Flashcards in Quiz 3 Deck (60):
1. Brad has a SIMPLE plan at work. He is not an owner of the company. He plans to continue
working and make contributions to the SIMPLE. What is his latest required beginning date for
A. When he is age 70-1/2
B. April 1st of the year when he is age 70-1/2
C. April 1st of the following year when he is age 70-1/2
D. April 1st of the following year when he is age 70-1/2 or retired
1. C. For SIMPLE plans, the RBD is always the April 1st of the year following the calendar year in
which the covered participant attains age 70-1/2. For SIMPLE plans, the RBD is always the April
1st of the year following the calendar year in which the covered participant attains age 70-1/2.
2. Joan purchased a single premium whole life policy in 1990. She paid $30,000 of premium. The
death benefit is $100,000. The contract is worth $50,000 ($40,000 guaranteed cash value and
$10,000 of dividend cash value). If she takes out a loan of $30,000, which of the following is
A. She can take the $10,000 of dividends tax-free, and $20,000 will be subject to ordinary
income tax plus a 10% penalty.
B. She can borrow $20,000 tax-free, but $10,000 will be subject to ordinary income taxes plus
a 10% penalty.
C. $20,000 will be subject to ordinary income tax plus a 10% penalty, and $10,000 will be a tax-
free return of basis.
D. $30,000 will be subject to ordinary income tax plus a 10% penalty.
2. C. A single premium policy purchased after 1988 is a MEC. Current CV $50,000 - basis $30,000 =
$20,000 gain. Dividends in a MEC become taxable when lent or withdrawn. $20,000 is her gain;
$10,000 is basis. If you are thinking dividends can be removed tax free - reference the Live
Review Insurance section. Dividends under a MEC are taxed. Only the gain is subject to income
tax and a 10%penalty.
3. Bob wants to convert his IRA (approximate FMV of $1,000,000) to a Roth IRA. Bob is age 72 and
will be taking an RMD of $40,000 this year. Bob estimates his other taxable income for the year
to be $70,000. Can he convert the IRA to a Roth IRA?
A. Yes, there is no limit on the dollar amount of the conversion.
B. No, Bob cannot take a RMD and convert in the same year.
C. Yes, RMDs are considered income for income tax purposes.
D. No, Bob can only convert up to his taxable income.
E. No, it is too late (Bob's age is over 70 ---) to do a Roth conversion.
3. A. There is unlimited Roth conversion. It says Bob is taking his RMD first, then he will convert.
Answer C is true, but it does not answer the question. It does not use conversion as an answer.
4. Which of the following is (are) not a qualified retirement plan?
I. Defined-benefit plan
II. Profit-sharing plan
III. Target-benefit plan
IV. SEPV. 403(b) with no match
A. I, II, III
B. I, IV, V
C. IV, V
4. C. A 403(b) with no match is a retirement plan. There is no way to use it as an answer because
there is no choice that correctly includes it. Qualified plans are those plans subject to Code
section 401(a) and include defined-benefit, cash-balance, money-purchase, target-benefit,
profit-sharing, 401(k), stock bonus, and ESOP.
5. Your client, Frank, currently age 44, believes that the business cycle is about to turn sharply and
that an 8% inflation rate is a necessary assumption in the construction of his retirement plan.
You, a CFP certificant, strongly believe that inflation is an will continue to be substantially lower
averaging between 3 and 4 percent in the long run. Which inflation rate from the choices below
would you reject first?
A. Current year's inflation rate
B. Frank's inflation rate assumption
C. The 10-year average inflation rate per the CPI
D. The 100-year average inflation rate
5. A. A one-year inflation rate does not constitute an inflation rate for a long-term goal
achievement. Remember that client and planner must mutually agree on plan assumptions.
While the client's 8% assumption may not end up as the one used in the plan, it should be
considered. It might make sense for the planner to run the numbers using both his personal
inflation assumption and run them again using the client's so the client can see that his
assumption would probably be less workable.
6. Harry is very concerned about U.S. Government debt. He subscribed to a newsletter that
indicates a default of government debt. The newsletter spells out of the government having to
keep the printing presses running 24 hours a day, 7 days a week to keep up. He cannot sleep at
night and he currently has 100% of his investable assets in a money market fund paying minimal
interest. Which of the asset allocation would you suggest?
