned fee simple by Scott. There is great sentiment associated with the home: Scott and his wife, Clarisse (age 66) were married in the home and raised their two children Rebecca and Jonah (now adults) there. What technique, if any, will accomplish Clarisse’s goals?

Answer 63

With a proper provision in Scott’s will, if Clarisse disclaims ownership of the home, it can be transferred to a disclaimer trust, the terms of which permit Clarisse to live in the home for her lifetime. This would be a family trust.

Many well written wills include disclaimer trust provisions which give the surviving spouse the ability to put specific disclaimed assets into the trust by disclaiming ownership of a portion of the estate. Disclaimed property interests are transferred to the trust, without being taxed.

Provisions can be written into the trust that provide for regular payouts from the trust to support survivors, or in the case of the Hardings, the right to occupy (but not own) property. The trust can also be written so that surviving minor children can also be provided for, as long as the surviving spouse elects to disclaim inherited assets, passing them on to the trust. To keep the assets from being included in Clarisse’s estate, the trust would have to be a family trust rather than a marital trust.

If a disclaimer trust is used, the full extent of the tax planning occurs upon the death of the first spouse. At that point, the surviving spouse can either accept the trust assets or disclaim them. I f he or she disclaims them into the disclaimer trust, the trust will function like a credit shelter trust that will shelter the assets from inclusion in the surviving spouse’s estate. But if there is no tax reason to use credit shelter planning, the spouse can simply receive the assets outright. This allows tax-planning flexibility without creating unnecessary complication.

Using answer D will mean for the life of the QPRT it could be brought back into her estate. It is not a bad answer. With Answer B, the house uses the exemption. Suggestion: The questions are not too long to read. I would recommend reading it first.

Question 64

HSAs & LTC Premiums

Answer 64

Yes, the HSA can pay for qualified LTC premiums (age-based)

The amount of qualified long-term care insurance premiums that constitute qualified expenses is allowed. However, the LTC premiums are still limited to age-based limitations (as adjusted annually). Answer B does not specifically answer the question. This is an HSA not an FSA. Premium payments are not allowed in FSAs but are allowed in HSAs.

Question 65

Sid Thomas works for TTI, Inc. Sid makes $120,000 per year. TTI contracted with a disability insurance company to buy long-term disability for its key employees. The carrier agreed to insure up to 50% of salary. In Sid’s case, that is up to $5,000 per month. However, TTI only agreed to pay for 60% of the $5,000 per month coverage with the provision that Sid could elect to pay for the remaining 40%. Which of the following statements is/are true?

I. If Sid elects not to pay for the additional coverage, the disability benefits ($3,000) will be taxable as income.

II. If Sid elects to pay for the additional coverage, 60% of the disability benefits are taxable as income, and 40% are tax-free.

III. If Sid elects not to pay for the coverage, the disability benefits ($5,000) will be taxable as income.

IV. If Sid elects to pay for the coverage, the disability benefits ($5,000) will be tax -free.

Answer 65

I. If Sid elects not to pay for the additional coverage, the disability benefits ($3,000) will be taxable as income.
II. If Sid elects to pay for the additional coverage, 60% of the disability benefits are taxable as income, and 40% are tax-free.

60% of the benefits are taxable as income (the company-paid portion of the premium), and 40% of the benefits are tax-free (if Sid pays the premium). The question says Sid could pay, not had to pay which makes Answer I correct.

Question 66

A corporation purchased a whole life insurance policy for the life of a key employee. The corporation was both the owner and beneficiary under the contract. The corporation did not deduct the premium but instead listed the premiums paid as an asset on its financial statement. The corporation borrowed from the insurance company and various banks using the policy as collateral for the loans. Today, the corporation surrendered the policy for a gain. How will the gain be treated for income tax purposes?

Answer 66

Life insurance surrender gain above basis is always taxed as ordinary income.

Question 67

Life insurance surrender gain above basis

Answer 67

is always taxed as ordinary income!!!!!!!!!

Question 68

Neil Aldrin, a retired 70-year-old single male, comes to see you, a CFP® practitioner, about planning for his granddaughter. He has total assets of $5,500,000. $3,500,000 is invested of which $2,500,000 is in his Traditional IRA. He is upset about having to start RMD’s in a few years and thinks the IRS are crooks. Neil has no debt, but he is always interested in a good time and fast cars. He is as healthy as a 35-year-old and expects to live past 100. He likes to be able to sell stocks and pay cash for whatever he comes across at the drop of a hat. His auto collection, while not up to Jay Leno’s, is fairly extensive, with hotrods, sports cars, uni-body pickups, and choppers. He wants his collection to go to a museum when he is gone. In his 20’s, Neil was a test pilot/astronaut for NASA’s Apollo missions in the early 70’s. He flew the prototype lunar landing craft to determine whether or not man could sustain controlled flight in space. At one point, he and the craft were 49 miles away from the command module for a period of 5 hours and 200 orbits around the earth. Had he not been able to reconnect with command module for reentry, he would have literally been “toast”. This type of daredevil attitude has carried over into his investment philosophy. He has never had an advisor and has always picked his own stocks. He is and has always been allocated 100% equities. His son, Buzz, is also a risk taker, but in a different way. He has never had a job other than being a backup cowbell player in various regional cover bands. Buzz plays a mean cowbell. However, his only real accomplishment is having a daughter, Eva, age 8. It is Eva that Neil wants to take care of. Neil is not convinced that Buzz’s career path will lead to stardom. He also doesn’t trust Buzz with money and did setup a revocable trust years ago. The trust has $1,000,000 in stocks. What do you recommend that Neil do?

