Fundamentals 1 Flashcards
0
Q
Federal Trade Commission (FTC) prohibits…
A
Bait and switch advertising
1
Q
Consumer Credit Protection Act.
A
- Credit terms must be disclosed for evaluation purposes
- Interest must be reported in terms of APR
- Consumer liability for a lost/stolen credit card is limited
- Cardholder liable for only $50 in unauthorized charges if he/she reports card stolen
2
Q
What types of documents are typically gathered from the client before constructing his/her comprehensive financial plan?
A
- Wills and Trust Agreements
- Corporate Tax Returns for Small Businesses
- Retirement Plans
- Instructions to your executor
- Bank statements and canceled checks
- EE benefit booklets
- Articles of incorporation for small buiness
- Investment statements
3
Q
Invested assets include the following:
A
stocks, bonds, mutual funds, precious metals, collectibles, genstones, fine art, business ownership interest, retirement plan accounts and REITS.
- ** Short term CD’s are considered cash equivalent
- **Jewelry is a use asset.
4
Q
What is the general rule for the maximum consumer debt ratio?
A
20% of net income
5
Q
All the following are forms of discipline that may be imposed by the CFP Board’s Disciplinary and Ethics Commission upon a CFP Board Certificant charged with misconduct:
A
- Private censure
- Public letter of admonition
- Suspension up to 5 years
- Revocation of the right to use the certification marks
6
Q
CFP continuing education requirement
A
30 hours every 3 years, and must be at least in 3 areas: tax, investments and estates
7
Q
What things are found on the balance sheet?
A
Assets and liabilities at FMV/ Net Worth
8
Q
What are the three main types of assets in the Balance sheet?
A
- Cash
- Invested Assets
- Use Assets (residence, furniture, autors)
9
Q
What are the two catagories of liabilities listed in LIABILITIES on Balance sheet
A
- Current liabilities (credit card balances)
2. Long term liabilities (auto loans, mortgages, life insurance loans)
10
Q
What are things that increase/decrease net worth on balance sheet?
A
Increase: shares of S&P 500 index fund increase in value with market
Decrease: Interest rates have a substantial increase and client has a big bond portfolio
11
Q
What are examples of events that have no impact on the Net Worth?
A
- Paying off debt with cash (repayment of loan using funds from a savings account)
- Buying an asset with cash (purchase of an auto 75% financed and 25% down payment - additional auto increases assets - 25%/down payment decreases cash - 75%/financing increases liablities, again a wash)
12
Q
Examples of liquidity (in order of liquidity)
A
- Mutual Funds
- Cash value life insurance
- Real Estate residence
- Jewelry
13
Q
What does a pro forma statement do?
A
forecasts future balance sheets and cash flow statements
14
Q
Inflows - Outflows =
A
discretionary cash flow
15
Q
Cash Flow Statement: Specific Date or Ranges?
A
Ranges: Cash flow are snap shots of ranges such as a year or quarter
16
Q
What are Outflows
A
Savings and Investments - by item Fixed outflows (non-discretionary) Fixed outflows (discretionary) Variable outflows (non discretionary) Variable outflows (discretionary)
17
Q
Bankruptcy Chapter 13
A
- Allowed to set up repayment plan
- Allowed to hold on to property as long as making regular payments
- File for 13 if faced with foreclosure
- Debts that cannot be discharged through chapter 7 can be done through chapter 13
18
Q
Bankruptcy Chapter 11
A
- Allowed to reorganize
- Debtor remains in possession of assets
- Subject to oversight of court
19
Q
Savings and investment should equal
A
5% - 10% of gross income not including reinvested dividend and income
20
Q
Renter’s expense - less then?
A
30% of gross monthly income
21
Q
Housing Payment ratio
A
Monthly payments on a home (PITI) should be not more than 28% of gross income
22
Q
Consumer Debt Ratio
A
Consumer debt ratio (credit cards, auto loans and the like) should not exceed 20% of net income (gross income - taxes)
23
Q
Individuals close to retirement use budgeting to figure out what?
A
Answer; the best wage replacement ratio for retirement
24
Important considering in preparing a budget?
Answer: Inflation
25
Budget: Adjustable or firm?
Adjusted monthly.
26
Bankruptcy Chapter 7
1. Has to do with liquidation (voluntary and involuntary)
| 2. extinguishes debtors responsibility for Dischargeable debt
27
Supreme Court recently ruled that creditors cannot take what kind of asset from debtors in bankruptcy?
Retirement plan assets
28
Lifetime learning credit allows how much of a credit per return?