A. 25% in equity REITs, 25% in an international fund, 50% in a gold fund
B. 25% in Canadian bonds, 25% in a global fund, 50% in real estate LPs
C. 50% in gold bullion, 25% in natural resources, 25% in cash
D. 100% in a short position on government bonds
6. C. The type of question is typical of the nasty asset allocation questions on the exam. This
question is not one of their questions, it is totally made up. Answer D is the best choice for a
riverboat gambler, but Harry will not do it. Answer A is not bad but he can't sleep at night.
Answer B is invested 75% in the U.S. market. Subjective.
7. T Max, Inc. is concerned about corporate AMT due to the company's growth. The company has
four large life policies to consummate the existing stock redemption buy-sell. The officer
owners have decided to switch to a cross purchase buy-sell. What can or should be done with
the existing life policies?
A. Use the existing policies for the cross purchase buy-sell
B. Keep the policies for key-person coverage
C. Sell the policies to the insured, if they are interested, or cancel the policies
D. Buy new policies to fund the cross purchase buy-sell
7. C. Answer A will trigger transfer-for-value problems. Keeping the policies as key-person
coverage will continue to trigger AMT. Answer D is true, but it doesn't answer the question.
Mulitple owners creates a transfer-for-value problem. It is covered in prestudy insurance 7-7.
8. A client wants to buy a mutual fund that will perform nearly opposite the market. Which fund
should he/she select?
A. Mutual Fund A: Alpha +2, Beta 1.5, R2 (squared) 15
B. Mutual Fund B: Alpha +1.9, Beta 1, R2 (squared) 100
C. Mutual Fund C: Alpha +1, Beta .1, R2 (squared) 40
D. Mutual Fund D: Alpha -1, Beta -1.3, R2 (squared) 1.5
8. D. If a mutual fund has a beta of -1, this means that when the market moves up, this mutual
fund moves down at the same rate (a counter cyclical mutual fund such as gold fund would fall
into this category.) R2 affects whether you use Alpha, Treynor, or Sharpe. The R2 does not affect
the answer. This is a beta question, move opposite the market - see Live Review Investments IV-34
9. Basic Metals, Inc. has an owner-employees profit-sharing 401(k) plan. Basic Metals is never able
to maximize contributions. Now the company has been informed that its owner employees will
have to reduce their deferrals. Why did this occur?
A. The plan became top-heavy.
B. The plan failed ADP/ACP testing.
C. The plan became discriminatory.
D. The plan used the wrong vesting schedule.
9. B. The ADP and ACP tests can limit what the highly compensated employees can defer. Top-
heavy plans (discriminatory) have other requirements: special vesting rules and minimum
benefits for non-key employees.
10. In an insurance contract, the legally binding arrangement that spells out the basic promise of
the insurance company is called which of the following?
A. The declarations
B. The definitions
C. The insuring agreement
D. The exclusions
E. The conditions
10. C. In this section, the company promises to pay for loss if it should result from the perils
11. As a CFP certificant and busy practitioner, you frequently refer clients to CPAs and attorneys.
Most of your attorney referrals are to Randall Porter Esq., and most of your accountant referrals
are to Marcy Stanford CPA. Randall typically sends you $200 in cash for each client referral.
Marcy Stone does not pay referral fees but sends a large fruit basket to your office each year at
holiday time. Regarding this situation, which of the following statements best reflects the
regulatory and ethical implications of this situation?
I. You must disclose the referral fees from Porter to any clients you referred and for
whom such fees were paid.
II. You must disclose the gift from Stone to any clients you referred to her.
III. You need not disclose the referral fees from Porter because they have no impact
whatsoever on the client's financial plan.
IV. You need not disclose the gift from Stone because it is minimal and consumable.
A. I, II
B. I, IV
C. II, IV
D. II, III
11. B. Clearly, the in-cash referral fees must be disclosed to the pertaining clients. However, de
mimimus gifts like fruit or candy need not be disclosed.
12. A CFP certificant has prepared a plan. The clients have agreed with the planning. The CFP
certificant can assist them with which of the following?
