1
Q
regulations
source
A
- administrative
- address issues and explain IRC
- can be issued by Treasury
2
Q
revenue rulings
source, force of law
A
- administrative
- Treasury proclamations to address common questions
- no force of law
3
Q
revenue proedures
source
A
- administrative
- provide additional info documents to taxpayers (adjusted inflation #s)
4
Q
private letter rulings vs determination letters
source
A
- private: before transaction
- determination: after transaction
- source: administrative
5
Q
which courts allow jury trials for tax claims?
A
US District Court only
6
Q
which courts require prepayment of tax for tax claims?
A
federal and district court
7
Q
IRS statute of limitations
A
- 3 to audit
- 6 to audit of >25% of income omitted
- 10 to collect
- none if fraud or never filed
8
Q
technical advice memos
source
A
- administrative
- tells IRS reps how to treat transactions
9
Q
Commerce Clearing House vs Congressional Committee Reports
A
- Commerce: plain language interpretation of law
- Congress: “blue book”; congress reason/intent
10
Q
1231 vs 1250 taxation
carry back
A
- 1231: gain = capital; loss = ordinary; carry back 5 years
- 1250: realty only; accelerated depreciation = OI; deprecition recapture = 25%; gain = LTCG
11
Q
gift holding period
A
carries over unless it’s gifted as a loss in which case double-basis rules apply and it’s ST
12
Q
MACRS
A
CAT OFF Right Now
- 5: computers, auto, trucks
- 7: office furniture and fixtures
- 27.5: residential realty
- 39: commerical realty
13
Q
deductions FOR AGI vs FROM AGI
A
FOR:
- 1/2 self-emp tax
- student loan interest <$2500
- moving
- alimony
- buisness expenses
- loss on property exchange
FROM
- medical > 7.5% AGI
- state and local income OR sales tax up to $10K
- foreign tax
- property tax
- interest (investment, mortgage)
- charity
- gambling
- casualty
- IRD
14
Q
what kind of assets are not capital assets?
A
ACID
- A/R
- creavive works in hands of creator; copyrights
- inventory
- depreciable property
15
Q
loss sale to relative
taxation, holding period, who is a relative
A
- tax: seller gets no deduction, buyer has double basis
- holding: no carry over
- who: mostly lineal (not in law, aunt/uncle, cousin)
16
Q
1244 capital loss and 1202 gain
A
- 1244: deduct up to $50K ($100K MFJ) for small business (<$1M) stock; carry forward
- 1202: favorable capital gain treatment for small business stock held >5 years
17
Q
1031 unsimultaneous
requirement, timeline
A
- hold funds in escrow
- 45 days to identify property
- 180 to receive property (within sale or due date of return)
18
Q
quaified widow
A
- NOT in year of death (use MFJ or MFS)
- 2 years after
- must have dependent child and not be remarried
19
Q
qualified dependent child vs relative
A
child
- <19 or student <24
- must have SSN
- can be niece, sibling, grandchild
relative
- provide >50% support
- earn <$4400
- no SSN required but must be N. American
- NOT cousin
- YES niece
20
Q
child tax credit
amount and requirement
A
- amount: $2K (phased out) with $1500 refundable
- <17 and you provide >50% support
- must have SSN
21
Q
SS benefit taxation
hurdle values
A
- provisional income = AGI + tax-exempt interest + 1/2 SS benefits
- Single hurdles: $25K and $34K
- MFJ hurdles: $32K and $44K
- below 1st hurdle = 0% tax
- above 2nd hurdle = 85% tax
- between = 50% of benefit OR 50% of amount above 1st hurdle
22
Q
flexible spending allowable exclusion
A
$2850/year
$500 can rollover
23
Q
charity deduction %
limits and carrying forward/back
A
- cash = 60% of AGI
- LTCG: 50% if using basis and 30% if using FMV (cannot use basis if loss property)
- STCG: lesser of FMV or basis up to 50% AGI
- carry forward 5 years
24
Q
realty passive loss exception
A
- if material participant, can deduct $25K of passive income against other income
- carry over the rest
- AGI phaseout $100-$150K
25
personal vs mixed vs rental use and tax treatment
- **personal**: rent <15 days; no income recognized
- **rental**: rent >14 and use < greater of 14 days or 10% of rental; taxable income but deduct losses
- **mixed**: anything in between; can't deduct beyond income; interest and taxes are deduted daily based on rental days / 365; other expenses are deducted based on rental days / total days used
26
section 179 expense
- expense up to $1,080,000 for tangible business
- reduced by amount > $2.7M
- limited to income
- can carry forward but still limited to income
27
when is international travel assumed purely business
| airfare treatment
- <7 days
- <25% personal
- no control over arrangements
- Note: airfare is pro-rata unless it's fully business travel
28
tax preparer penalty
if willfull or reckless under-reporting, greater of $5K or 50% income received
29
sequence that business credits are applied (current year, carry forward/back)
- carried forward
- current year
- carried back
30
accuracy-related penalty
if substantial understatement of liability (>10% or $5K), 20% unless fraud which is 75%
31
minimum failure to file penalty
lesser of $435 or 100% of tax due
32
how much must self-employed make before required to file?
$400
33
Form 5498 vs 8606 vs 1099-R
- 5498 - IRA contributions
- 8606 - IRA distributions
- 1099-R - IRA rollovers
34
over what period are intangible assets amortized?
| examples
15 years
non-compete, goodwill, TM, copyright
35
what is substantial authority?
| examples
- any official rulings/words that someone can rely on
- IRC, Treasury regulations, private letters, blue book
36
what are qualified dividends and how are they taxed?
