Flashcards in Quiz 2 Deck (60):
1. An employer can self-fund certain benefits under a 501(c)(9) voluntary employees' beneficiary
association (VEBA). Which of the following may be funded?
I. Death benefits
II. Medical benefits
III. Unemployment benefits
IV. Retirement benefits
V. Deferred compensation benefits
A. All of the above
B. I, II, III, IV
C. I, II, III
D. I, II
E. IV, V
1. C. Retirement and deferred compensation benefits may not be funded through the vehicle.
Reference: Live Review Insurance I-44
2. Mr. Hallas owns 80% and his daughter 20% of Hallas, Inc. (a corporation). Hallas, Inc. grosses
$20 million per year or more. He and his daughter also own a partnership worth $5 million. Mr.
Hallas owns a $3 million life insurance policy outright. 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
2. D. If the corporation owns the policy, there are two problems. The policy may trigger corporate
AMT. In addition, the proceeds may be considered in valuing the decedent's interest unless
there is valid agreement fixing the price (very difficult because they are father and daughter).
Answers B and C have similar problems. There is no partnership if Mr. Hallas dies. The
partnership dies. Remember, he wants to remove the policy from his estate. This is the simplest
3. Terry Hand is an old college friend and a client of yours for years. His account is in his name.
For some strange reason you do nothing social with him and you never have met his wife. On a
late Friday afternoon he comes by to ask if you could join him for a drink. Your relationship has
always been as a financial adviser. At a quiet bar he starts belting down drinks. You sip yours.
Finally, he says he has a problem. He has two families with children by both his wife and
girlfriend. The girlfriend knows he is married. He is worried if he dies how to set up his estate
plan. You quickly order a second drink. How would you respond?
A. He should place all his assets in a revocable trust to keep all transactions private.
B. He should see an attorney
C. He needs to find another financial adviser because you have a conflict of interest.
D. You need to get his wife's consent to do an estate plan.
3. B. You do not have a conflict of interest or get his wife's consent because she has never been a
client. But an attorney can represent him, you cannot. Any jointly held property with his wife
will pose a conflict of interest. Should you terminate the relationship? Not with only separate
4. Joe Jones works for Take-A-Boat. The company rents boats. The company has a SIMPLE plan
which Joe participates in. As he approaches 70 he plans on working less hours. He still plans to
participate in the SIMPLE plan. Which of the following can he do?
A. He can only contribute to a non-deductible IRA. He cannot contribute to a SIMPLE IRA after 70.
B. He can continue to contribute to a SIMPLE.
C. Since he is a more than 5% owner he must take distributions from the SIMPLE when he
reaches 70 1/2 and stop contributing.
D. He can contribute to a Roth IRA.
4. B. We do not know his AGI. AGI affects Answer D. It may or may not be true. After 70--- he
cannot do either an IRA or a non-deductible IRA. There is nothing that indicates he is an owner.
But as an employee he has to take distributions from the SIMPLE when he reaches 70 but he can
still contribute whether he is just an employee or he is an owner.
5. Baker, Inc. has an ERISA retirement plan (employer funded). The plan lost 50% due to poor
investment decisions last year. What can the employees do?
A. Sue the plan officials for 100% of the investment losses
B. Sue plan officials for 50% of the 50% loss
D. Sue the plan officials for 100% of the losses plus punitive damages
E. Sue the plan officials for losses to the plan
5. E. Errant plan officials can be held personally liable for losses to the plan. Answer E is the best
answer because there could be additional factors involved (i.e. a reasonable return). ERISA
prohibits monetary punitive damages for claims.
6. Coverdell Education Saving Plans can pay for which of the following qualified education
expenses (including elementary and secondary education expenses) tax- free?
I. Academic tutoring
II. Special needs services
IV. Expenses for room and board
A. None of the above
B. All of the above
C. II, III, IV
D. I, II
6. B. After the Tax Relief Act of 2001, all these items are covered including expenses at the
elementary and secondary education levels. Remember Coverdells used to be known as
7. Childhood pals Stu and Lou had always wanted to spend time together, so shortly after
graduating high school, they opened a hamburger joint which they called Good Guys Burgers.
The business has been quite 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?
A. Lou only (estate)
B. Stu only
C. Both Lou's estate and Stu
D. Neither Lou nor Stu
7. C. 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 post mortem 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.
8. Pension contributions are based on compensation. Which of the following is considered
I. Salary paid
II. Bonus paid
III. Employee 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
8. D. For tax purposes, compensation is considered current when it is paid no later than 2-1/2
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 paid. An ISO (not disqualified ISO) is not compensation.