A. Buying mutual funds
B. Preparing wills
C. Doing comprehensive estate planning (trust documents)
D. Help in changing account ownership
12. D. The question does not indicate whether the CFP certificant is security licensed or a practicing
attorney. Very simple answer. It says 'help' changing the account ownership. It doesn't say
he/she changed it.
13. Bob made an investment in a commercial property. He had a required rate of return of 10%. He
recently sold the property and is asking you if the investment was profitable. Was it?
A. Yes, but only if the NPV was positive
B. Yes, it would meet his required rate of return if the NPV was zero.
C. No, if the NPV was negative
D. Yes, but only if the NPV was greater than 10%
13. B. When the NPV is zero, the investment met his required rate of return. Answers A and D are
wrong because of only. An investment can be profitable even if the NPV is negative. NPV
positive or negative tells us if the client achieved his required rate of return, not the amount of
his/her profit. Best answer
14. Terry starts a business as an S corporation with cash (capital of $1,000). He also personally lends
the corporation $50,000. He is now in need of additional capital. If the corporation applies for a
commercial loan and he personally endorses it, will the commercial loan increase his basis?
A. Yes, but only by $51,000
B. Yes, by the amount of the commercial loan
C. Yes, by the amount of the commercial loan because he personally endorsed the loan
D. No, because it is not a direct loan
14. D. When an S corporation incurs a debt, no shareholder has any personal liability for the debt.
Accordingly, S corporation debt is included in a shareholder's stock basis, even if the
shareholder has personally guaranteed the debt. If he personally took out the loan and then he
lent the money to the S corporation, his basis would increase (direct loan).
15. Bob died. Which is the following is included in his gross estate?
A. A life insurance policy owned by Bob's daughter. She is the beneficiary. It has a death
benefit of $10 million.
B. $6 million of taxable gifts Bob made during his lifetime.
C. A general power of appointment Bob had on his deceased mother's trust.
D. Assets gifted to his ex-wife who is a resident alien
15. C. General powers are included in the gross estate. The life insurance policy is owned by his
daughter. The taxable gifts are added to the taxable estate. Answer D may or may not be
taxable gifts but again they are added to the taxable estate. They are not in the gross estate.
16. Which of the following are amounts received that will be treated as income-first distributions
under a MEC contract?
I. Cash dividends
II. Interest accrued on a policy loan (added to loan balance)
III. Dividends retained by the insurer to purchase (paid-up) additions
IV. Dividends retained by the insurer as principal or interest on a policy loan
A. All of the above
B. I, II, IV
C. II, III
D. III, IV
16. B. Option III dividends are not treated as income-first distributions. The loan interest wasn't
paid. It is added to the existing loan. It is like you made a loan against the loan. Answer III does
not cause a MEC problem, therefore the answer has to be B. They buy additional amounts of
paid-up insurance each year. They are not distributed to the client but are in fact reinvested in
the contract. Please review life insurance MEC contracts involving dividends.
17. Rusty's parents died in a car wreck. Before their death, they had established various trusts:
revocable living trusts (each parent), a life insurance trust, and a 2503(c) trust. While under age
21, the trust earnings will support Rusty's normal living needs. Into which of the following trusts
will Rusty's parents' assets pass?
A. Revocable living trust
B. 2503(c) trust
C. Crummey trust
D. Standby trust
E. Family trust
17. E. The revocable trust will become irrevocable and will turn into a family trust. It is rare that a
revocable trust would name the beneficary a 2503(c) children's trust. 2503(c) trusts terminate at
18. Saul Rosenfeld is the founder of Strategic Consulting Services, Inc. and plans to retire when he
has determined that he has sufficient savings to provide for his golden years. His current net
profits from the business are $75,000 annually after all expenses are paid. He feels now may be
a good time to retire, as he has recently finished paying off all of his debt, sold his home, and
rented a penthouse apartment downtown. His ambition is to play golf or tennis at the club
everyday, where he has been a member for many years. Because the rent is reasonable at the
new apartment, his total monthly expenses are now $6,250.00 and he expects inflation to be
nonexistent well into the future. As a new client, he has requested that you let him know if he
can retire now, and help evaluate his bond portfolio that consists of $1,500,000 invested in tax
exempt municipal bonds, which represents all of his savings, except $38,000 he keeps in his
checking account at the bank. The tax exempt municipal bonds in this current portfolio pay 5%
income and mature in 30 years. He would like you to determine if he is properly allocated to
reach his goals. He is seeking this limited engagement of your services because he has been
concerned about the recent gyrations in the market and many economists predicting a (long
term) downturn in the economy that may last a decade or more, but he really likes his tax-free
bonds and hates paying income taxes. He believes the gloomy economic forecasts are correct,
and the country needs to brace for a (new normal) period of austerity with reduced consumer
spending, and high unemployment damping the economy for many years to come. After he told
you that he wants to plan for a life expectancy of 30 years in retirement, even though he is
already 67 years old, you agree to help him determine whether or not he can afford to retire
right now, or if he should wait a couple more years, along with investment recommendations.