- held for >60 days in the 121 days surrounding the ex-dividend date
- taxed as capital gains
37
can you claim head of household if spouse lived in the house this year?
yes, as long as they moved out 6+ months ago
38
what can AOTC be used for?
tuition, required fees, textbook (direct or indirect), required lab fees
39
do you have to use the same accounting method for W2 and self-employment income?
yes
40
do REITs pay qualified dividends?
no, but they can pay make nondividend distributions
41
factors for determining whether compensation is unreasonable
- consider circumstances when agreement was made
- can be reasonable if EE took some risk (e.g., comp based on profit)
42
how is a worthless security taxed?
it's considered sold as of 12/31 of the year it became worthless, so it may be ST or LT
43
when is functional use test used vs the use test?
- **functional**: in non-taxable exchange if taxpayer used the asset directly
- **use** - in non-taxable exchange if taxpayer did not use directly; must use the new asset in an activity that is treated the same for tax
44
what is the value of gifted property for depreciation purposes?
lesser of FMV or basis
45
how and when is bargain element taxed for NQSO?
at exercised, recognized (OI?)
46
when does 179 recapture apply?
- when you sell the asset before it would have depreciated fully OR
- when the business use drops before 50%
47
universal life
| return, investment control, A vs B
- flexibility
- minimum return but ER controls invesment
- can use CV to pay premiums
- A = constant DB
- B = DB can increase with CV; varbiable premium
48
whole life
| premium, DB, investment control, return, ordinary vs limited pay
- use to get guarantees
- fixed DB and fixed premium
- ER controls investment with fixed return
- ordinary = pay premiums until 100 or 120
- limited pay = pay premiums until certain age
49
speculative risk
chance of loss or gain
50
risk management tools
- avoid (don't drink and drive)
- transfer (insurance)
- retain (door dings, minor cut)
- reduce (install sprinklers, protective clothing)
51
indemnity vs subdrogation
- indemnity - cannot profit from insurance; right to be made whole
- subdrogation - insuror can collect on your behalf
52
insurance branches and roles
- legislative - enacts licensing laws
- judiical - rules on constitutionality
- executive - interprets/enforces laws
53
federal insurance oversight
IRS, SEC, ERISA
54
what does NAIC do
- provides watch list of companies
- issues model legislation
- accredits state regulatory offices
55
installment refund annuity
pays over life until death but provides refund to return basis at death
56
HSA penalty
| when and how much
- for any non-medical expenses
- tax + 20% <65
- tax but no penalty 65+
57
non-forfeiture rights vs settlement options vs dividend options for insurance
- **non-forfeiture**: cash surrender value, reduced paid up, extended term
- **settlement**: lump sum, interest only, annuity, fixed period, fixed amount
- **dividend**: cash, accumulate at interest, reduce premiums, paid up additions (no health assessment), 1 year tern (health assessment)
58
ADLs
BED To Chair
- Bathing
- Eating
- Dressing
- Toileting
- Transferring
- Continence
59
direct recognition program
loan from CV for life insurance means dividends and interest will be based on lower CV amount
60
who must provide COBRA?
ER that offers group health plan with 20+ EEs
61
how long is COBRA offered?
- 18 months: normal termination
- 36 months: retire, death, divore, medicare eligible, loss of dependency status
- 29: disabled (24 months until SS received and then 5 mo elimination period to get disability)
62
how are LTC premiums and benefits taxed?
- premiums - deduct to extent they exceed 7.5% AGI
- benefits tax free if qualified policy
63
requirements for LTC policy to be qualified
- no surrender value
- dividends only reduce premiums or increae benefits
- does not cover medicare expenses
- meets consumer protection laws
64
HO section 1
- A - dwelling (asset)
- B - other structures (barn)
- C - personality (casualty)
- D - loss of use (Days Inn)
- E - personal liability (Eddie's needed)
- F - medical payments (fallen)
65
general HO exclusions
ground movement, law, water damage, war, power failure, neglect, intentional
66
HO 1,2,3,4,5,6,8,15
- 1 - basic perils
- 2 - broad perils
- 3 - special (open but personalty is broad)
- 4 - renters (4 rent)
- 5 - open perils
- 6 - condo
- 8 - modified form
- 15 - endorce personalty of open endorcement (3 x 5 = 15)
67
auto A,B,C,D,E,F
- A - liability (Auto Attorney)
- B - medical bills (Bills)
- C - uninsured motorist (Cunt doesn't have insurance lol)
- D - collision and comprehensive (Damage to auto)
- E - duties under accident
- F - not usable in Mexico
68
impact to benefits when SS is taken early or late
- early: -5/9% per month for first 36 months then -5/12% per month
- late: +8% per year up to 70 (+2/3% per month)
69
definition of disability for SS purposes
expect to last 12+ months or result in death
cannot do any occupation
70
who qualifies for medicare?
- 65+
- disabled 2+ years
- spouse 65+ based on spouse's work history
71
who can receive SS from someone else's work history?
EE still alive
- spouse 62+
- spouse with child <16
- disabled spouse
- child <18 if in HS (50%)
- ex-spouse of 10+ years is 62+ but didn't remarry after 60
EE dead
- same as above
- widow 60+ (100%)
- child < 18 and in HS (75%)
- dependent parent (82.5%) if fully insured
72
who gets benefits if EE dies while currently insured?