Answer: up to 20% of 10k up to $2000 per family
29
American Opportunity Tax Credit
4 years, per student, max $2,500 if there are $4000 of qualified expenses
30
CFP Standard 100-1 Establish and Define Relationship with Client
1. Clearly define & agree on services to be provided.
2. Cost of services
3. Compensation
4. Responsibilities of both parties
5. Term of engagement
31
Principle of Confidentiality; CFP may disclose confidential client Information under which of the following:
1. Express consent of client
2. Legal requirements
3. CFP charged with wrongdoing
4. Civil Dispute between CFP and Client
32
Practice Standard 200-1 Determining a Client's Personal and Financial Goals, Needs and Priorities
"When appropriate, the CFP shall try to assist the clients in recognizing the implications of unrealistic goals and objectives
33
Principle of Fairness means
1. Disclosing conflicts of interest
2. Treating others in the same fashion which you would want to be treated.
3. Intellectual Honesty.
34
Schedule 1 Form ADV
1. Filed with SEC each year, no later than 90 days at end of fiscal year
2. Allows SEC to know whether the investment adviser is still in business
3. Allows the SEC to know if there have been any changes in the adviser's information
4. Gives investment adviser opportunity to submit current balance sheet
35
SEC Rule 204-3
Also known as the Brochure Rule, requires investment adviser to deliver special disclosure statement to existing/prospective clients
36
Required SEC Reports
Annual Report Form 10-K
Quarterly Report 10-Q
Proxy Statement
37
Characteristics of Part I and Part II of SEC Form ADV
1. Form ADV used for initial registration
2. Part I of the form General Info
3. Part II Detailed Information
38
FINRA Registration
Form U-4 through broker/dealer
39
Investment Advisers register with the SEC using
FORM ADV
40
Principle Fairness
CFP must disclose material information relevant to the professional relationship, including CFP's address, telephone, credentials, qualifications, licenses and compensation structure
41
Registration and Regulation of Investment Advisers was established by
Investment Adviser's Act of 1940
42
Three step test to determine if a registration is required
1. Does the advisor provide analysis or advice concerning securities
2. Is the advisory in the business of providing investment advisory services
3. Does the adviser receive any compensation for providing investment advisory services.
43
Granted SEC authority to seek civil penalties against those accused of insider trading?
Insider Trading and Securities Fraud Enforcement Act of 1988
44
Principle of Integrity
Never work with an untrustworthy client
45
GSTT designed to tax transfers from an individual to a skip person
1. Uses a Flat Rate Formula
2. Highest Estate/Gift Tax rate 40%
3. In addition to Gift and Estate Tax
46
GSTT Overview
1. Lifetime transfers to skip persons may be subject to both gift tax and GSTT
2. Testamentary transfers to skip persons may be subject to both gift tax and GSTT
3. There is no additional penalty for skipping more than one generation
47
Exemptions to GSTT
1. Trusts that were irrevocable before Sept 25, 2985
| 2. Wills that could not be changed after 1987
48
GSTT Skip Person
1. Related person 2 or more generations below the transferor (grandchild)
2. A trust, when all beneficiaries are 2 or more generations below the donor
3. An unrelated individual young than the transferor by 37.5 years or more
49
Skip person does not include
1. Transferor's spouse, former spouse, regardless of age
2. Grandchild of the transferor, if transferor's child is deceased (Predeceased parent rule)
a. Grandchild effectively moves up one generation
b. Parent may be transferor's child or spouse's child
c. Grandchild may be any grandchild
d. Grandparent who has no grandchildren can make a gift to a grandnephew or grandniece without GSTT
50
Direct Skip
1. Direct skip is a direct gift or bequest to a skip person
2. Transferor or his estate, is liable for any GSTT due on the transfer
3. For lifetime transfers, any GSTT paid will be added to the value of the gift to determine the value of which to apply to the federal gift tax
51
GSTT Taxable Distribution
1. Distribution from a trust made to a beneficiary two or more generations below donor's generation
2. Taxable amount is the net value of the property received by beneficiary
3. Any resulting GSTT is paid by the recipient
52
Taxable termination
1. Occurs when an interest in a trust terminates because of death or lapse of time or release of a power that results in a skip beneficiary holding interest in the trust.