Answer 68

Recommend a complete cash flow analysis and considering various options concerning income, gift and estate taxes

B is right because his ability to live the lifestyle he desires should take precedence. Nothing is mentioned in the question about what his needs are. Option A would produce significant taxes. Option C is probably good suggestions too but if we don’t know his retirement needs, we don’t know his required rate of return. Option D is also not a bad suggestion considering the size of his estate and his health. Yes, somewhat suggestive but remember this is what the exam questions will be like. On the exam, you must the best decision and move on.

Question 69

Health Reimbursement Arrangement (HRA)
Health Savings Account (HSA)
FSA

Answer 69

HRA- It is an employer-funded plan that makes available to employees a fixed pool of money to reimburse for qualified medical expenses (not taxable to employees).

HSA- is a trust created exclusively for the purpose of paying for the qualified medical expenses of the account holder. The account holder may be any individual covered by a qualifying high deductible.

FSA- It is an option under a cafeteria plan through which employees may defer salary on a pretax basis into an account created exclusively for reimbursing or paying the qualified medical expenses of the employee.

Question 70

Mr. Able created a $1,000,000 GRAT. He reserved a 5% annuity for a period of 20 years. If the grantor retained interest is $563,165. What is the amount of the taxable gift?

Answer 70

The amount of the gift ($1,000,000 gift -563,165 retained interest) is $436,835. This is a gift of a future interest, not a gift of a present interest. This is why Answer A is wrong ($16,000). The taxable gift is $436,83

Question 71

Diane is a great photographer. She wants to donate one of her photos to the local art museum. Her cost for film developing, printing, mounting, and framing is $250. The art museum curator feels the photo is worth $3,000. If her AGI is $100,000, how much can she deduct for her gift to the museum?

Answer 71

$250

The tax deduction for a work of art created by the taxpayer is limited to basis. Please review the income tax deductions for gifts to charity created by the taxpayer.

Question 72

Tommy Todd died this year. He was an employee of a large company. The company owned a group life policy covering him for $50,000 and the company also had a company benefit of paying a $5,000 death benefit outright. If both death benefits were paid to Tommy’s wife, how much would be subject to income tax?

Answer 72

$5,000

A group life policy is normally owned by the company. The company pays the premium, but the benefits (up to $50,000) are tax-free. The $5,000 death benefit paid the company used to be tax-free (a De Minimis fringe benefit) but is now taxable.

Question 73

Arthur is in a 35% income tax bracket. He has decided to buy a $40,000 car with cash. He needs to sell an investment to raise cash. Which one of the following assets would generate the least amount of tax liability if sold?

NOTE: LTCGs rate is 15%.

A. An annuity worth $30,000 with a basis of $28,000
B. A stock bought 6 months ago for $27,500, now worth $30,000
C. stock bought 13 months ago for $24,000, now worth $30,000
D. A baseball card bought 2 years ago for $26,000, now worth $30,000

Answer 73

B. A stock bought 6 months ago for $27,500, now worth $30,000

In regard to the annuity, you cannot assume he is over age 59½. The question must tell you the person is over 59 1/2. You must assume it is a deferred annuity because it is worth more than he bought it for originally. It cannot be an immediate annuity.

The tax is calculated as follows for each answer.

A. $2,000 ordinary income at 35%, plus 10% penalty on $2,000 = $900 (under 59 1/2)

B. $2,500 STCG at 35% = $875

C. $6,000 LTCG at 15% = $900

D. $4,000 at 28% = $1,120

Question 74

Gail Goodrich, single, owned a small corporation, GG, Inc. Due to business reversals, she had to close the business, and the stock became worthless. Which of the following is true if the loss is $120,000?

A. If she meets the requirements of Section 1244, she can take an ordinary loss of $100,000 and a capital loss of $3,000. The remaining $17,000 is a carry-forward loss.
B. She can take a $103,000 short-term loss.
C. She can take a $53,000 long-term loss.
D. None of the above

Answer 74

D. None of the above

Answer A is wrong because she is single, not married. Section 1244 allows for a $100,000 ordinary loss for married filing jointly and a $50,000 ordinary loss for single persons. Answers B and C are wrong because we do not know how long she was in business. The correct answer for single is $50,000 ordinary loss plus $3,000 capital loss and a $67,000 carry forward.

Question 75

Tammy is getting a divorce. As part of a property settlement, she is getting 50% ($250,000) of her husband’s IRA ($500,000). Out of the settlement, she needs to buy a car ($20,000) with cash. What should she do if her AGI is less than $100,000 this year (single)?

A. Take a distribution for $20,000 and roll over $230,000 into her own IRA. The $20,000 will be subject to ordinary income tax but no 10% penalty (QDRO exception).

B. Roll the $250,000 into her own IRA. If she pledges $20,000 of the IRA to make the car loan, only the loan interest would not be deductible (consumer interest).

C. Roll the $250,000 into a Roth IRA and then withdraw $20,000 to buy the car. Only the $20,000 would be subject to ordinary income tax.

D. Take a 60-day distribution for the whole $250,000 and buy the car. Then, before the 60 days are up, she could roll all available funds into her IRA and pay ordinary income tax and a 10% penalty on the non-rollover money.

Answer 75

D. Take a 60-day distribution for the whole $250,000 and buy the car. Then, before the 60 days are up, she could roll all available funds into her IRA and pay ordinary income tax and a 10% penalty on the non-rollover money.

Answer A is wrong because this isn’t qualified plan money. QDROs only apply to qualified plan distributions. Answer B is wrong because pledging the IRA to make a loan makes the IRA subject to income tax and a 10% penalty. Doing Answer C would make the whole $250,000 subject to income tax and the $20,000 subject to a 10% penalty. I think Answer D is the best answer. During the 60 days, she might find a cheaper car or find more liquid assets to reduce the taxable event. This is the only possible answer.