- survivor if child <16
- child <18
- lump sum is provided
73
how are SS beenfits impacted if you take SS while still working?
reduced by $1 for every $2 earned above the Earnings Limit
74
Medicare Part A
| what it's for, deductible, coinsurance
- places (hospital, home, hospice; NOT custodial LTC)
- deductible normally $1556/benefit period
- coinsurance:
- days 61-90 = 1/4 of deductible
- days 91-150 = 1/2 of deductible
- skilled nursing care 21-100 = 1/8 of deductible
75
Medicare part B
| what is it for, permiums, deductible
- extras like dental, hearing, prevention, eye, cosmetic
- premium: $170.10+ based on income which is deducted from SS
- deductible: $233/year then 20% copay
76
Medicare part C and D
- C: advantage but must have A and B and usually no hospital or emergency
- D: perscription drugs
77
aleatory
money exchanged must be unequal (small premium, large benefit)
78
parole evidence rule
once writtten, prior understanding is disregarded
79
estoppel
denied rights otherwise would've been entitied to (can't raise premiums if insurer said they wouldn't)
80
insurance rating agencies
AM Bests, Moodys, Standard & Poors
81
group LTC taxation
| cafeteria plan
- no tax on premiums or benefits
- cannot be in cafeteria plan
82
split definition of disability
own occupation to start (2-3 years) then modified any occupation
83
taxation of premiums when EE pays some of gorup term premiums
- calculate normal inclusion of income for amount over $50K in coverage
- subtracted what the EE pays in premiums
84
IPA vs group model for HMO
- IPA: greatest flexibility
- group: network model
85
what is the main responsibility of the insurance underwriter?
guard against adverse selection
86
collateral source rule
person who commits a tort won't benefit just because victim has insurance
87
disability income policy rider
converts coverage after 65 to LTC
88
how does entity purchase agreement impact surviving owner basis?
no change
89
what is the minimum number of people that must be covered under a group term plan?
10
90
conditional receipt
provides temporary insurance coverage until insurability is proven
91
how are NQSO taxed?
- **grant**: no tax as long as the exercise price is > or = FMV of stock at grant
- **exercise**: OI on bargain element
- **sale**: LTCG or STCG based on time from exercise
92
cash balance plans
| return, PBGC, vesting
- guaranteed investment return
- not 100% guaranteed by PBGC
- 3-year cliff
93
what is the vesting requirement for qualified automatic contribution arrangements?
100% in 2 years
94
can ESOPs be integrated with SSS?
no
95
how do changes in turnover impact DB funding costs?
- lower turnover = increased funding costs
- higher turnover = reduced funding costs
96
maximum excess rate for DB vs DC plan?
- **DB**: 2x benefit formula limited to 35 years and 0.75%
- **DC**: 2x contribution limited to disparity of 5.7% (e.g., if 10% than max excess is 15.7%)
97
are forfeitures included in annual additions?
Not if they're not allocated to individual accounts (i.e., they are used to reduce ER contributions)
98
required contribution and vesting for top-heavy plan
- DC: 3% to non-key
- DB: 2%
- 2-6 graded or 3 year cliff
99
who can be the beneficiary of a pension plan
the spouse only unless the spouse agrees to sign a waiver
100
what is the maximum contribution that can be made to a DB plan?
whatever the actuary determines needs to be made
101
paired plans aka tandem plans
combines Money Purchase and profit-sharing plan
101
paired plans aka tandem plans
combines Money Purchase and profit-sharing plan
102
Section 415 limit for DC plans
$61K
103
do voting rights need to be passed through to participating EEs in profit-sharing plan?
Only if ESOP
104
what is the non-elective contribution on a QACA Qualified automatic contribution arrangement)?
3%
105
what is the max # service years a CODA can require?
- 1 for participation; max of 2 for ER match
- the 2 year of service rule for participation is for qualified plans other than a 401k
106
what cannot be included in a VEBA?
retirement benefits and commuter benefits
107
for a group term insurance plan to be non-discriminatory, what % of EEs must it benefit?
70% of all EEs or a group of qhich 85% are not key EEs
108
what is a SERP?
- deferred comp plan
- provides retirement benefits above the company's qualified plan AND without regard to Section 415 limits
109
what is a funded deferred comp plan
- non-qualified
- provides vested beneficial interest in an account
110
what is a 412(e) plan?
DB plan funded with insurance products
111
does a profit-sharing plan allow EE elective deferrals?
No; a 401k is the only one that does
112
what type of plans can use the offset method of integrating with SS?
DB only
113
can a SIMPLE plan be integrated with SS?
No
114
What is the SIMPLE IRA withdrawal penalty?
25% (+ tax) in the first 2 years if no exception is met
115
what type of plans does the 20% withholding requirement for withdrawals apply to?
qualified plans (i.e., not SIMPLEs)
116
do Roth account distributions for disabled have tax or penalty?
No penalty but tax will apply on a pro rata basis if account is <5 years old
117
is participation in a SIMPLE considered an active participant?
Yes
118
what is the penalty for RMDs not taken?
50% excise tax on the amount not taken
119
what happens when a DB plan is converted to a cash balance plan?
- PV of the accrued benefit from the DB plan is preserved
- you earn additional benefits under the Cash Balance plan
120
how does taxation work when life insurance is an incidental benefit inside a qualified retirement plan?
| tests
- the premiums paid within the plan are taxable to the EE at the time of payment
- 25% test for term or universal (premiums cant exceed 25% of ER contributions)
- 50% test for whole
121
is immediate vesting required for negative elections?
no
122
can an owner of a c corp take a loan without it being a prohibited transaction?
Yes, as long as:
- loans are available to all equally
- reasonable interest rate
- complies with plan provisions
- adequately secured
123
what vesting does cash balance plan use?
3 year cliff
124
how many work hours are required for a year to count for vesting?
1000
125
do SEPs allow forfeitures?
No
126
Does ACP testing apply to 403b?
Yes if it is an ERISA plan
127
When does the SS earnings test apply?
| what does it apply to?
- only before normal age retirement
- only applies to earned income
128
what program would cover a hospital stay over 100 days?
Medicaid or LTC insurance
129
exceptions to 10% penalty for qualified plans
- death
- disability
- substantially equal distributions
- medical >7.5%
- federal tax levy
- **DC only**: birth/adoption up to $5K
- **qual plan only**: service separate 55+, QDRO
- **IRA only**: HHH; health insurance if unemployed, higher education, first home purchase up to $10K
130
what does 50/40 test apply to?