2. A taxable termination cannot take place as long as at least one nonskip person has an interest in the property
3. Taxable amount is value of property transferred, less debts and taxes.
4. Any resulting GSTT is paid by the trust.
53
GSTT Calculation
1. Annual exclusion is allowed for direct skip transfers
2. Gift splitting is available if both spouses elect
3. A lifetime GSTT exemption is allowed for every taxpayer ($5,250,000)
4. Qualified transfers (payment of medical expenses or tuition directly to provider) are excluded from GSTT
54
GSTT Reporting
1. Lifetime gift subject to GSTT is reported on Form 709, Gift Tax Return
2. Testamentary transfer subject to GSTT reported on Form 706, Estate Tax
55
Reverse QTIP Election
1. Under GSTT, QTIP property included in surviving spouse's gross estate is considered transferred by the surviving spouse, not the decedent. If a decedent transfers property into a QTIP Trust and the trust beneficiaries are grandchildren, the decedent will not be allowed to use his GSTT exemption. The surviving spouse would be required to use her GSTT exemption at death.
2. The Reverse QTIP election is a special election available for GSTT purposes. The election treats the QTIP property as if the QTIP election was not made for GSTT purposes.
3. The marital deduction will be available for the estate tax purposes but not for the GSTT purposes.
4. The reverse QTIP election is often made to utilize a decedent's GSTT exemption
56
Life Insurance Inclusion in Gross Estate
1. Ownership by insured - DB included in insured's gross estate
2. Joint ownership by insureds - inclusion to the extent of the contribution rule (spouse deemed 50%) to the estate of the insured
3. Ownership by someone other than insured
a. No inclusion if another person purchased the policy with insurable interest on insured's life.
b. If policy acquired by transfer or assignment, throwback rule applies within 3 years of death.
c. Second to die policy is transferred, the DB will be included in gross estate of second person to die.
57
Life Insurance Martial Deduction
1. If entire ownership interest in life insurance policy is gifted to donor's spouse, the transaction will qualify for the unlimited gift tax marital deduction
2. If a gift is in trust for the spouse, the transfer will qualify for the unlimited gift tax marital deduction on if it is in a trust that qualifies under the terminable interest rules. (power of appointment trust or a QTIP)
58
QTIP Election
1. QTIP Election allows property to qualify for estate tax marital deduction in estate of first spouse to die, even though interest left to surviving spouse would otherwise be a terminable interest not eligible for the deduction.
2. Downside is QTIP property must be included in surviving spouse's gross estate to the extent it has not been spent.
59
Taxable terminations of a trust subject to the GSTT, the tax is imposed on...
Answer: The Trust
60
Taxable Termination Cannot occur as long as at least one...
non-skip beneficiary has an interest in the property
61
Taxable Termination occurs when...
An interest in a trust terminates because of death or lapse of time or release of a power that results in a skip beneficiary holding interests in the trust.
62
In a private annuity....
no part of the purchase payment is deductible by the buyer.
63
Deferred Payment of Estate Tax (Section 6166)
1. An election available to owner's of farms or closely held business.
2. Value of the closely held business must exceed 35% of the value of the adjusted gross estate.
3. Applies to proprietorships, partnerships, and corporations.
4 . Executor may defer for 5 years estate tax payment relating to the business. The estate tax can be paid in 10 annual installments beginning after the 5 year deferral period. Interest is paid during the deferral period.
64
Stock Redemption Section 303
1. Permits the Estate of a decedent shareholder to redeem the decedent's shares with favorable income tax treatment.
2. The transaction will be treated as a disposition of an asset (capital gain) rather than receipt of a dividend (ordinary incoome).
3. Conditions to be met:
a. Stock must be included in decedent's estate
b. The value of the stock must be more than 35% of adjusted gross estate
c. Redemption proceeds eligible for capital gain treatment cannot exceed death taxes plus deductible funeral and adm.
65
Special Use Valuation (Section 2032A)
1. Decedent own real property used in a farm or closely held business
2. Aggregate reduction in value cannot exceed $1,070,000
3. Value of property (real and personal) used in the farm/closely held business must be at least 5% of the adjusted value of the gross estate
4. Value of the real property must at least 25% of adjusted value of gross estate
5. Decedent/family must have been material participant in business for 5 out of 8 years
6. Executor must make Election on Form 706
7. Qualified use 10 years after decedent's death
66
Per Stirpes distribution
members of a designated class, including deceased members, inherit as members of the class
67
Per Capita distribution
means that members of a class, including heirs of a deceased member, share in inheritance as individuals
68
DNI (Distributable Net Income)
1. Provides a limit on the deduction that a trust or estate may receive for amounts distributed to beneficiaries.
2. Limits the amount of the distribution that may be taxable to the beneficiaries
3. DNI excludes items relating to corpus, such as capital gains