He is relying on his investments (the municipal bond portfolio & checking account balance) as
the only source to provide income for him throughout retirement, because does not expect to
receive social security and will close down the business completely. Upon his death, he will
leave University of Tampa a minimum of $1,500,000 through his will to provide an expansion to
the library to be named in his honor. The municipal bonds are all non-callable insured general
obligation bonds for various county and state governments across the nation. What do you
A. He can retire now, but he needs to take a more balanced approach with his portfolio by
reallocating his investments to asset allocation mutual funds for better diversification.
B. He should wait until age 70 to retire, and he should sell his municipal bonds and purchase
corporate bonds since he is in a low tax bracket.
C. He should wait until age 70 to retire, and reallocate his portfolio to a more balanced
approach utilizing asset allocation mutual funds for better diversification.
D. He can retire now and leave his portfolio invested in the municipal bonds.
18. D. Utilizing a capital preservation approach to provide his legacy wishes to the college, his
current portfolio provides $75,000 a year ($6,250/mo.) in tax free income, and is diversified
geographically with strong credit quality of general obligation bonds (backed by taxing
authority) providing enough income to retire now. The portfolio is immunized based on his life
expectancy and limiting his reinvestment rate risk with the non-callable bonds. While many
planners would agree that to maintain purchasing power (protection against inflation), he
should be better diversified, he likes the bonds, hates paying taxes, and can meet all of his goals
to retire now leaving his current plan intact, since he does not expect inflation. If he is wrong
about inflation or the economy, etc., then it will be his responsibility to adjust his lifestyle or
investments accordingly in the future if the situation changes or his feelings are different at that
time. Suggestion: I would have read the answers first. This is a very long question. It has a highly
19. A company's officers are concerned about being trustees for the company's pension plan. What
should they do?
A. Use four different families of funds for investment choices
B. Use eight different mutual funds for investment choices
C. Use mutual funds that range from money market accounts to sector funds
D. Use an investment manager that will manage the plan
19. D. If an investment manager has been appointed, no trustee will be liable for the acts or
omission of such investment manager, nor will any trustee be under an obligation to invest or
otherwise manage any asset of that plan that is subject to the management of the investment
manager. However, this relief does not totally excuse from liability the named fiduciary who
appointed the investment manager. ERISA holds fiduciaries to as high a standard as that of a
professional money manager or investment expert in making investment decisions. A good
argument can be made that professional money managers, investment advisers, banks, and
trust companies (which serve as qualified plan fiduciaries)hold themselves out to be experts and
are therefore subject to ERISA's Prudent Expert rule. (Case law applies.)
20. A worker will be entitled to Social Security disability benefits if which of the following is true?
I. has been disabled for 12 months or is expected to be disabled for at least 12 months
or has a disability that is expected to result in death
II. is NRA or over
III. is insured for disability benefits
IV. has filed an application for disability benefits
V. has completed a 5-month waiting period or is exempted from this requirement
A. All of the above
B. I, III, IV, V
C. II, III, IV
D. III, V
E. IV, V
20. B. For disability, he/she must be under NRA (Normal Retirement Age).
21. Harry started taking substantially equal payments from his IRA at age 55. For three years, he
took the required amount. Then, in year four, due to a qualified hardship, he withdrew an
amount greater than the normal substantial equal payment. He took the additional $50,000 as
a hardship. What penalty did he have to pay on the $50,000?