DB plans
131
what makes a plan considered top-heavy?
| how many officers are considered?
- >60% of accrued benefits (DB) or account balances (DC) belong to key EEs
- 50; if >50, it's ranked by compensation
132
is a 403b plan a qualified plan?
no, it is only a tax-advantaged plan
133
parent-subsidiary vs brothersister relationship
- Parent: 1+ corp; 80%+ of the stock is owned
- Bro-sis: 2+ corp; 80%+ controlling interest or 50%+ effective control
134
do money purchase plans use an actuary?
No; annual contribution is predefined in plan docs
135
what is max PBGC and who does it not insure?
- ~$6200
- DC, profit-sharing, DB for professionaal service with <26 participants
136
new comparability plan
- contributions based on EE class (e.g., officer)
- must comply with cross-testing
137
what is a thrift plan?
allows after-tax EE contributions (like a Roth)
138
due date for corrective distribution and penalty if missed
- due within 2.5 months of plan year end
- 10% excise tax on excess
139
qualified automatic enrollment
| ER contributions, EE deferrals, vesting
- ER: non-elective 3% or match 100% of 1% and 50% of 2-6%
- 2 year cliff
- EE: max 15% (scales by year; 3-6% in years 1-4)
140
diversification option requirement for ESOP
age 55+ AND 10 years participation can diversify 25% for 5 years (50% year 6)
141
qhich non-qualified Roth IRA distributions have a penalty?
- conversions within 5 years
- earnings
142
which investments are not permitted for IRAs?
- life insurance
- collectibles
- other coins (krugerrands, maple leaf, panda)
143
SEP
| funding, eligibility, max, vesting
- **funding**: ER contributions only
- **eligibility**: 21+, services 3/5 last years, comp $650+
- **max**: lesser of 25% OR $61K
- **vesting**: immediate (like IRA)
144
SIMPLE
| who can/can't establish, funding, deadline to est., vesting, penalty
- <101 eligible EEs who earn $5K+
- cannot establish if ER contributes to any other DC plan
- **funding**: ER required contribution of 2% non-elective or 3% match
- optional EE deferral
- **deadline** for establishing: Ot 1 of plan year
- **vesting** 100% immediate
- **penalty** of 25% for withdrawals within 2 years; 10% after that if no IRA exception
145
which plans do not allow SS integration?
401k, ESOP, SIMPLE
146
penalty for prohibited transactions in qualified plan
- 15% excise tax unless corrected within 14 days of discovery
- 100% if not corrected within taxable period
147
penalty for prohibited transactions within IRA
10%
148
403b aka TSA
| who can est., catch up contributions, investments, loans
- **who**: public education, tax-exempt
- **catch up**: for HER (health, education, religious) of $3K/year up to $15K if 50+ and 15+ YoS
- **investments**: insurance annuity, mutual funds
- **loans**: allowed
149
457
| who can est., catch up, roll over
- **who**: government (public) or 501c (private)
- **catch up**: only for public
- **add'l catch up**: within 3 years of retirement, add'l $20,500 if unused deferrals but can't combine with normal catch up and ER doesn't have to offer it (public or private)
- **roll over**: 457/401k/403b/IRA (public); 457 (private)
150
secular trust substantial risk of forfeiture
irrevocable but not subject to ER creditors so no risk unless it includes vesting
151
can ISO or NQSO be gifted?
| basis
- ISO: only after exercise date
- NQSO: yes if ER allows but EE still has income when donor exercises and donoee gets all basis
152
taxation of stock apppreciation rights
- cashless exercise
- W2 at exercise
- can make 83b election
153
Employee Stock Purchase Plan
| price, limit, taxation
- price: 85%+ of FMV at grant or exercise
- limit: $25K/year based on 100% of FMV at grant
- taxed as ordeinary or W2 depending on whether you meet the 2 year grant and 1 year exercise holding
154
ER taxation on non-qualified deferred comp
saves on payroll taxes except for 1.45% medicare
155
is catch up deferral impacted by ADP limitation for non-safe harbor plans?
no; even HC can still do $6500
156
deadline for making a deductible IRA contribution
due date of return with NO extensions
157
does qualified plan vesting period start before age 21?
Yes, as long as you work 1000+ hours
158
if 2 spouses have SS, what is the minimum amount the lower spouse will get?
50% of higher spouse's amount
159
are 403bs subject to ADP testing? What about SIMPLEs?
No for both
160
457 eartly withdrawal penalty
generally none because it's considered deferred comp
161
tax or penalty on IRA distributions >59.5 but <5 years old?
- No penalty because 59.5 is a penalty exception
- Tax on any earings distributed
162
what is the limit for annual contributions for someone who is self-employed who has a 401k and a 457?
- CAN exceed $61k
- $20,500 to 401k (+$6500 catch up)
- $20,500 to 457
- 20% to self-employment plan
163
are ineligible EEs counted for 20% HC election?
Yes and rounded up to whole person
164
for ADP test, is it the total of all deferrals divided by total of all covered comp or simple average of deferral %?
simple average of deferral %
165
is there tax or penalty on a QDRO distribution?
tax (so 20% withholding) but no penalty
166
how do relatives impact who is HC?
even if they don't meet the HC threshhold, considered HC if relative is
167
notice of investigation
| time to respond, what happens if not met
- 30 days (calendar)
- second notice
- 30 days
- default
168
request for documentation
| time to respond, what happens if not met
- 30 days
- second request
- 14 ays
- failure to cooperate may be grounds for sanction
169
motion for interim suspension
| time to respond, what happens if not
- 14 days
- no specific consequence
170
prove not using marks post-suspension or revoke
| time to respond, what happens if missed
- 45 calendar days
- no specific consequence
171
Fitness Standards - ALWAYS bar certification
- felony for financial or tax crimes
- felony for murder or rape
- felony for violent crime within last 5 years
- financial professional license revoked (unless administrative error) NOT just suspended
172
Fitness Standards - PRESUMED unacceptable
- 2+ personal/biz bankruptcies
- revocation/suspension of non-financial license (real estate, attrorney)
- suspension of financial/tax license?