Question 76

Mr. Golden bought a $1 million life insurance policy 10 years ago. He has paid $150,000 in premiums over 10 years. The current cash value is $175,000. The cost of the insurance over 10 years was $10,000. Mr. Golden has no use for the policy anymore. A life settlement company has offered him $400,000 in cash to buy the policy. If he sells the policy, what will be the taxable event to him? Hint: Remember the trick to life settlements.

I. $25,000 taxed as ordinary income

II. $225,000 taxed as ordinary income

III. $235,000 taxed as long-term capital gains

IV. $225,000 taxes as long-term capital gains

V. $225,000 included in his estate if he dies within 3 years of the policy transfer

Answer 76

$25,000 taxed as ordinary income
$235,000 taxed as long-term capital gains

This information is in the Live Review. Life settlements are subject to capital gains. Look for the capital gains answer that is the best way to solve this type of question. Answers III and IV are possible answers. However, answer II and V are false. Therefore, the answer has to be B. A life settlement is taxed differently than a viatical settlement. Both are the sale of the policy. The cost of insurance affects the premiums paid. $150,000 - 10,000 = $140,000 basis. Mr. Golden will have to recognize income of $260,000 (400,000 - 140,000). The income is characterized as ordinary income to the extent the cash value exceeds the premiums paid ($175,000 - 150,000) or $25,000. The balance will be treated as capital gains $260,000 - 25,000 or $235,000. HINT: With this type of question always back into the answer.

Question 77

Sally Single works as an employee for a large company. The company has recently reduced health benefits and increased deductibles in the company health insurance plan. Sally wants to know what kinds of medical care costs not covered by her insurance are deductible subject to 7.5% of AGI.

I. Dental x-rays
II. Athletic club expenses
III. Bottled water bought to avoid drinking fluoridated city water
IV. Divorced spouse’s medical bills
V. Eyeglasses

Answer 77

I, V

Medical expenses include the cost of diagnosis, cure, mitigation, treatment, or prevention of disease or any treatment that affects a part or function of your body.

Question 78

While on a trip, Sandra’s wedding ring disappeared. The ring was worth $10,000. She has an HO-3 policy. Which one of the following statements is true?

A. The coverage on the ring is limited to $1,000.
B. The coverage on the ring is limited to dollar amount ($1,000 - 1,500) if the loss is due to theft.
C. If she has more than $10,000 personal property coverage, the ring is covered for its full value.
D. The ring is not covered.

Answer 78

B. The coverage on the ring is limited to dollar amount ($1,000 - 1,500) if the loss is due to theft.

The ring is only covered if its disappearance is due to theft. The dollar amount shown is not important. See Insurance pre-study lesson 3. It is a concept question (theft). There is no coverage unless a theft occurred. The theft must be reported to the police. It is a commonsense question/answer. Some policies cover jewelry up to $5,000.

Question 79

Which statements regarding a health FSA are correct?

I. It may receive contributions from an eligible person.

II. Allowable contributions are not subject to FICA.

III. Allowed contributions are not included in income.

IV. Reimbursements from the health FSA used for expenses are not taxed.

Answer 79

Statement IV is wrong because it does not specify qualified medical expenses.

Question 80

Investment interest

Answer 80

margin

is any interest incurred to purchase property that is held for investment, such as raw land.

Question 81

What is the advantage between taking excessive income as a stockholder from a corporation or an S corporation if the corporation is very profitable?
A. Taking earned income as compensation from a corporation will qualify the stockholder to ultimately get more Social Security benefits.

B. Taking earned income as compensation from a corporation will qualify the stockholder for a large retirement contribution.

C. Taking limited income from an S corporation will reduce FICA and FUTA taxes because the remainder of income will be unearned income.

D. Taking limited earned income from an S corporation and the remainder as unearned income will reduce corporate taxes.

Answer 81

C.
Taking limited income from an S corporation will reduce FICA and FUTA taxes because the remainder of income will be unearned income.

In answer A and B there are salary caps that limit what qualifies for Social Security benefits and retirement contributions. But compensation is subject to unlimited Medicare taxes (disadvantages). That is why Answer C is a better answer. Unearned is not subject to Medicare. Answer D is incorrect, an S corporation does not pay corporate taxes (conduit entity). You may have chosen Answer D because it is an advantage for an S corporation owner. Yes, S owners reduce their wages to pay less FICA taxes by taking the maximum unearned income. This is why many people do an S corporation - avoid FICA taxes. But that is not what Answer D says. You have to answer the question as written.

Question 82

Which of the following is (are) true of an existing Medical Savings Account (MSA)?

I. A MSA may receive contributions from any person, including an employer or family
member, on behalf of an eligible person.
II. Contributions by the eligible individual are deductible even if that person does not
itemize.
III. Employer contributions are not included in the eligible person’s income.
IV. Both the employer and eligible person may contribute to the MSA in the same tax year.

Answer 82

II. Contributions by the eligible individual are deductible even if that person does not
itemize.

III. Employer contributions are not included in the eligible person’s incom

Statements I and IV are wrong because the only parties that can contribute are the eligible person or the employer but not both in the same year. Contributions by the eligible individual go on the front of the 1040 (adjustments to income).

Question 83

Earliest age to claim Social Security spousal survivor benefits (with no child in care)

Answer 83

60

Question 84

Earliest age to claim one’s own Social Security retirement benefits

Answer 84

62

Question 85

Maximum age to collect Social Security dependent’s benefits (assuming no disability)

Answer 85

18 or 19

Question 86

Age(s) at which kiddie tax no longer applies to unearned income

Answer 86

18 or 24

Question 87

ho-15

Answer 87

HO-15 is an endorsement added to a Homeowner’s insurance policy for open perils coverage on the
insured’s personal property. It is typically combined with HO-3 coverage

Question 88

OASDI

Answer 88

OASDI stands for Old Age, Survivors and Disability insurance tax. It is that portion of FICA tax that
does not address Medicare. It is imposed on earned income up to the “taxable wage base.”