9. 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. She can qualify for some state scholarships. Her parents, both professionals, earn well
over $80,000 each, but spend almost all they make. Which of the following may generate
federal income tax credits for undergraduate as well as graduate education?
A. American Opportunity Credit
B. Lifetime Learning Credit
C. Coverdell (ESA)
E. None of the above
9. E. The American Opportunity Credit may work during the undergraduate years, but not for the
graduate years. The Lifetime Learning is subject to phaseout. The Coverdell and PLUS do not
generate federal income tax credits.
10. Which of the following trusts distributes income annually?
A. A simple trust
B. A 2503(c) trust
C. A life insurance trust
D. An irrevocable trust with Crummey provisions
E. A QPRT
10. A. By definition, a simple trust distributes income annually.
11. Your client is a 70-year-old man about to retire. If he annuitizes the benefit from his retirement
plan, which of the following will achieve the highest payment in his first year of retirement?
A. Lifetime income with a 5-year certain
B. Life annuity
C. Lifetime joint income with his son (age 49)
D. Lifetime joint income with his wife (age 71)
11. B. Life annuity always achieves the highest payout.
12. Barry retired a few years ago from Belmont, Inc. at age 65. He is turning age 70 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. He has the following types of retirement accounts. Out of 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
12. B. A minimum distribution is required for the year in which the participant attains age 70-1/2.
The way the question is phrased, I believe he still will be retired when he reaches age 70-1/2
(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 next year. Tough.
13. Sam was terminally ill with HIV. He sold his $250,000 life policy to a qualified viatical settlement
company for $175,000 a year ago. In the past few days, he found a medicine that will prolong
his life for 5-10 years. How is the $175,000 affected?
A. He will have taxable income of $175,000.
B. He will have to return the $175,000.
C. The viatical settlement company is in deep do-do.
D. The viatical settlement company can return the policy to Sam per the settlement
13. C. The viatical company's return will suffer if Sam lives too long. People living longer than
expected greatly affect the profitability of viatical settlement companies. Sam is not affected.
Deep do-do is my humor.
14. Mrs. Elbert, an existing client, has just turned 70 years old. She has $10,000 in the bank, a
modest yearly income of $20,000 (retirement plus social security benefits). She averages
$10,000 a year in medical and disability-related expenses. She is generally opposed to living in a
nursing home and wants advice on long-term care insurance policies. As a CFP¨ practitioner,
what should you do?
A. Convince her to purchase a LTC policy
B. Investigate long-term care policies for her, explain LTC and other alternatives to her, let her
make a decision
C. Explain Medicare and Medicaid benefits she may be entitled to.
D. Tell her she cannot afford long-term care insurance and fire her as a client.
14. B. Although Answer C is a correct answer, I believe Answer B is the best answer. The question
says you are a CFP¨ practitioner. As she wants advice on long-term care insurance policies. You
should give her all the alternatives and let her make the decision. The CFP Board wants us to
educate clients. She asked about LTC, therefore you should advise her about LTC. Can she afford
or qualify for LTC, that is another issue.
15. Based on the following facts, what is the holding period return of the following investment?
- Purchased 1,000 shares at $30 on January 1st
- Paid a $1 dividend on December 1st of the first year
- Paid a dividend on December 1st of the second year. It was 5% greater than the prior
- Sold 1,000 shares at $41 on December 31st of the second year
15. C. HPR = ($41.00 + $1.00 + $1.05) - $30 = 43.50%
16. Which of the following is true about a QPRT if the grantor dies during the retained-interest
A. The value of the remaining term will return to the grantor's estate if the grantor fails to
survive the term.
B. It leaves the grantor's estate with no greater tax liability than it would have had if nothing
had been done.
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 estate.
16. B. Answers A and D are wrong because the full value is brought back into the estate. Let's say
you transferred a home worth $1 million under a 10-year QPRT. But you died in 7 years when it
was worth $1.5 million. Well, either way $1.5 will be included in your estate as that is what
Answer B is stating. This has a slightly different slant to the concept but is similar to the what
you will experience on the exam.
17. Mr. Sims purchased a $500,000 life policy 27 years ago (at age 30) with 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.
17. A. 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. 2014 - 28 years ago is 1986. It was
purchased before 1988.