A. None, because he did a hardship withdrawal of $50,000
B. None, because he did a qualified loan of $50,000
C. 10% of $50,000
D. 10% of the withdrawals in years 1, 2, and 3, and $50,000 in year 4
21. C. The question is only asking about the $50,000 not the withdrawals from years 1-3. Yes, the
withdrawals from years 1-3 would be subject to the 10% penalty, plus interest, but that is not
what the question asked. The question says he is 55, not 59---. Hardship withdraws full under
401(k) plans, not IRA. Here a hardship withdrawal is just a withdrawal from an IRA due to
22. What would not be included as IRD in the estate of a decedent?
A. A promise to pay a debt
B. Dividends declared but not yet paid
C. Business income declared but not yet paid
D. A contract to sell real property (prerequisites fulfilled)
E. Interest on certificates of deposit attributable to the period before the date of death
22. A. Income with respect to a decedent (IRD) covers income (including capital gains) which a
decedent had a right to receive but that wasn't actually or constructively received by a cash
basis decedent. The debt is not IRD. The interest on the debt would be taxable income at the
time the debt was paid, but none is shown. The other items are IRD.
23. Under the provisions of HIPAA, qualified LTC insurance premiums paid are deductible as medical
expenses (with limits). Which of the following provisions will make the LTC contract
A. The contract is guaranteed renewable.
B. The contract has a cash value.
C. The only insurance protection provided under the contract is for qualified long-term care
D. All refunds of premiums and policy-holder dividends must be applied as future reductions in
premiums or to increase future benefits.
23. B. A qualified LTC contract cannot provide for a cash surrender value. However, a cash value
insurance policy can have a qualified LTC rider.
24. George and Linda gift $106,000 to an irrevocable living trust with Crummey provisions. The
trust has two beneficiaries. George and Linda consent to gift splitting. If George or Linda dies,
how much of the gift will be brought back into their gross estate?
24. A. A gift of cash to an irrevocable living trust is irrevocable. The gift is out of their estate. Both
George and Linda will have a taxable gift of $25,000, but that is not in their gross estate. It is
added to their taxable estate.($106,000 - [56,000 (14,000 x 4)] = $50,000 50,000 / 2 = 25,000
25. Mr. and Mrs. Iverson sold their home for a $400,000 gain. They excluded the gain under Section 121. They used the proceeds of the home sale to purchase another home. Now, a year and a
half later, they sold the second home for a $50,000 gain. How much of the gain must they
25. D. After keeping the second residence more than two years, the exclusion becomes available
again. It does not say they sold because of a job change, divorce, or unforseen circumstance. If it
was due to a job change, etc. then you could prorate the exclusion. But none are shown.
26. Ted is subject to AMT. What suggestions would you make?
I. Purchase municipal bonds
II. Purchase public purpose municipal bonds
III. Purchase private purpose municipal bonds
IV. Purchase high-yield taxable bonds
A. I, III, IV
B. II, IV
C. III, IV
E. II, III
26. B. Municipal bonds could include both public and private purpose bonds. The public bonds are
totally tax free. Private bonds are a preference item and are subject to AMT. Additional taxable
income should be considered as an attractive investment when faced with AMT. The overriding
theme is to construct a fixed-income portfolio that generates the highest after-tax returns based
on individual tax circumstance (1040 and AMT). Public purpose bonds are a neutral effect. They
do not create taxable income nor do they create AMT income.
27. Which of the following is true?
A. The time-weighted return and the dollar-weighted return are just different words for the
same calculation and are interchangeable.
B. The reason for the use of the time-weighted return over the dollar-weighted return is to
evaluate the performance of the portfolio manager.
C. The reason for the use of the dollar-weighted return over the time-weighted return is to
evaluate the performance of the portfolio manager.
D. The reason for the use of the time-weighted return over the dollar-weighted return is to
eliminate the reinvestment rate risk.
27. B. The time-weighted return is the geometric mean calculation. The dollar-weighted return is
28. Tom Adkins is concerned about his disability policy. When he bought the policy, the agent told
him the company could not change the premium. What should he look for in the policy
A. Loss of income
B. Guaranteed renewable
C. Own occupied
28. D. Non-cancellable policies have future rates that are guaranteed. Insurance is an unilateral
contract but that does not have anything to do with what the question is asking.