- felony for nonviolent crime in last 5 years (including perjury)
- felony for violent crime 5+ years ago
173
Investment Advisor Act of 1940 definition of investment advisor
ABCs
In the BUSINESS of providing ADVICE about securities for COMPENSATION
174
EXCEPTions to SEC registration
the Publisher was Broke because he was L.A.T.E. to US Bank
- Publisher
- Broker/dealer
- Lawyers, Accountants, Teachers, Engineers
- US secured securities
- Banks that are not investment companies
175
EXEMPTions for SEC registration
VIPs are SaFE
- advise only **Venture** capital funds
- advise only **Insurance** companies
- advise only **Private** funds (<$150m)
- clients reside in their **State** only
- **Foreign** advisors with no US business
- not advising on a **National** exchange
176
thresholds to be considered an accreditied investor
1,2,3 test
- $1M net worth excluding personal home
- make $200K+ in 2 most recent years if single
- $300K+ if married/married equivalent
177
does the federal reserve control the prime lending rate?
no
178
Discount Rate vs Federal Funds Rate vs Prime Rate
- **Discount**: tool used by federal reserve; rate at which banks borrow from federal reserve to meet reserve requirement
- **Federal Funds**: rate that banks borrow from each other
- **Prime**: rate banks give their best customers (NOT set by federal reserve)
179
federal pell grant
| who can get it, what can it be used for
- needs based
- bachelors or professional degree only
180
is grad PLUS loan subsidized?
no
181
American Opportunity Tax Credit
| how much is it, max, what it can be used for, what level of education
more than Lifetime Learning but only 4 years
- **how much**: 100% of first $2K in expenses; 25% of next $2K
- **max**: $2500 per STUDENT
- **use**: tuition paid drectly but others do not
- **level**: 4 years post-secondary
182
Lifetime Learning Credit
| how much is it, max, what it can be used for, what level of education
lower amount and more restricted but can use for more years than AOTC
- **how much**: 20% of $10K in expenses
- **max**: $2000 per FAMILY
- **use**: all expenses paid directly to institution
- **level**: any post-secondary
183
what is Form ADV used for and what does it outline?
- used by RIA to register with SEC
- part 1: background of firm and execs
- part 2: compensation, education, strategy, conflicts
- part 3: relationship summary (broker vs dealer)
184
fiduciary duty
loyalty
care
follow client instructions
185
code of ethics
I Can Obtain CFP Designation
- Integrity
- Competence and Confidentiality
- Objective judgement
- Conflicts disclosed
- Fairness
- Professionalism (reflects Positively)
- Diligence
186
duties owed to the client
- fiduciary
- disclose conflicts
- confidentiality and privacy
- provide info (documents)
187
duties owed to firms and subordinates
- supervisors use reasonable care
- comply with lawful firm objectives
- provide notice of public discipline
188
Standards of Conduct
- duties owed to client
- financial planning and applying practice standards
- duties to firms/subordinates
- duties to CFP board
- prohibition on circumvention (can't do anything prohibited indirectly)
189
main goals of Federal Reserve
- maintain long-term economic growth
- maintain price levels
- maintain full employment
190
what do a series 6 and 7 allow you to sell
- **6**: mutual funds, UITs, variables (life insurance, annuities IF state license)
- **7**: everything except for commodities and futures
191
who uses monetary policy vs fiscal policy
- Federal Reserve uses monetary
- Congress uses fiscal
192
Chapter 7 vs 11 vs 13 bankruptcy purposes
- 7: liquidation
- 11: reorganization (business)
- 13: adjusting debts (individuals)
193
what debts are not discharged in chapter 7
- 3 years back taxes
- alimony and child support
- student loans
- debts through fraud
194
what assets are protected in chapter 7
- rollover IRAs
- IRAs and Roths up to $1.3M (NOT inherited IRAs)
- alimony and child support
- pensions, life insurance, annuities
195
what can 529 money be used for?
- college
- apprenticeships up to $10K/year
- elementary/secondarty up to $10K total
196
529A ABLE?
| who can have it, limits
- entitled to SS disability or SSI
- 1 account per beneficiary
- if >$100K, SSI suspended
197
Coverdell Education Savings Account
| max, what can it be used for, age limits, FAFSA treatment
- **max**: $2K/year/beneficiary (can have multiple accounts but still $2K max combined)
- **use**: elementary or secondary too
- CAN change beneficiary
- **age**: No contributions after 18 and no distributions after 30
- **FAFSA**: asset of the parents
198
529 owned by grandparent
| FAFSA, strategy
- NOT included in FAFSA unless distributed
- wait to distribute until as late as possible so they grow without impacting other aid
199
are any of these items considered an asset for FAFSA?: life insurance, investment real estate, annuities
investment real estate = yes
life insurance and annuities = no
200
is scope of engagement required when providing financial advice?
No, only when providing financial planning
201
principles vs values-driven planning
- **principle**: based on clients goals?
- **values**: looks at the clients life goals, including personal, emotional, and spiritual goals, rather than just financials
202
what term describes savings accounts, stocks, bonds, mutual funds?
| liquid assets, use assets, or financial assets
financial
203
what goods/services are most affected by the recesion?
capital goods (e.g., car)
204
are money market mutual funds insured by FDIC? what about IRAs?
- money market: no
- IRA: unlikely but can be if invested in cash
205
in what situations is disclosing a client's information acceptable?