18. A premature distribution penalty tax applies to which one of the following IRA distributions?
A. A distribution made to the owner ($10,000 lifetime limit) for the primary residence
B. A distribution made to the owner for qualified higher education expenses furnished to the
C. A distribution made after the death of the owner
D. A distribution attributable to the owner's disability
18. A. The distribution must be for the purchase of a first home, not necessarily a
19. John and Carol had their financial liabilities change from $250,000 of debt to $200,000. This
occurred because of the following.
- They used their cash flow to pay off $20,000 of credit card debt.
- They sold off 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 loan on their auto.
Their only other debt was 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 did
they get on the mortgage?
Net change in liabilities $50,000
Less credit card payment -20,000
Less auto loan payments -12,000
Residence Mortgage $18,000
The sale of the stock at a loss is a wash. The new car replaces the stock as an asset. Their assets
would have shown the stock at FMV, not basis. The auto loan would have to be paid from cash
flow. There is no other possibility. The loss would affect their taxes and cash flow.
20. The date is April 13th and CPA Hal Kraft calls you, a CFP practitioner, introducing himself as a tax
preparer for your clients. Your clients are a married couple, Norma and Eric Cotter. The Cotters
were unable to locate a K-1 from a low-income housing limited partnership that you suggested
that the Cotters acquire. Mr. Kraft asks you to provide him with information as to the Cotters'
holdings and reporting tax year distributions. What should you do?
A. Give Mr. Kraft the information as a fellow financial services professional.
B. Decline to give the information to Mr. Kraft until you have permission from the Cotters.
C. Report Mr. Kraft for violating generally accepted accounting principles.
D. Consult the CFP Board for specific guidance in this matter.
20. B. Until the client grants permission to share financial information with third parties, the planner
many not do so. This presumes that the requesting party is neither a regulator, a member of the
IRS, or preparing a defense on the planner's behalf.
21. Which of the following techniques will not trigger a taxable dividend?
A. Dividends paid under preferred stock recapitalization
B. Dividends paid under a personal holding company
C. A distribution to redeem a portion of stock of a decedent under Section 303
D. Unreasonable compensation paid to a shareholder-employee of a corporation
21. C. Section 303 allows a corporation to make a distribution in such a way that it will not be taxed
as a dividend. The other answers produce taxable dividends. This is a very technical answer
probably only found in the educational courses you took to qualify for the exam.
22. Bob works for T2. Bob's salary is $100,000. He makes an elective deferral of $17,500 to the
company's 401(k) plan. If T2 is a large company, what is the maximum T2could contribute and
deduct as a match and a profit-sharing contribution for Bob in 2014?
22. D. Beginning after 2001, Òtotal payrollÓ (for purposes of the 25% limit) includes elective deferral
amounts. However, the deduction limit does not apply to elective deferral amounts or to
individuals. The 25% deduction limit applies to total includible plan compensation. The
company may contribute and deduct more than 25% of salary in addition to the elective deferral
of an individual employee (not to exceed $52,000) so long as the plan deduction for total
includible compensation does not exceed 25% (not including elective deferrals). Section 415
says a maximum of 100% of compensation or $52,000. 52,000 -17,500 = $34,500 NOTE $25,000
which could be an answer, is not included.
23. The distribution penalty during the first 2 years of participation for a SIMPLE IRA is which of the
A. Zero on employee contributions and 10% on employer contributions
B. 10% of the distribution
C. 25% of the distribution
24. During the initial meeting with a client you learned the following: 1) Single 2) Age 38 3) has
$3,000 annual cash deficit. She recently sold her home, and purchased a large home on the
water. She used most of her cash and has a mortgage of $100,000. She purchased a boat and a
truck. She would like to start investing to retire in 7 years and would like your ideas on the best
investment vehicle. She also wants to send her daughter to an Ivy League college and take her
on a trip to Europe before she starts. Her daughter is 15. What recommendation would you
A. Sell the home and move into one more affordable
B. Dollar cost average into an aggressive growth fund to get the returns needed to retire
C. Start gifting to the child using EE bonds
D. Have the client reassess and commit to her goals
24. D. During the initial meeting you would do Step 1 and 2. This is really a steps in financial
25. Charlie was granted an incentive stock option (ISO) four years ago when the FMV and option
price was $20 per share. Charlie exercised the option two years ago when the stock was trading
at $30 per share. If he sold the stock today for $35 per share, which statement(s) is/are true?
I. Charlie was taxed for the $10 per share gain at capital gains rates when he exercised
the option (no substantial risk of forfeiture).
II. There are no regular income tax consequences when the ISO is granted or exercised;
Charlie will pay capital gains when the stock is sold at a gain.
III. If Charlie sells the stock for $35 per share, he will be taxed at capital gains rates on
the $15 gain per share.