Question 89

FOMC

Answer 89

FOMC stands for the Federal Reserve Board’s (FRB) Federal Open Market Committee. The FOMC influences the U.S. Money Supply by alternately infusing the domestic banking system with cash or securities. FOMC has a strong influence on short-term interest rates and on unemployment rates.

Question 90

RSU

Answer 90

RSU stands for Restricted Stock Unit. This executive perk generally based on performance and years of
service grants stock. Presuming the granting employer stays afloat, (unlike rights–which may expire
worthless) the RSUs will have some amount of value.

Question 91

XD

Answer 91

XD stands for Ex-dividend meaning that the stock trade will not be eligible for distribution of the current dividend.

Question 92

LLC

Answer 92

LLC stands for Limited Liability Corporation which generally means a corporation choosing to be taxed
as a partnership. It offers the limited liability of corporations as well as the pass through nature of a
partnership.

Question 93

Situations where FICA and FUTA taxes apply

Answer 93

Employee contributions to Section 457 plans
Employee 401(k) plan elective deferrals
Employee contributions to HSAs
Distributions from nonqualified deferred compensation plans
Employer payments to Section 162 programs

Question 94

Situations where FICA and FUTA taxes DO NOT apply

Answer 94

Employer contributions to HSAs
Employee contributions to FSAs
Social Security retirement benefits
Distributions from IRAs
Contributions to nonqualified deferred compensation
Employer matching contributions to 401(k) plans
Earnings distributed from a ROTH IRA

Question 95

section 162

Answer 95

Section 162 arrangements represent a bonus in the form of life or disability insurance from an employerto retain a valued executive. As a bonus the employer-paid premium for the insurance that is given to the employee is treated as compensation subject to FICA and FUTA tax as well as to federal income tax.Certain employers may gross up the bonus to cover the employee’s tax exposures.

Question 96

Mr. Teig bought common stock in Company X two years ago. Unfortunately, the insider information he was given turned out to be false. The new drug produced by Company X has yet to be approved by the Food and Drug Administration (FDA). As a result, he is sitting on a large loss. He needs the loss to offset capital gains. However, he is still optimistic about the stock. What can you recommend to avoid a wash sale?

A. Sell the stock and buy a deep-in-the-money call.
B. Sell the stock and sell a deep-in-the-money put.
C. Sell the stock and have Mrs. Teig buy the shares the next day.
D. Sell the stock and wait 31 days to buy it back.

Answer 96

D. Sell the stock and wait 31 days to buy it back.

The question says it is a deep-in-the money call. For example, if the market value is $30, then the exercise price must be less, like $15 - 20. He will have to pay at least $10-15 to buy the option. The call and put options leave Mr. Teig in the same position as if he owned the stock. Mrs. Teig’s purchase of the stock would probably fall under the related party rules causing it to be a wash sale. Answer D is the best answer.

Question 97

The Walkers are so proud that their daughter Wendy was awarded a full scholarship to an Ivy League university. Of the following benefits from Wendy’s full scholarship, which are tax-free for federal income tax purposes?

I. Books
II. Equipment that is required for courses
III. Room and board
IV. All expenses if Wendy agrees to work for the federal government in the future
V. Tuition

Answer 97

I, II, V

Books, tuition, course-related fees, equipment, and supplies that are required for courses are tax-free. Room, board, and incidental expenses are taxable. The same is true for a graduate student who is paid a stipend for teaching. A scholarship or fellowship given to a degree candidate who agrees to work for the federal government is taxable (Item IV).

Question 98

2032A facts

Answer 98

The election generally allows an executor to elect to value a farm for federal estate tax purposes based on actual current use, as opposed to the fair market value of the property if it was sold for development purposes.

he applicable base amount is $750,000. It is indexed for inflation. It is over $1 million currently. The decedent must have been a U.S. citizen or resident. The qualified heir must be a lineal descendent.

Question 99

Treasury Inflation-indexed securities (TIPS)

Answer 99

The interest and inflation adjustment may be deferred until the bond is redeemed or maturity occurs in 30 years

Answer C is referring to I bonds. Tax reporting is similar to EE bonds. TIPS are adjusted for deflation as well as inflation. In deflation, the principal is adjusted downward and interest payments are less than they would be. This answer, as written, came from Treasury direct website.

Question 100

Robert Owen (age 64) owns a small business. He has engaged you, a CFP ® practitioner to review his business and his personal finances.

Robert owns and manages Owens Waste Management, a refuse collecting business with his three sons (3) and would like to start phasing out of the day-to-day operations of the business to focus on his passion, politics. Owens Waste Management has significant positive cash flow and operates as an S corporation. Owens Waste Management employs 108 workers (including Robert’s three sons). Owens Waste Management offers a 401(k)-profit sharing plan with a 3% company match, a high deductible health insurance plan, which includes a health savings account (HSA), and a dental plan. Additionally, Owens Waste Management provides a group term life insurance program to all eligible employees.

Robert’s income is $250,000 per year. There is a balance of $100,000 remaining on his 15-year mortgage. He and his wife (age 52) built their dream home 9 years ago, at a cost of $750,000. The house is now worth $1,000,000. Robert’s qualified account at work is currently valued at $875,000. Before he ventures into politics Robert would like to secure a comfortable retirement and help the employees of Owens Waste Management do the same. Given Robert’s objectives, which action shown below would you recommend?

A. Transition Owens Waste Management from an S corporation to an LLC. This will allow Robert to claim the Sec 179 deduction on his personal tax return. With the extra money he will be able to pay off his house and save a little for retirement. Move the 401(k) plan to a Safe Harbor 401(k) plan.