- within own firm and professionals setving that client
- to defend a civil claim by a client
- between attorneys, accountants, and auditors
NOT to compliance officer of broker/dealer of the client in the past
206
which set of rules prohibit a CFP from commingling financial assets?
Standards of Conduct
207
is the code of ethics specifically defined?
no, it is aspirational and leads to more detailed rules and obligations
208
what should you do if you and the client cannot agree on economic and return assumptions?
limit the scope and exclude retirement capital needs analysis
209
what should you do if a client refuses to supply tax returns?
either limit the scope to what info is provided or disengage
210
is advising on life insurance need considered financial advice or financial planning?
advice
211
systematic vs unsystematic risk
- **systematic**: PRIME; Purchasing power, Reinvestment, Interest rate, Market, Exchange rate
- **unsystematic**: ABCDEFG; Accounting, Business, Country, Default, Executive, Financial, Government
212
how to value stock options
- premium = intrinsic value + time value
- intrinsic is how much the option is in the money; cannot be <0
213
futures contracts
| long position
- highly leveraged, legally binding obligation to make and take delivery on specified date
- long position = buyer (e.g., tropicana goes long on oranges contract
214
mutual fund and stock rating agencies
- value line: stocks only; 1 is best
- morning star: mutual funds and stocks; 5 is best
215
Securities Act of 1933 vs 1934, Investment Company Act 1940, Securities Investors Protection Act 1970
- 1933 - regulates primary market
- 1934 - regulates secondary market; created SEC
- 1940 - authorized SEC to regulate investment companies
- 1970 - protect from brokerage firm failures (up to $500K)
216
Market Indices
| Dow, S&P, Russell 2000, Wilshire 5000
- **Dow**: simple price weighted average of 30 stocks
- **S&P**: value weighted
- **Russell 2000**: value weighted for small cap
- **Wilshire 5000**: value weighted on all stocks
217
coefficient of variation vs correlation coefficient vs coefficient of determination
| symbol, what it measures, when to use it
- **coefficient of variation (CV)**: measures standard deviation relative to return
- **correlation coefficient (r or p on sheet)**: ranges from -1 to 1; diversification when <1
- **coefficient of determination (r2)**: how much of the risk (variation of returns) is market risk; must be ≥70% to use beta as a benchmark
218
efficient fronteir vs indifference curve vs security market line vs capital market line
- **efficient**: best posible returns from all portfolios; above is unattainable and below is inefficient
- **indifference**: return required for each level of risk; steeper curve = more risk adverse
- **capital**: It connects from risk free rate and along mid point (most efficient) of efficient frontier. considering a risk free rate, our optimal portfolio is along this line. Uses standard deviation.
- **security**: graphical representation of CAPM (Ri) which measures relationship between risk (beta) and return. Similar to capital but used for individual securities. because they not diversified, we require different return for different betas.
219
capital asset pricing model
| symbol, what it measures
- Ri on sheet
- relationship between risk and return of an individual security
- risk premium = Rm - Rf
220
when is it appropriate to use beta as a measure of risk?
when r^2 is 0.7+
221
arbitrage pricing theory
how does return vary based on multiple factors across the market, not just risk (e.g., inflation)
222
efficient market hypothesis
- **random walk theory** = the behavior of stock prices are unpredictable but not arbitrary
- **weak**: prices reflect historical info/prices (technical analysis wont help but supports fundamental)
- **semi-strong**: prices reflect historical info and public info (technical and fundamental analysis won't help)
- **strong**: prices reflects historical info, public info, and private info aka insider trading (only option is to diversify)
223
technical vs fundamental analysis
- **technical**: historical prices and trading volume; used by people who believe supply and demand drive stock prices; also uses market indicators and charting
- **fundamental**: analyzing individual company reports (10-K) and ratios, economic data; believe finanials of firm drive stock price
224
Series E/EE Bonds vs Series I vs TIPS vs STRIPS
- **E/EE**: sold at FV; accrue interest but don't pay periodically; cannot transfer or sell
- **I**: inflation protection by adjusting coupon rate; accrue interest but don't pay periodically
- **TIPS**: principal adjusts for inflation
- **STRIPS**: separate trading of coupon payments and principal basially making many zero coupon bonds
225
mortgage bonds vs CMOs
- **mortgage bonds**: backed by pool of mortgage; risk of default and prepayment
- **CMOs**: divide investors into tranches (ST, LT) to mitigate prepayment risk
226
what securities are backed by the full faith and credit of US government?
Ginnie Mae (GNMA) and US Treasuries
227
unsecured bonds
| debentures, subordinated debentures, income
- **debentures (bonds)** - unsecured debt not backed by a specific asset (e.g., corporate bond)
- **subordinated debentures (bonds)** - have a lower claim on assets than unsecured debt so more risky
- **income bonds** - interest is only paid when specific level of income is obtained (rather than fixed coupon)
228
unsecured bonds
| debentures, subordinated debentures, income
- **debentures (bonds)** - unsecured debt not backed by a specific asset (e.g., corporate bond)
- **subordinated debentures (bonds)** - have a lower claim on assets than unsecured debt so more risky
- **income bonds** - interest is only paid when specific level of income is obtained (rather than fixed coupon)
229
CY and how do coupon, CY, YTM and YTC relate
- **CY**: annual payment / current price
- **premium**: coupon > CY > YTM > YTC
- **discount**: YTC > YTM > CY > coupon
- alphabetical bsed on last letter except coupon goes at end/beginning next to CY
230
calculate conversion value of a bond
(par / conversion price) x current price of stock
231
eurodollars vs eurodollar bonds vs yankee bond vs American Depository Receipts
- **eurodollar**: deposits in foreign banks denominated in USD
- **eurodollar bonds**: issued by foreign governments/companies but not traded in US (so no SEC)
- **yankee**: issued by foreign governments/companies but traded in the US
- **ADR**: Allow U.S. investors to buy foreign country stock denominated in dollars.