29. Which of the following is (are) true about profit-sharing plans?
I. They may be integrated with social security.
II. They may have contributions for individual employees in excess of 25%.
III. They may have flexible contributions.
IV. They may be age weighted.
A. I, II, III, IV
B. I, II, III
C. I, III
D. I, IV
29. A. Non-cancellable policies have future rates that are guaranteed. Insurance is an unilateral
contract but that does not have anything to do with what the question is asking.
30. Mrs. Roberts, age 60, has come to you. She is about to purchase a life insurance policy for
estate planning purposes. She wants you to help her determine which policy she should buy.
- Whole life policy with Company A The illustration shows premiums are paid in full with
dividends in 10 years. (They vanish.)
- Universal life policy with Company B The illustration shows the death benefit will be
zero at age 95 based on current interest assumptions
- Whole life policy with Company C The illustration shows premiums are paid in full with
dividends in 15 years. (They vanish.)
On what criteria would you base your advice to her?
I. Review the insurance company's ratings (A. M. Best etc.)
II. Review the size of the insurance company
III. Review the insurance company's past history of paying claims and its future ability to
IV. Review the agents' competence, knowledge, and reliability
V. Review whether the whole life premiums will vanish and whether the universal life
policy will make it to age 95
A. All of the above
B. I, III, IV, V
C. I, III, IV
D. III, IV, V
E. II, V
30. B. High ratings from two or three rating agencies would be important. The single most
important factor is the strength of the insurer (ability to pay claims). The size of a company is
not always a controlling factor. The agent is important. There is no guarantee that the whole life
premiums will vanish or the UL will last to age 95. In fact, the NAIC prohibits such language.
Investigating vanishing premiums could be difficult. Answer A could be true. Subjective.
31. You are an insurance agent and a CFP practitioner. A client is referred to you for help. The
client started a fire on his neighbor's property that ultimately spread to the house. The police
are investigating the fire. The client wants to disclose all the facts to you to get insight on how
his and his neighbor's insurance companies will react when the truth comes out. How should
you respond to this situation?
A. Tell the client he has no coverage for intentional acts
B. Tell the client you do not have advisor-client privilege and terminate the relationship
C. Tell the client he should document the information with pictures and diagrams
D. Tell the client to keep his mouth shut, nothing may ever be discovered
31. B. Rules on Conduct 3.1 states a certificant shall treat information as confidential except as
required in response to proper legal process. The real question is are you acting as an insurance
agent or a CFP practitioner when the client asks the question. You should answer as a CFP
32. Chris Towns is self-employed. His business has 10 employees. He is successful enough to fund
various employee benefits for him and his employees. Which of the following existing benefits
are either added to the front of his 1040 as gross income or as deductions on the front of the
1040 to determine AGI?
I. Group life insurance benefit of $200,000 for him
II. SEP contribution for him
III. Net profit from his business of $350,000
IV. IRA contribution by him for his wife
V. Group health contribution for him and his wife
A. All of the above.
B. I, II, III, V
C. I, II, III
D. II, V
32. B. The group life is in excess of $50,000. The contribution excess is compensation. The SEP
deduction and health contribution are deductions for AGI. The net profit is taxable income. She
is above the spousal phaseout for the IRA deduction.
33. Bob has retired. His company had an ESOP. Stock with a basis of $50,000 was contributed to it.
Stock with a market value of $125,000 was distributed at Bob's retirement. Six months after
retirement, Bob is selling all the shares for $150,000. What is Bob's tax situation?
A. $50,000 was taxed as ordinary income at the time of retirement; $75,000 will be taxed at
LTCG rates at the time of sale, and $25,000 will be taxed at STCG rates at the time of sale.
B. $150,000 will be taxed at LTCG rates at the time of sale.
C. $100,000 will be taxed at LTCG rates at the time of sale.
D. $50,000 was taxed as ordinary income at the time of retirement; $100,000 will be taxed at
LTCG rates at the time of sale.
33. A. The unrealized appreciation is taxable as long-term capital gain to the recipient when the
shares are sold, even if sold immediately. If the recipient holds the shares for a period of time
after distribution, any additional gain (above the net unrealized appreciation) is taxed as long or
short-term capital gain, depending on the holding period. The $25,000 gain between
distribution ($125,000) and the sale ($150,000) is STCG because only 6 months went by.