IV. At the time of exercise, $10 per share was an add-back item.
A. I, II, III, IV
B. II, III, IV
C. I, III
D. II, IV
25. B. The stock was held for the two-year/one-year holding period. It qualifies for LTCG and was an
AMT add-back. The question does not indicate any AMT was paid, therefore the basis is the cost
of the shares.
26. When clients retire, they expect to live on 50% of their current pre-retirement income adjusted
for inflation. What do they need to consider least?
A. Their income taxes
B. Their investment performance
C. Their risk tolerance
D. Their life expectancy
26. A. They will probably be in a low tax bracket. The amount of income they actually receive will be
based on investment performance and risk tolerance. Receiving income is more important than
paying taxes (my opinion). Life expectancy is also important.
27. A company has 18 full-time employees participating in their group health plan, and 4 full-time
employees who are not participating in the plan. Joe, a participating employee with family
coverage, just divorced Sara. How long will COBRA cover Sara and Debbie (his 12-year-old
I. Sara gets 18 months.
II. Sara gets 36 months.
III. Debbie gets 18 months.
IV. Debbie gets 36 months.
V. Debbie is still covered under the plan.
A. I, III
B. II, IV
C. II, III
D. I, V
E. II, V
27. E. Sara will get 36 months (due to divorce). Debbie is still Joe's daughter and will continue to be
covered by his group health plan (family plan). The plan is subject to COBRA (22 employees).
28. An U.S. investor owns German bonds. What will make the bonds perform the best?
A. A decrease in the value of the Euro
B. An increase in the European interest rate
C. A strong U.S. dollar
D. A decline in U.S. interest rates
28. D. If a U.S. investor owns securities denominate in a foreign currency, that individual would
profit if the dollar declined (devaluation) or the value of the foreign currency rose (revaluation).
An increase in European interest rates will decrease the value of German bonds. If U.S. interest
rates decline, the value of the dollar will decline.
29. Terrie Cross and Brenda Davis have decided to close their business. They have cross-purchase
life insurance policies in force. Both Terrie and Brenda are married. How should they handle
the split up of their policies?
A. Each should purchase her own policy from the other person.
B. No change.
C. Terrie should transfer Brenda's policy to Brenda's husband, and Brenda should transfer
Terrie's policy to Terrie's husband.
D. Same as C but opposite husbands
29. A. Answer B makes no sense regarding the situation. Answers C and D trigger Òtransfer for
valueÓ. The insured can always buy their own policy and not trigger Òtransfer for value.Ó
30. Timmy works for X+, Inc. He makes $100,000 per year. X+ provides a nondiscriminatory group
term life insurance plan (two times salary). The company pays the full premium and charges
Timmy the Table I cost. If Timmy names a charity as the irrevocable beneficiary of the policy, his
charitable tax deduction is which of the following?
A. The death benefit
B. The premium paid
C. The Table I cost
D. Zero. The charity does not own the policy.
30. C. This allows Timmy to make, with a limited cash outlay (income tax paid), a potentially
significant charitable gift. The charitable deduction is based on the Table I cost (the cost of the
term insurance) not the full death benefit. He was only charged the Table I cost which he pays
income taxes. The charity gets the full death benefit, but no income tax or estate tax benefit.
31. The definition of beta is which of the following
A. The measure of the systematic risk of a security
B. The measure of how a money manager outperforms or underperforms the market as a
C. The measure of how a money manager reduces the fluctuation of the fund relative to the
market as a whole
D. The measure of the unsystematic risk of a security
31. A. By definition.
32. Mr. Smith leaves $50,000 in his C corporation to keep his taxes low (28%). As a result, Mr. Smith
is subject to the AMT. Which of the following can reduce his AMT payable?
A. Exercising more nonqualified stock options
B. Taking out a larger mortgage
C. Purchasing more municipal bonds (private activity)
D. Buying an oil and gas partnership
E. Purchasing more public purpose bonds
32. A. Exercising nonqualified stock options will increase his regular income. A larger mortgage will
decrease his taxable income. Purchasing public purpose bonds will have no effect. If he
increases his taxable income, he will pay more regular taxes. I believe that is the purpose of the
AMT questions. TOUGH
33. Why should a company (5 equal owners) use a cross-purchase agreement rather than a stock-
A. Income-tax-free benefits
B. Rather than 5 insurance policies, they would need 20 insurance policies.
C. Step-up in basis to the remaining shareholders
D. Deductible premiums
33. C. Answer B is true. The way to calculate the number of policies in a cross-purchase agreement
is (number of employees 5) x (number of employees minus 1) or (5) x (4) = 20, but it was not the
best choice. It is a good reason, but answer C is the best reason. Answer B is a disadvantage.