B. Sell the house and pay cash for a new house, change the 401(k) match to 5%, add life insurance policies to the plan.

C. Transition the business from an S corporation to an LLC. Make the 401(k) a Qualified Automatic Contribution Arrangement and add a new comparability profit sharing contribution. In addition, sell the house and pay cash for a new house.

D. Increase the 401(k) match, add an Automatic Contribution Arrangement at 6%, make new comparability profit sharing contribution until he retires, and set up an installment sale arrangement to gradually transfer ownership of the business to his sons.

Answer 100

D- Correct - The ACA feature helps the employees save for their retirement along with an increase in the match. In addition, the new comp will maximize his retirement, and he will receive additional retirement income from the installment payments.

A – Incorrect - The question doesn’t give enough information about the business to invoke Sec. 179. The question also doesn’t indicate the 401(k) plan has issues with non-discrimination testing.

B – Incorrect - Selling the house may not help.

C - Incorrect - Not enough information about the business to determine if an S corp or an LLC is the best option. While new comp will help maximize his retirement, the question does not indicate the 401(k) plan is failing the non-discrimination tests; therefore, a QACA feature is not needed.

Question 101

Dr. Walters, who is age 64, wants to retire next year. He has asked you, a CFP® practitioner, for a retirement income analysis. Given his current assets and risk tolerance, he is asking for an impossible retirement income payout. In order to meet his projections, you would have to factor very high return assumptions into your analysis. What should you do?

Answer 101

Run the projections using only your normal return assumptions and explain why the client’s assumptions are not realistic.

Question 102

Bob Taylor, CFP®, just finished preparing a financial plan for a couple who are his clients. The plan showed the need for a large amount of life insurance on the husband. However, during the initial meeting with the client, the husband said he does not believe in life insurance. What should Bob do?

Answer 102

Present the plan and recommend the life insurance on the husband’s life.

Question 103

Mrs. Pell, a widow who has always lived in a community property state, has found out that her deceased husband bequeathed all his community property to a charitable organization without her knowledge. She is quite upset. What sort of relief do community property states provide in this type of situation?

Answer 103

The widow’s right to elect against the will

Question 104

or the plan to be in effect for the employer’s fiscal year end, a SEP has to be established before what date?

A. Within the tax year for which the employer wishes to take the tax deduction
B. On or before the first date by which a contribution is required to be deposited
C. By April 15th of the year following the year for which the tax deduction is to be attributed
D. By the due date of the business tax return, including extensions

Answer 104

D. By the due date of the business tax return, including extensions

nswer A applies to qualified plans. Answer B applies to SIMPLE plans. Answer C applies to IRAs.

Question 105

Tilly put $100,000 into a trust for her grandson. During his high school years (4), college years (4), and graduate school years (2), he will receive all the income from the trust. After the 10 years, the remaining trust assets will be returned to Tilly. Which phrase below most accurately describes who will pay the tax on the trust income and why?

Answer 105

Tilly as this is a reversionary interest

Question 106

IRD

Answer 106

If the income is included in the gross estate, the estate tax attributable to that income item is generally deductible by the recipient of the income.

Question 107

Mr. Tate died owning a whole life insurance policy under which Mrs. Tate is the named insured. The death benefit of the policy is $250,000, and the cash value was $30,000. Relative to this policy owned by Mr. Tate, what amount will be included in Mr. Tate’s gross estate for federal estate tax purposes?

Answer 107

The interpolated terminal reserve plus the unearned premium

This is the correct way to answer the question. The amount will be greater than the cash value. Replacement value isn’t a correct answer. He died owning a policy on his wife. She was the insured; he was the owner.

Question 108

You are gathering data from your new client, Matt Markham, who is age 50. Matt provides you with the following information regarding his insurance coverages.

No disability insurance
No LTC insurance
A PAP with $100,000/$300,000/$50,000 BI/PD liability coverage
An umbrella liability insurance policy that requires $250,000/$500,000/$100,000 liability limits on the underlying auto policy
Individually owned comprehensive major medical insurance having a $1,000 deductible $1,000,000 umbrella policy
What do you recommend that Matt do first?

Answer 108

Increase the liability limits on the PAP.

This is the simplest and fastest recommendation. Increasing the auto liability will allow the umbrella to work properly. We don’t know enough about the client to do A, B, or D. Is he/she working, retired, married, etc.? What is his/her health? The client is 50 years old. Disability insurance is subject to both health and financial underwriting. It will take time to accomplish.

Question 109

Tim Brown, a new client, has engaged you a CFP® practitioner. He is asking for investment advice only. In addition to holding the CFP® certification, you are a registered representative of a FINRA broker-dealer. Tim has a portfolio of stocks he has purchased through dollar cost averaging over the years. The portfolio contains 5 stocks that are equally weighted in very different industries. In reviewing his portfolio, what composite (risk adjusted) measure of portfolio performance should you implement given his existing stocks?

Answer 109

Sharpe

Five securities are not a diversified portfolio. Some textbooks say 10-15 securities, or more are generally necessary for a portfolio to be diversified. Therefore, the portfolio has both systematic and unsystematic risk. This is a different type Treynor, Sharpe, Jensen question.

Question 110

Mr. and Mrs. Rich bought a home valued at $1,000,000 this year. The current mortgage balance is $750,000. They have decided to purchase a lot in North Carolina having a current FMV of $150,000. If the Richs’ took out a $150,000 home equity loan, the home equity loan would be subject to which of the following?

A. Passive income limitations
B. Active participation rules
C. Excess qualified residence limitations
D. A capitalization rate limitation
E. Interest expense limitations

Answer 110

.
Excess qualified residence limitations

New home equity indebtedness is limited to $750,000 including a home equity loan

Question 111

Mr. Lucky wins a $40 million lottery. If he takes a lump sum award, he will have to pay a substantial amount of taxes. His alternative is to take payments of $2.9 million per year over 20 years. What should Mr. Lucky consider?