232
how do coupon, YTM, and term impact duration?
- higher **coupon** = shorter duration
- higher **YTM** = shorter duration
- longer **term** = longer duration
233
if you think interest rates are going to fall, what kind of duration do you want?
- longer duration; lock in higher rates
- i.e., you'd want a bond with longer term and/or lower coupons because that would have longer duration
234
calculate modified duration
| what does it measure?
- modified duration = duration / (1 + YTM)
- *convexity is our friend*
- measures bond's price sensitivity to changes in interest rates
235
liquidity preference thory vs market segmentation theory vs expectations theory
| inverted yield curve
- **liquidity**: people prefer liqudity so they'll accept lower yields for lower terms
- **market**: yield curve varies based on supply and demand for a given maturity (inverted yield curve if demand for ST bonds is less than supply and demand for LT is greater than supply)
- **expectations**: all about inflation expectations; longer yield required for longer term beause inflation is unknown
236
property valuation using capitalization rate
- value = net operating income / capitalization rate
- NOI = net income - depreciation - mortgage interest
- stated vacancy rate reduces gross income
237
REIT
- must distribute 90% of investment income to maintain tax-exempt status
- three types: equity (actually owns buildings; most common), mortgage (invests in loans), hybrid (little of both)
238
holding period return
- (sale price - purchase price - margin loan payback) + - cash flows / purchase price without margin loan
- not compounded and no time consideration
239
bottom up vs top down analysts
- **Bottom up**: looking for the next big, undiscovered stock; start with the company, then the industry and finally the economic climate
- **Top-down**: starts with the economic climate, moves to the industry and then the company.
240
tools of technical analysis
| names of the tools and rough meaning
- **price**: Advances and declines
- **market volume**: number of shares traded, market direction
- **charts**: plot historial prices to determine trading pattern
- **short interest**: # shares sold short
- **odd lot trading**
- **dow theory**: signals bull or bear market has ended
- **breadth of market**: # stocks that increase vs decrease
- **advance decline**: # stocks that closed up vs down
241
how to calculate standard deviation on calculator
return 1 -> E+ -> return 2 -> E+ -> return 3 -> E+ -> etc -> orange -> Sx, Sy
242
geometric average return vs arithmetic vs time-weighted
- **arithmetic**: simple average
- **geometric (GM)**: same as time-weighted; bottom right on formula sheet based on year-over-year return
- **time weighted**: enter cash flows; used for mutual funds
243
what does duration measure?
the moment in time the investor is immunized from interest rate and reinvestment rate risk
244
calculating tax-equivalent yield for muni bond
- need to consider that although state taxes apply, state taxes are exempt from federal tax
- **t** = state tax rate x (1 - federal tax rate)
245
calculate tax-equivalent yield for treasury security
- for TEY, consider the taxes you save
- Treasury securities don't have state/local taxes, so t = state and local taxes
246
types of investment companies
- **closed-end**: fixed initial market cap; traded on organized exchange and no new shares issued
- **open-end**: unlimited number of shares; traded at NAV = (assets - liabilities) / shares outstanding
- **unit-investment trust**: can be equity or fixed income; self-liquidating with passive management; sells "units"; thinly traded secondary market but can be sold back to the trust at NAV
247
which risk measure measures variability and which measures volatility?
- **variability**: standard deviation; how far a return varies from the expected mean average
- **volatility**: relative relationship between a benchmark (aka the market) and a return
248
support vs resistance
- chart of time (X) and stock price (Y) used by technical analysists
- **resistance**: top of the chart; can develop when investors who bought on earlier high view it as last chance to get even
- **support**: bottom of chart; can develop when stock goes down to lower level because investors choose to act on a purchase opportunity they previously passed; may signal new demand is coming
249
calculate dividend yield
divided / stock price
250
yield curve and y axis
x = time
y = yield
251
A vs B vs C shares
- **A**: up-front sales commission, no redemption fee or back-end load, good for **LT** investors because low 12b-1 fee
- **B**: back-end sales load and high 12b-1 fee, no front-end sales load, can convert to A; many funds don't offer them anymore
- **C**: no front-end load, small back-end load and max 12b-1 fee, best for **ST** investors, cannot convert to A
252
Mortgage amortization on calculator
- calculate pmt like usual
- first # payment (typically 1)
- INPUT
- end # payment (e.g. 12 if 1 year)
- ORANGE
- AMORT
- = gives principal paid
- = gives interest paid
253
Are mortgage closing costs based on the purchase price or mortgage price?
Mortgage price
254
arbitrage pricing theory
- pricing imbalances cannot exist for a significant period of time because investors will exploit them
- **multi-factor model** that attempts to explain return based on many factors but **NOT standard deviation or beta**
- factors include things like inflation, risk premium, sensitivity to factors
255
12b-1 fees vs management fees vs commissions
- **12b1** fees are used for marketing and distribution costs.
- **management**: All other costs, such as legal, accounting and analysis
- **Commissions** are paid using either a front load or a back load.
256
power of appointment trust
| marital deduction, when they can be created, gift tax eclusion,
- **marital deduction**: will qualify if spouse has general power of appointment but NOT if limited to ascertainable standard
- can be **created** at life or death
- qualifies for annual **exclusion** if beneficiary can take withdrawals at their discretion
257
can ILIT qualify for annual exclusion?
yes, if Crummey power is used
258
how are gains treated when someone sells appreciated property to a charity for below FMV?