NOTE: The number of policies calculation has been an answer on the exam.
34. A client calls you. He heard about a mutual fund. He asks you if the mutual fund is a wise
investment and if he should buy it. You research the mutual fund and find out the following.
alpha beta R2 SD T-bills
-7 .4 80% 10% 4.5%
What would you recommend?
A. You tell the client not to buy the mutual fund because the alpha is negative.
B. You tell the client to buy the mutual fund because the beta is low.
C. You tell the client to buy the mutual fund because the Sharpe Index will be high.
34. A. When the R2 is high, look for the alpha answer. Alpha is negative; your suggestion would be
not to buy the fund.
35. Mr. and Mrs. Bell are divorced. Mr. Bell is required to pay alimony for 10 years. After two
years, Mr. Bell dies. What happens to the alimony payments?
A. Excess front-loading rules apply, and excess alimony is recaptured.
B. Alimony payments cease.
C. Alimony payments continue to be paid by Mr. Bell's estate for the remaining eight years.
D. A lump-sum alimony payment is paid to Mrs. Bell from Mr.Bell's estate.
35. B. This is why a life insurance policy is usually made part of a divorce agreement to handle this
36. Mr. and Mrs. Connors took out at $400,000 30-year mortgage exactly 10 years ago. The interest
rate was 7%. Now they would like to refinance their remaining mortgage principle at current
attractive rates. They would like to reduce both their monthly payments and potentially pay off
the mortgage in less time. As they approach retirement, they would like to reduce their monthly
outflows to enjoy their retirement years. Given both of their objectives, which mortgage
arrangement would you recommend? (Note: Difficult and subjective)
A. 15-year fixed at 5%.
B. 20-year fixed at 4.2%.
C. 15-year variable at 4.5%.
D. 20-year variable at 4.0%.
36. C. First you must calculate the remaining principle ($343,250). Currently they are paying
$2,661.12. The method is found in pre-study GP-8-4. Answer A is $2,714. Answer B is $2,116.
Answer C is $2,625. Answer D is $2,080. Answer C reduces the payment but also reduces the
time by 5 years. Yes there is some risk but it meets the two issues. The issues are less outflow
and less time. Answer C best answers the question. Answers B and D do not reduce the time
37. Mrs. Perry has an AGI of $145,000. She recently donated $100,000 of publicly held stock to a
private university. The stock was purchased 10 years ago for $25,000. What is the maximum
allowable income tax deduction she can take in the current year on this gift?
37. B. Long-term appreciated property is allowed a deduction of 30% of her AGI. Using basis
(50%),she would only get a deduction of $25,000. A private university is a public charity.
38. 2 years ago John and Jim started a business J&J, Inc. an S corp. The company has grown at a
rapid rate despite the downturn in the economy. They have focused on selling shoes to men
with small feet. At the time the business formed they entered into an entity buy sell agreement
funded with Life insurance policies on each owner. The business has been very successful over
the time with John producing more of the income than his partner Jim. Most of this is due to
Jim's personality, he does not like people which does not bode well for a sales job. Therefore Jim
mostly handles the administration of the business and does not deal with customers on a day to
day basis. John believes he can outsource the administrative work and therefore decrease the
overall expense of the business. Because of this John is looking to move out on his own and
sever ties with J&J. John believes he can start his own company with lower overhead and double
his revenue and income within 3 years. He believes he can do this by selling all sizes of shoes
instead of just shoes to men with small feet. His research shows that this will increase the size of
his target market immensely. Jim is going to go into business with another partner, Scott. They
too will form an S corporation, J&S Inc. This time Scott and Jim will use Cross purchase buy sell
agreement. Jim believes that selling shoes to men of all foot sizes is preposterous and does not
want to offer 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 owned by Scott to fund the Cross Purchase
Agreement in J&S, Inc.
II. If Scott and Jim were going to do an Entity purchase Buy Sell the J&S Inc could buy
Jim's policy from J&J Inc and there would not be a transfer for Value.