Answer 111

The safety and security of these payments must be balanced against the opportunity cost of potentially gaining a greater overall return by taking his single lump-sum amount and investing it.

Question 112

Dan Tedesco, owner of DT, Inc., a $50,000,000 closely held corporation, was granted ISOs by the Board of Directors for $1,000,000 that vest 10% per year over the next 10 years. Which of the following statements is/are correct?

I. Only the first $100,000 will be treated as an ISO for federal income tax purposes.

II. The company cannot grant ISOs to a greater-than-10% shareholder.

III. The company can grant ISOs to Dan providing they vest within 5 years of the grant.

IV. Dan may transfer the ISOs to his heirs by will.

Answer 112

III, IV

More than $100,000 of ISOs may be granted to an employee at a time as long as no more than $100,000 of ISOs (based on the FMV of the underlying stock as of the grant date) vest in a given year. Statement II is false. As long as the exercise price is at least 110% of the FMV of the stock at grant date and the options vest within 5 years, a greater-than-10% shareholder may be granted ISOs. Statement IV is correct. However, ISOs cannot be transferred by the option holder during his/her lifetime. That would be a disqualifying event.

Question 113

Mrs. Turner lives in a state with a 6% state income tax rate. She has a federal income tax rate of 24%. Considering her tax brackets, which of the following bonds would give Mrs. Turner the best return?

A. A municipal bond issued in the state in which she resides paying 5.4%
B. A Treasury bond paying 7%
C. A corporate bond paying 7.8%
D. A municipal bond (issued in another state) paying 6.4%

Answer 113

D. A municipal bond (issued in another state) paying 6.4%

Question 114

Mac Blair decided to make a gift of Blair, Inc. common stock to his son, Blake. Mac seeks that any future appreciation of the stock is not included in his estate for federal estate tax purposes. He is going to retire soon and will need income during his post-retirement years. Mac has converted the majority of his common stock to preferred stock and gifted the remaining common stock to his son. What is the result?

Answer 114

The value of the common stock for gift tax purposes will be based on dividends paid on the preferred stock.

Question 115

a married couple both of SS benefits, what will the remaining spouse gets after the spouse deceases?

Answer 115

After John’s death, Mary will be entitled to the greater of her benefits or 100% of John’s benefits. John and Mary had matching amounts at or over $3,000 per month. That amount will continue.

Question 116

Mrs. Smythe, a widow, just discovered that 85% of her Social Security retirement benefits were taxable last year. What could have caused her benefits to be taxable?

A. One-half of her benefits plus her MAGI exceeded $25,000.
B. She redeemed a large quantity of 30-year-old EE bonds.
C. She exchanged a large quantity of 30-year-old EE bonds for HH Bonds.
D. She purchased a large quantity of EE bonds.

Answer 116

The correct answer is B.

Answer A would make only 50% of Mrs. Smythe’s benefits taxable. For a single taxpayer the 85% is triggered when the provisional income exceeds $34,000 in any given year. The EE bonds produce taxable income when she redeemed them. When HH bonds were issued, EE bonds could be exchanged at maturity for HH bonds. HH bonds are no longer issued.

Question 117

Puffy Sleeves, Inc., an over-the-counter stock is currently selling for $28.50. Its estimated future earnings are $3 per share. If Puffy’s P/E ratio is 11 using the P/E valuation model, is the stock underpriced or overpriced?

Answer 117

The stock is underpriced. ($3 x 11 = $33) using P/E formula.

Question 118

Using the CAPM (Capital Asset Pricing Model) if, on a specific common stock, the market risk premium is 4.5%, the risk-free return is 1.5%, the inflation rate is 3.5%, and the expected market return is 6%. What is the required rate of return? Formula given: r=rf + (Erm – rf) B

Answer 118

6%
The stock risk premium is
r=rf + (Erm – rf) B
r=1.5% + 4.5% = 6%

Question 119

What is the biggest risk associated with establishing an unfunded ILIT?

Answer 119

The grantor(s) transfer in an existing second-to-die policy then die within three years following the transfer.

The biggest risk is that an existing policy will be included in the grantor’s estate 3 year. So, if they die within the 3 years, the policy is included in the estate, but the proceeds are payable to the trust. It is a royal mess. Who will pay the tax? If the trust purchases the policy, the policy will not be subject to a 3-year rule (Answer A). The premium paid on the policy will come from gifts made by the grantor(s). This is an unfunded trust, not a funded trust (Answer C). Answer D could be true, but the trustees have a fiduciary responsibility.

Question 120

Sally gifted property with a basis of $55,000 to her daughter, Alice. The FMV on the date of gift was $110,000. The gift was subject to gift tax at a 40% rate. What is Alice’s adjusted basis in the property for determining her gain or loss when she sells the property?

Answer 120

Alice’s basis will be increased by the gift tax paid by her mother that is attributable to the appreciation.

Question 121

Mr. Adams, age 52, just received an excellent job offer and is going to leave his current employer. He has $300,000 in his account in the employer’s qualified plan (fully vested). Mr. Adams isn’t sure what to do with the $300,000 now. However, he feels he may need some of the money in 4 years. He plans to work for a competitor company for the next 4 years. His new employer provides a 401(k) plan. What do you recommend he do?

Answer 121

Roll the $300,000 into his new employer’s 401(k

There will be no adverse tax consequences if Mr. Adams rolls the current account balance into his new employer’s 401(k) program, A qualified plan, like a 401(k), triggers no 10% penalty for separation from service after age 55. The age 55 exception does not apply to IRAs. Mr. Adams is now age 52; in four years he will be 56 not 59½, so the premature withdrawal penalty would apply unless he arranges substantially equal payments. In four years, Mr. Adams may need more money than that. He can also take out a loan from the 401(k).