- sale price as % of FMV applies as the % of basis that can be used to offset the gain from the sale
- e.g., if sold for 10% of FMV, 10% of adjusted basis can offset the sale price
259
are life estates included in the gross estate?
no, they are a terminable interest
260
is an ILIT included in the gross esate if estate can demand distributions to pay taxes?
yes
261
is a niece a skip person?
no, a niece is one generation below
262
is a niece a skip person?
no, a niece is one generation below
263
can ILIT, bypass, or general power of appointment trust permit the trustee to invade the principal for HEMS for all beneficiaries? Presuming each trust is structured with the spouse as income beneficiary and the children as remainder beneficiaries?
- ILIT and bypass CAN because they are nonmarital trusts
- GPOA trust is a marital trust and the trustee would be redirected to invade for the spouse only or the trust would not qualify for the marital deduction.
264
if a stock redemption agreement requires the corporation to buy all shares of a deceased or disabled shareholder, how is the decedents estate impacted and does the decedents family get a step-up in basis on the shares of stock covered by the plan?
- **estate**: not impated as the deceased shareholder does not own the policy and already has the value of his interest in his gross estate.
- **step-up**: yes, there is a step-up in basis because the decendant died and the shares are "purchased" by the corporation.
265
how much of the decedent's adjusted gross estate value must be the stock of a closely-held firm for a 303 redemption?
35%
266
section 6166
- owners of closely held buisness can elect to make installment payments over 14 years (4 years interest only then 10 years ammortized)
- business must be 35%+ of adjusted gross estate
267
Do any of these trusts require distribution of income?
GPOA, Q-Tip, Estate Trust
- **GPOA and Q-Tip** = YES at least annually to the spouse
- **Estate Trust**: is a special type of power of appointment trust that grants the spouse a testamentary GPOA over the trust assets so it DOESN'T require distribution of income
268
disadvantage of UGMA/UTMA custodial accounts
- annual gift tax exclusions apply but the assets in the account are in the child’s estate not the donor’s
- can severely reduce the child’s ability for financial aid
- custodian no longer has any control over the assets upon maturity. The child may or may not choose to use the assets wisely.
- assets may not be transferred or revoked.
269
in a private annuity, can the individual responsible for making annuity payments deduct the interest portion of those payments?
no
270
SIC
| how much has buyer paid if seller outlives term,
Which of the following statements regarding SCINs is correct?
If the seller outlives the SCIN term, the buyer has paid no more than the FMV.
The payments received by the seller under a SCIN are treated as interest income.
A SCIN can give the seller a collateral interest in the property sold.
If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Solution
Solution: The correct answer is C.
Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
271
SIC
| how much has buyer paid if seller outlives term,
Which of the following statements regarding SCINs is correct?
If the seller outlives the SCIN term, the buyer has paid no more than the FMV.
The payments received by the seller under a SCIN are treated as interest income.
A SCIN can give the seller a collateral interest in the property sold.
If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Solution
Solution: The correct answer is C.
Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
272
SIC
| how much has buyer paid if seller outlives term,
Which of the following statements regarding SCINs is correct?
If the seller outlives the SCIN term, the buyer has paid no more than the FMV.
The payments received by the seller under a SCIN are treated as interest income.
A SCIN can give the seller a collateral interest in the property sold.
If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Solution
Solution: The correct answer is C.
Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
273
SIC
| how much has buyer paid if seller outlives term,
Which of the following statements regarding SCINs is correct?
If the seller outlives the SCIN term, the buyer has paid no more than the FMV.
The payments received by the seller under a SCIN are treated as interest income.
A SCIN can give the seller a collateral interest in the property sold.
If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Solution
Solution: The correct answer is C.
Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
274
SIC
| how much has buyer paid if seller outlives term,
Which of the following statements regarding SCINs is correct?
If the seller outlives the SCIN term, the buyer has paid no more than the FMV.
The payments received by the seller under a SCIN are treated as interest income.
A SCIN can give the seller a collateral interest in the property sold.
If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Solution
Solution: The correct answer is C.
Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
275
SIC
| how much has buyer paid if seller outlives term,
Which of the following statements regarding SCINs is correct?
If the seller outlives the SCIN term, the buyer has paid no more than the FMV.
The payments received by the seller under a SCIN are treated as interest income.
A SCIN can give the seller a collateral interest in the property sold.
If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Solution
Solution: The correct answer is C.
Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
276
SIC
| how much has buyer paid if seller outlives term,
Which of the following statements regarding SCINs is correct?
If the seller outlives the SCIN term, the buyer has paid no more than the FMV.
The payments received by the seller under a SCIN are treated as interest income.
A SCIN can give the seller a collateral interest in the property sold.
If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Solution
Solution: The correct answer is C.
Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
277
SIC
| how much has buyer paid if seller outlives term,
Which of the following statements regarding SCINs is correct?
If the seller outlives the SCIN term, the buyer has paid no more than the FMV.
The payments received by the seller under a SCIN are treated as interest income.
A SCIN can give the seller a collateral interest in the property sold.
If the seller dies before the end of the SCIN term, the seller is deemed to have made a taxable gift to the buyer equal to the difference between the payments made and the total principal payments due on the SCIN.
Solution
Solution: The correct answer is C.
Answer "A" is incorrect because the buyer of a SCIN pays the FMV plus the SCIN premium. Answer "B" is incorrect because each payments received by the seller consists of (1) interest income, (2) capital gain, and (3) return of adjusted basis. Answer "D" is incorrect because the transferee bought the right to cancel thus no gift.
278
SCIN
| how much buyer paid if seller outlives, pmts taxation, collateral, gift
- If the seller outlives the SCIN term, the buyer will have paid FMV and SCIN **premium**
- payments received by the seller consists of **interest** income, capital **gain**, and return of adjusted **basis**
- can give seller a **collateral interest** in the property
- there is **no gift**, even if the seller dies before the end of the term because the buyer bought the right to cancel
Comprehensive
flashcards
Decks in class (9)
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