III. If J&S was set up as a C Corp and the policy was transferred to Scott the death
benefits would avoid 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
V. John could buy his policy from J&J Inc and this would not be a Transfer for Value.
A. I, V, IV
B. I, II, V
C. II, V
D. II, III, V
E. I,II, III, V
38. B. I is a correct statement although it would create a transfer for value issue. Although it is not
the ideal answer, it can be done. II is correct because a corporation of which the insured is a
shareholder can purchase the policy. III is wrong because it does not matter how long he lives,
there will still be tax due to transfer for value. IV makes no sense at all, it is mixing up 2 different
rules. V is correct because John can buy his own policy. Confusing, but similar to the exam.
39. Which of the following plans can be integrated with social security?
I. 401(k) plan (no match or company contribution)
II. Money-purchase plan
IV. Stock bonus plan
V. Defined benefit plan
A. All of the above
B. I, II, III, IV
C. II, IV, V
D. III, V
E. II, V
39. C. 401(k) with no match and ESOPs cannot be integrated with social security. Profit-sharing
plans can be integrated. It say does not say anywhere if or if not a profit sharing 401(k) can be
integrated. But, Answer I does indicates it is a pure 401(k) with no match or profit sharing
contribution. There is nothing to integrate in the 401(k) plan. So Answer I is out, but Answers II
and V can be integrated. Even if you the did not know about the ESOP, the only possibilities are
Answers C and E. Stock bonus plans can be integrated.
40. Mr. and Mrs. Dell have decided to retire. They have lived all their lives in California, a
community property state. They have decided to move to Arizona (a community property
state). They sold their California house (basis $100,000) for $800,000. They purchased an
Arizona condo for $400,000. What is the basis of the Arizona condo?
40. D. Mr. and Mrs. Dell sold their California home for a $700,000 gain ($500,000 exclusion). The
basis in the Arizona condo is what they paid for it.
41. Which mortgage investment is guaranteed by the U.S. Treasury?
B. I, IV, V
C. I, II, III
D. II, III
41. A. Legally, federal agencies are part of the federal government, and their securities are fully
guaranteed by the Treasury. The most important agency is Ginnie Mae. FHA and VA are loans
guaranteed to reduce the risk to the lender (a form of insurance). GNMA is an investment.
42. Which of the following is true?
A. Employers can always fully deduct the net premiums paid for employee group health
B. Employers can always fully deduct the net premiums paid for employee group disability
C. Employers can always fully deduct the net premiums paid for employee group life insurance
D. Answers A, B, and C are true.
E. None of the answers are true.
42. D. As long as the question says group, I believe all the answers are true. Even the 2% owner rule
does not apply to group coverage. The employer can always deduct the net premium due on
group life. (The employee may be taxed above $50,000 DB.) NOTE: Net would be less any
premiums paid by the employee. Always isn't always wrong as an answer. It is often"
43. Which of the following statements about disability payments and benefits are true?
I. Employer contributions to employee group disability insurance plans are deductible.
Benefits will be taxable income to the employee.
II. When an employee pays for an individual disability policy, or the plan is contributory,
the employee pays for the plan with after-tax dollars. Then the benefits will be tax-free
to the employee.
III. The employer uses an executive bonus (Section 162) to purchase an individual
disability policy for an employee. The premium is deductible by the employer, and the
benefits are tax-free to the employee
IV. S corporation owners always get tax-free disability benefits.
A. All of the above
B. I, II, III
C. I, II
D. II, III
E. III, IV
43. A. Employer contributions for group disability insurance will result in no taxable income to the
employee. However, the payment of benefits will result in taxable income (Answer I). If the plan
is contributory (executive bonus Ð Section 162) and the employee is charged with the insurance
premium (bonus), then the benefits are tax-free. Please refer to Live Review Insurance pages I-24. Yes, answer IV is true.
44. Your client, Mrs. Cates, died 6 months ago. Her family inherited almost $5 million tax free with
step-up in basis. One family member, her son, got $2 million. The son, Robert Cates, placed the
money in an existing joint account with his wife. Robert and his wife, Cindy, had been clients
before Mrs. Cates died. The account, with previous assets, is now worth $3.5 million. Robert
just stunned you this morning. He said he needed $100,000 cash, not a check from the account.
This is not a normal request, so you ask him the reason for the withdrawal. He says he needs it
to pay his mistress off. What should you do?
A. Call up Cindy to get authorization
B. Tell him it is impossible to pay out $100,000 in cash
C. Tell him you have a conflict of interest and cannot handle the transaction without Cindy's
D. Terminate the relationship based on moral questions
E. Make arrangements to pay him $100,000 in cash
44. E. There is a conflict of interest because you were hired by Robert and Cindy. The account is
considered joint. The truth of Answer B is unknown. Unfortunately one joint tenant can remove
assets without consent of the other joint tenant. You should not have asked him why he needed
45. Sam Waters, age 63, has decided to retire. The company he has worked for has an endorsement
type split dollar policy on his life. Sam has no other life insurance and has been told that if he
applied for life insurance he would be rated (more premium) or declined. His company has
informed him that he can purchase the policy under the split dollar agreement. Can he? What
would he have to pay?