Question 122

Consider the information below regarding Stocks A and B:

The risk-free rate of return is 5%.
The market return is 10%.
Stock A is currently selling for $19 with a beta of 1.2. Dividends are currently $.90 and are expected to increase by 5% per year.
Stock B is currently selling for $60 with a beta of .7. Dividends are currently $1.25 and are expected to increase by 6% per year.
Using the DDM formula which statements below are true?

I. Stock A is overvalued.

II. Stock A is undervalued.

III. Stock B is overvalued.

IV. Stock B is undervalued.

Answer 122

Both stocks are overvalued.

Question 123

What is the order of liquidation payout if a corporation goes bankrupt?

Answer 123

Secured creditors such as mortgage bondholders and equipment trust certificate holders are senior. Second are unpaid wages, taxes, and trade creditors. Third are debenture bondholders followed by preferred shareholders. Common shareholders are the most junior and therefore last.

Question 124

Freida Fine owns Freida’s Frocks Inc. which manufactures children’s clothing. Freida had been raised in the Sunny Smiles orphanage which is a public charity so qualified under IRC Section 501 (c) 3. Freida would like to donate 200 girls’ dresses to Sunny Smiles. How would this in-kind gift be evaluated for federal income tax purposes?

Answer 124

At the cost of the dresses to Freida’s Frocks plus one-half of its mark-up to retail pricing

Question 125

Tilly recently inherited a significant amount of personal property from her mother. She is concerned about her property insurance coverage. Which item(s) do you suggest that she talk with her insurance agent about full protection?

I. Gold coins

II. Old furniture and workable TVs that are used in what the family calls “The Shack” that is 500 feet away from the main house

III. Silver—flatware service for twelve

IV. Paintings bought on Amazon.com

Answer 125

Under the HO forms, coins are covered for no more than $200. While the question does not indicate the coins are collectible, given that they are gold the $200 limit applies. Silver has an internal (sub) limit of $2,500 in coverage for theft only. The personal property in a separate structure (“The Shack”) is covered. Artwork bought on the internet would be covered as normal personal property rather than collectibles.

Question 126

ask yourself: is it reasonable to do what the client asks?

Answer 126

always good rule of thumb

Question 127

Alex Hamilton, now age 57, quit his job 2 years ago. After being married for 30 years. Alex and his wife decided to split when he quit his middle management job and started developing websites for the handicapped. His now ex-wife took half of their money and moved to France. Alex’s websites went viral and his annual income went from around $90,000 in a typical year to $300,000. He has no formal employees but some of his fraternity brothers help him and are paid under a 1099 arrangement. Alex wants to establish a retirement plan. You ask him about his lifestyle and his expenses. He says he is now dating the lovely Fifi, who is age 39. To compete with her other boyfriends, he leased a Mercedes-Benz and takes Fifi to fine restaurants and the theater where he buys main floor seats. From the choices below, which type of retirement plan would you suggest?

Answer 127

Uni0K

The catch-up provision available with the Uni (Solo) 401(k) allows Alex to contribute a total of $67,000 for the current tax year. Given that they do not offer a catch-up contribution opportunity, the SEP and target benefit only allow $61,000. The Uni-(k) will be an ERISA plan. Fully funding actuarially determined contributions to a defined benefit plan will require more money than his current expenses allow.

Question 128

Jill’s estate will be subject to federal estate tax at its current 40% rate. She is considering transferring appreciated stock to a charitable remainder annuity trust (CRAT). Jill plans to retain a 5% annuity interest for herself. After her death, the assets would pass to the charity or charities that are named in the trust. If she had not created the trust, her heirs would have inherited her estate. However, main disadvantage to the plan is the loss of the inheritance to her family. What type of additional planning would you recommend to Jill?

Answer 128

A wealth replacement is an irrevocable life insurance trust (ILIT) that is generally established for the children of parents with charitable remainder trusts. Under CRT arrangements, the parents receive the trust income and the charity(s) take the remainder. The wealth replacement trust provides the children with money when the parent(s) die. The insurance benefit would ultimately be distributed to family members to replace the wealth given to charity. Some of the income paid by the CRAT can be used to pay premiums on insurance on the donor’s life.

Question 129

The Federal Reserve Board (FRB) has the means to affect the supply of money in the US economy. If the federal government wanted to increase the money supply, what would it most likely do?

Answer 129

Reduce federal income taxes

The question asks what the federal government would do and not the activities of the FRB. This represents fiscal, rather than monetary policy. The other answers which are incorrect, represent monetary policy.

Question 130

Mrs. Able established a Generation Skipping Trust. When Mrs. Able dies, $23,400,000 will be put into the trust. After her death, the trust will pay income to her son. At her son’s death, all remaining principal will be distributed to her grandchildren. From the choices below, identify the party with the responsibility to pay the GST tax.

Answer 130

At her son’s death, the GSTT is due. The trustee will pay the tax.

Mrs. Able’s trust will create an indirect skip (taxable termination because the assets in the trust will exceed the GST exemption. The trustee will pay the GST tax from the trust assets when her son’s life interest terminates, the assets will be transferred to the grandchildren (skip persons).

Question 131

Which of the following benefits would be covered under Medicare Part A?

I. Home health services that are part of a treatment plan

II. First 3 units of blood in a calendar year

III. Oral anti-cancer drugs

IV. Care in an extended care facility (maximum 100 days)

V. Emergency care while in Europe

Answer 131

I, IV

Medicare Part A will cover home health visits that are part of a treatment plan and up to 100 days in an extended care facility presuming rehabilitative purposes. The patient must pay the hospital cost for the first 3 units of blood in a calendar year or have blood donated by the person or someone else. Answer III is covered by Part B. Answer V is not covered by Medicare.