34. Mr. Williams' yearly compensation is $80,000. He contributes $10,000 to his 401(k). Mrs.
Williams does not work outside the home. They have no other taxable income. How much can
they contribute to an IRA and deduct in 2014?
34. C. You can only assume that he is under the $96,000 active participation phase out because no
other taxable income numbers are given. Therefore, he can do a deductible IRA. She can do a
spousal IRA ($5,500) because he has compensation. She is under the spousal $181,000
phaseout. You cannot assume they are age 50.
35. Bob owns the following.
- 2% interest in a non-publicly traded partnership. His investment was $100,000. The
partnership sent him a K-1 showing a $10,000 loss.
- 30% interest in a limited liability company (active) His basis is $100,000. The LLC sent him a
K-1 showing a $30,000 loss.
What amount of the losses can he use this year?
35. C. A loss from a non-publicly traded partnership is a passive loss (no deduction). A loss from an
LLC (active participation) is deductible up to basis.
36. Which of the following plans is not subject to FICA and FUTA on employee deferrals?
A. Profit sharing 401(k)
E. Section 125
36. E. A 125 is a flexible spending account (FSA). All the other plans require FICA and FUTA on
37. Mrs. Pike purchased XYZ stock some years ago for $100,000. The stock was such a good
investment she bought more from year to year (additional purchases of $10,000, $25,000,
$35,000, and $20,000). At the time of her death, the stock was worth $500,000. When she
died, her grandson inherited the stock. He felt so good he bought one lottery ticket and won
$15,000. He invested the $15,000 in the same stock. Now, six months later, he has decided to
sell all the stock. What will be the taxable event if the stock Mrs. Pike bought is worth $600,000
and the stock he purchased is worth $25,000?
A. $110,000 of capital gains
B. $410,000 of long-term capital gains and $10,000 of short-term capital gains
C. $110,000 of short-term capital gains
D. $100,000 of long-term capital gains and $10,000 of short-term capital gains
37. D. The gain from the sale of the stock bought with his lottery winnings is a short-term capital
gain of $10,000. The inheritance is always LTCG.
38. Barbara and Kathy are 50/50 owners of BK, Inc. When they started BK, Barbara and Kathy had
the company take out two $1,000,000 key-person term life insurance policies. Over the years,
the company has paid $5,000 in premium on Barbara's policy and $4,000 in premium on Kathy's
policy. Barbara and Kathy have decided to use the policies to do a cross purchase buy-sell. If
Barbara buys Kathy's policy for the premium paid by BK, what will be the result if Kathy dies
within one year?
A. Barbara will get $1,000,000 income tax-free (term insurance exclusion).
B. The policy will be subject to transfer for value.
C. The policy will be included in Kathy's estate (3-year rule).
D. The policy will increase the value of BK, Inc. by $1,000,000 (3-year rule).
38. B. It doesn't matter whether the policy is term or permanent insurance. Transfer for value
makes the policy income taxable above basis. The 3-year rule doesn't apply when transfer for
value occurs. Only Barbara can buy Barbara's policy, and Kathy can buy Kathy's policy. This is a
corporation entity, not a partnership entity.
39. Mr. Perkins, wealthy, is the insured on the following policies.
Dividends pay premium due.
Mr. Perkins is the owner. Mrs. Perkins is the primary beneficiary; his two daughters are the
Premium paid by employer.
Employer owns the policy (key man).
Mr. Perkins is about to retire. His employer is willing to transfer for value the policy to him. He
is concerned about the gift income and estate tax ramifications of life insurance. Which of the
following is (are) the best option(s) for him if he lives three years?
I. Have his life insurance trust purchase the employer-paid policy.
II. Have his wife purchase the employer-paid policy.
III. Gift his personal policy to his wife
IV. Gift his personal policy to his life insurance trust (His wife and two daughters are
V. Buy the employer-paid policy and gift the policy to his life insurance trust
A. All of the above
B. II, III
C. II, IV, V
D. III, IV
E. IV, V
39. E. Answers I and II will trigger transfer for value and make the policy income taxable. Gifting the
policy to his wife will include it in her estate. This will increase their potential estate tax at the
second death. I believe Answer E is the best answer to get the policies out of his wife's estate.