A. He can purchase the policy by paying $100,000 but it would trigger transfer-for-value
income tax consequences.
D. $100,00 plus 6% interest* (*His company's interest charge)
E. $120,000 plus 6% interest* (*His company's interest charge)
45. C. Under endorsement method, he will have to pay the higher of the cash value or premiums
paid. The company will have a gain on the premiums paid but cannot charge him interest due to
46. Mr. Hart, married has a son, Robert. Robert is now starting college. Mr. and Mrs. Hart are very
happy that Robert has turned his life around. Robert was convicted of a felony for distributing a
controlled substance. What can they do tax-wise in regards to educational funding if their AGI is
A. Claim an American Opportunity Credit
B. Make a deductible charitable gift of tuition to the college
C. Claim a Lifetime Learning Credit
D. Make a tax-free gift by paying Robert's tuition
46. C. Both the American Opportunity credit and Lifetime Credit programs spell out certain
exclusions. An eligible student can be excluded if convicted of a felony (distributing a controlled
substance) under the American Opportunity credit only. Lifetime learning does not have that
restriction. Their AGI qualifies them for a Lifetime Learning Credit. Answer D is an answer, but
Answer C gives him a tax write-off for Answer D. No, you cannot get a charitable deduction for
a tuition gift to a school.
47. Which of the following is not an exception to early distributions (before age 59-1/2) from an
A. First home expense up to $10,000 lifetime
B. Qualified education expense (tuition fees, books, supplies, and equipment)
C. Distributions for medical care that exceed 10% of adjusted gross income
D. Distributions to pay medical insurance premiums after separation from employment after
12 consecutive weeks of unemployment compensation
E. Distributions in accordance with a QDRO
47. E. There is a requirement to file for medical insurance premiums after separation from
employment. The QDROs exclusion is for qualified plans only.
48. Mrs. Beall told you that her broker is suggesting that she buy CDs through the brokerage firm.
You should tell her the following
I. They do not carry FDIC insurance.
II. They could pay more interest than CDs issued by local banks.
III. They will require her to pay a commission.
IV. They enjoy a secondary market made by the broker.
A. All of the above
B. I, IV
C. II, III
D. II, IV
E. III, IV
48. D. The CDs carry federal deposit insurance up to $250,000 (single owner), do not require an
investor to pay a commission, and have a secondary market. This means the CDs could be sold
at a premium or discount (marked to the market).
49. A zero-coupon bond eliminates which of the following risks?
A. Interest rate
C. Reinvestment rate
D. Purchasing power
49. C. One advantage of a zero-coupon is the elimination of reinvestment rate risk because there is
no coupon to be reinvested.
50. An employer has 19 employees, but only 15 are covered under the group insurance. If one of
the covered employees is terminated, what are his COBRA options?
A. -0- months of coverage
B. 18 months of coverage
C. 36 months of coverage
D. 29 months of coverage
50. A. COBRA starts at 20 or more employees.
51. Which of the following statements is correct?
A. The Securities Act of 1934 provides for protection from misrepresentation, deceit, and other
fraud in the sale of new issues.
B. The Securities Investor Protection Act is designed to protect the individual from losses.
C. The margin requirement is set by the SEC.
D. State security laws are referred to as blue sky" laws. "
51. D. The 1933 act covers new issues. SIPC insures investors against losses arising from the failure
of the brokerage firm. The initial margin requirement is set by the Fed.
52. Tom purchased a bond for $950 that has a coupon rate of 6%. The bond matures in 17 years
and is callable in 5 years at $1,110. What is the YTC for this bond?
BA II Plus
Set for 2 P/YR
Set for 2 P/YR
5, gold, x P/YR
5, 2nd, xp/yr, N
$950, +, PV
$950, CHS, PV
$950, +, PV
I/YR i, 2, x
53. Robert Zimmerman owns his own company (X). The company (X) has a profit sharing 401(k). He
defers the maximum, and with the company match and usually some forfeitures, annual
additions range between $20,000 - $25,000. He has started another company (Y) with some
friends, and they are considering a profit sharing 401(k) plan. He is considered a controlling
shareholder of the new company (Y). Which of the following is true?