Question 132

How would the Federal Reserve Board and Congress generally be expected to respond when unemployment is rising, consumer spending is declining, and stock prices are rising?

I. Decrease interest rates
II. Decrease margin requirements
III. Increase repo (repurchase) agreements (Buy securities)
IV. Decrease repo (repurchase) agreements (Sell securities)
V. Increase government spending

Answer 132

I, III, V

To stimulate the shaky economy, the Federal Reserve Board would pursue expansionary monetary policy (easy money). It would thus be expected to decrease interest rates and buy securities from the banking sector. Congress would increase spending with the intent to stimulate the economy. Decreasing margin requirements (30% versus current 50%) would just increase stock market speculation. If the Reg. T initial margin requirement is 50%, a decrease in to 30% would allow margin investors to buy more stock. However, that does not necessarily stimulate the economy.

Question 133

Under Coverdell ESAs, which of the following are qualified (nontaxable) elementary and secondary school expenses?

I. Academic tutoring

II. Extended day programs

III. Uniforms

IV. Computer software primarily involving sports

V. Intramural sports equipment

Answer 133

I, II, III

Question 134

After meeting with several doctors Mr. Lang now understands that he only has a few years to live. With an eye toward minimizing federal estate taxes, he would like to transfer appreciated assets to his children. If he died today, part of his estate would be subject to the 40% estate tax. Of course, Mr. Lang would also like to avoid gift taxes or use the full exclusion. He would like to receive income from the assets transferred and he would like to minimize the income tax on any distributions. Mr. Lang is in the maximum income tax bracket. Which of the following wealth transfer methods should he consider?

Answer 134

A SCIN (self-cancelling installment note)

Until Mr. Lang dies, under the SCIN, capital gain may be recognized in installments. The SCIN removes the property and any unsatisfied payments from Mr. Lang’s estate. Under a private annuity all gain would have to be recognized (be attributed) to the year of sale. Under a FLP he can only gift away $30,000 per beneficiary per year (presuming a 50% discount which may be too aggressive). The question does not specify how many children Mr. Lang has. Unless he has many children and considerable time, the family limited partnership strategy would not be effective.

Question 135

Lenny was divorced. He has two daughters with his first wife. A few years before his death, he married Marilyn (second wife). Lennie established a trust for Marilyn. The trust provisions gave Marilyn the right to trust income limited to the ascertainable standards of health, education, maintenance, and support (HEMS). The trust agreement also provides Marilyn with a discretionary right to principal, limited to the same HEMS standard, but which had to be preceded by the exhaustion of Marilyn’s other resources. After Marilyn’s death, the remainder of the trust passes to Lenny’s children. What type of trust does it appear that Lenny established?

Answer 135

The provisions for Marilyn reflect a bypass trust (B trust). The right to income limited to HEMS is not a right to all income from the trust as would apply with a QTIP trust. Also, the QTIP cannot use the lifetime exclusion.

Question 136

Josh Turner calls you first thing Monday morning and he is in a panic. He has been your client for the past 5 years. Josh needs cash immediately to help his unemployed daughter, his entrepreneurial brother whose business is on the brink, and to replace the air conditioning system in his home. His FICO credit score is low. Josh’s bank has declined to make loans to him. It appears that Josh has a small IRA, his wife’ has a medium-sized Roth IRA, and his 401(k) vested account balance at work is $100,000. In the background, you can hear Josh’s wife yelling at him. You are a CFP® certificant. What would you suggest for Josh to get the money?

Answer 136

Josh, contact the 401(k) plan administrator to arrange for a maximum loan from your account.

Question 137

John and Pamela Underton wrote a check for $500,000 to their daughter, Bunnie, on January 1st of the current year. It was a gift. They wrote the check out of their joint money market account. John called his CPA to inform him that the gift had been made and requested that the CPA prepare two Form 709’s to report the gift splitting. Before the 709 was filed, John died. Bunnie had not cashed the check as of the date of her father’s death. Given these events, what tax results would be expected?

Answer 137

The transfer will still be presumed as a split gift.

Gifts made before one spouse dies may be split even if that spouse dies before signing the appropriate consent and election on Form 709. On behalf of the deceased spouse, his executor can make the appropriate election. This is not per se an incomplete gift. The check was written from a joint checking account and Pamela (the mother) is still living.

Question 138

Mrs. Basic, a widow, is concerned about her son, Zach, age 13. Her husband died when Zach was only 6. Her only brother, Atilla has repeatedly demonstrated dishonest behavior and poor money habits. Mrs. Basic owns about $1 million in assets plus insurance life insurance policy. Being somewhat uncomfortable with lawyers, Mrs. Basic wants a simple arrangement. You have suggested that she establish a revocable trust, but Mrs. Basic thinks that entails too much fuss. Presuming that Zach seems to be a very responsible young person who has demonstrated good money habits, which of the strategies below might Mrs. Basic consider?

Answer 138

At death, transfer her property to an UTMA account naming a large bank as custodian

Question 139

Samuel Hall, age 69, is about to retire. He participates in his not-for-profit employer’s 403(b) plan. However, Samuel would like to avoid taking RMDs as he has cash set aside for retirement. He would like the proceeds of the 403(b) to pass to his children. Which of the following strategies would be available to Samuel?

.A. t retirement, roll the 403(b) into a Roth IRA
B. At retirement, take RMDs with his children as primary beneficiaries
C. At retirement, roll the 403(b) into an IRA and then into a Roth IRA
D. At retirement, take distributions

Answer 139

At retirement, roll the 403(b) into a Roth IRA

Under current rules, distributions from tax-qualified retirement plans, TSAs [403(b)] and governmental 457s may be rolled directly into a Roth IRA. Samuel will have to pay tax on the amount that is rolled over. There would be no penalty because rollovers do not incur penalty and because Samuel is well over age 59½.