A. He cannot be a participant in the new company's (Y) profit sharing 401(k) plan.
B. Since he is fully participating in X's plan, he cannot participate in Y's plan (related
C. He is limited to the lesser of 25% of covered compensation or $56,000 for annual additions
provided by both X and Y.
D. He cannot defer any income into the new company's (Y's) 401(k) plan.
53. D. He can be a participant of Y's plan for profit sharing contributions but not make any more
deferrals. Answer C is incorrect because his annual additions limit (for both plans combined) is
100% of compensation or $52,000 (controlling shareholder).
54. Four qualifying joint bank accounts in the same institutions are owned by A, B, C, and D as
A and B
B and A
A and B and C
D and A
What is the total amount insured by the FDIC?
1 - A and B
2 - B and A
3 - A and B and C
4 - D and A
= 650,000 T
55. Your newest client, Tiffany, is age 23. Her favorite uncle, Uncle Donald, has given her $5,000 as
a college graduation present after receiving her BA degree in Communications. Tiffany tells you
that she would like to invest the full $5,000 into a Roth IRA. After college and given the current
economic environment, it took her some time to find a job. She has only been working for six
months and has no spare cash. You tell Tiffany that she should analyze her cash flow and
establish an emergency fund before investing for retirement. Tiffany, who enjoys reading
financial magazines and listening to financial experts on morning talk shows is adamant about
wanting the Roth. What should you do now?
A. Refuse to continue the relationship with Tiffany, clearly you and she do not see eye-to-eye.
B. Assist Tiffany in opening the Roth IRA.
C. Educate Tiffany as to why she needs to have an emergency fund before saving for
D. Recommend that Tiffany acquire cash-value life insurance because it will provide her with
both tax-deferral and survivor benefits.
55. C. While it is true that Tiffany could have penalty-free access to a Roth IRA, arguably, the
financial planner's main function is that of an educator. Does the exam want educate as an
answer? Yes! There is no need to end the client/planner relationship at this point. There is little,
if any information in the question to indicate a need for life insurance before dealing with other
56. A man, age 55, has a fair amount of assets. He is concerned about long-term care beyond 100
days. Which statements are correct?
I. Medicare may pay for more than 100 days of care after a 20-day deductible.
II. If he purchases an LTC policy, the policy may pay if he qualifies (ADLs).
III. Medicaid may pay if he uses up his assets to below the state threshold.
IV. His major medical may pay if he qualifies.
A. All of the above
B. I, II, III
C. II, III
56. C. The key word is may in Answers II and III.
57. Mr. and Mrs. Cullen, ages 52 and 51 respectively, are involved in an auto accident. He dies at
the accident site. She dies the next day in the hospital. She had a very large 401(k) (original
Goggle stock) naming him the primary beneficiary, if living and if not, her living children. If the
state of dominicle uses USDA (Uniform Standard Death Act) rules, what type of tax could the
assets in the 401(k) be subject in 2013?
A. Estate and income tax
B. Estate tax only
C. Income tax only
D. Neither estate or income tax
57. B. When Mrs. Cullen dies second, her children inherit the 401(k) under the uniform
simultaneous death act (USDA). The 401(k) would have to start yearly distribution one year after
death. There would be no income tax in 2014. In 2014, it could be subject to estate tax only.
58. A stock has the following returns over the past 4 years.
Which of the following is true about the standard deviation?
A. The standard deviation is negative.
B. Can not compute
C. Only three years can be used.
D. The standard deviation is 24.5%.
58. D. Refer to Investments module for keystrokes for standard deviation. Answer A is false.
Standard deviation cannot be negative. Answers B and C are false. You never had to calculate to
get the answer.
59. Tony, CFP¨ certificant and licensed insurance producer, disclosed to his new client, Susan, that
under the express agency contract that he signed, he may only sell annuities that are issued
from the insurance company that Tony represents. Susan's financial goal has a 10-year time
horizon. Tony recommends to sell Susan a 10-year deferred fixed annuity. From an ethical
standpoint, what has transpired?
A. Tony has not violated the CFP Board Code of Ethics and Professional Responsibilty.
B. Tony has violated the Principle of Professionalism under the CFP Board Code of Ethics and
C. Tony has violated the Principle of Fairness under the CFP Board Code of Ethics and
D. Tony has clearly violated FINRA suitability rules.
59. A. Tony disclosed his proprietary relationship with the insurance company he represents. The
producer represents the timeframe of the client's goal. No Code violation has occurred. This
would not be a FINRA matter; a fixed annuity is not regulated by securities regulators.