The exact amount of taxable gift less exclusion is not part of the answer. Since his wife is a
beneficiary I am not sure she can split gift. But he can use his exclusions.
40. Charter, Inc. is owned 50% by John Tillman and Brad Porter. Currently, the company has a stock
redemption plan funded with insurance but John and Brad want to do a cross-purchase buy-sell
plan funded with insurance. Which of the following is true?
I. The company owns and is the beneficiary of the stock redemption plan insurance
II. John owns and is the beneficiary of Brad's stock redemption plan insurance policy.
III. Brad will own and be the beneficiary of John's insurance policy for the cross-purchase
IV. The company will own and be the beneficiary of Brad's insurance policy for the cross-
purchase buy-sell plan.
V. The current stock redemption policies on John and Brad can be sold to Brad and John
to fund the cross-purchase buy-sell plan. (example - John can buy Brad's policy_
A. I, III, IV
B. II, III, V
C. I, IV, V
D. II, IV, V
E. I, III
40. E. Under corporate (Charter, Inc.) stock redemption, the company owns the policies (Answer I).
Under cross-purchase, the owner buys a policy on the other owner (Answer III). Answer V is a
violation of transfer for value rules. Only Brad can buy Brad's policy.
41. Mrs. Tilley has the following income. How much of it is earned income?
I. Wages from an S corporation of $50,000
II. Corporate dividends of $5,000
III. K-1 income of $10,000 from an S corporation she is more than a 2% owner (active)
IV. Sale of a collectible for a $5,000 gain
41. E. Only the salary is earned income. The other answers are unearned income.
Note: K-1 from a S corporation is always unearned income even if she an active participant.
42. Joan Thomas sells her $200,000 term life insurance policy to Linda Bell for $1,000. Joan dies five
years later. Linda paid $4,000 in premiums over the past five years. Will the insurance proceeds
A. No, a term life insurance policy doesn't trigger 'transfer for value.'
B. $199,000 will be income taxable to Linda.
C. $195,000 will be income taxable to Linda.
D. $200,000 will be included in Joan's estate.
42. C. The sale of the policy triggered transfer for value. Linda didn't die. Joan died. Linda will not
net $200,000. Linda will get the proceeds subject to income tax. When Joan dies, it will not be
included in her estate (no 3-year rule/sale).
43. A client has $1,000,000 portfolio consisting of four stocks as follows:
a. $200,000 ABC @ 1.5 beta
b. $250,000 DEF @ 2.0 beta
c. $150,000 GHF @.5 beta
d. $400,000 JKL @ 1.2 beta
What is the portfolio beta?
43. B. Everything is a percentage of $1,000,000.
1. 20% x 1.5 = .30
2. 25% x 2.0 = 050
3. 15% of .5 = .08
4. 40% of 1.2 = .48
44. A client is sitting with his/her financial planner. The planner is patiently explaining the
probabilities of return with an investment portfolio. What analysis is the financial planner
A. Monte Carlo
B. Weighted beta
C. Correlation coefficients
E. Standard deviation
44. A. Monte Carlo attempts to recreate a frequency distribution of potential outcomes by
repeatedly choosing random values based on the underlying risk and return characteristics of
the securities themselves.
45. Mrs. Tilden, a widow, has gifted extensively to her daughter using both her full exemption
amount and paying gift tax. Mrs. Tilden recently married Bill Widner. She is considering gifting
him $1,000,000 but he must then gift the $1,000,000 to her daughter. How would you respond?
A. This is an effective way to do estate planning.
B. The transfer of $1,000,000 from Mrs. Tilden to Bill Widner will be a taxable gift (less the
C. This is an ineffective way to do estate planning.
D. Mrs. Tilden and Bill Widner need to be married for one year for this technique to work.
E. The transfer of $1,000,000 from Mrs. Tilden to Bill Widner will be a non-taxable gift (less the
45. B. I believe the gift will not qualify for the marital deduction. To qualify for the deduction, the
done spouse must be given the property outright or must have at least a right to the income
from the property and a general power of appointment over the principal. IRS considers this a
fraudulent transfer. This is my answer. Subjective.
46. Loretta started receiving substantially equal annual payments from her IRA at age 58. Loretta
stopped receiving payments at age 61 (a total of three payments). What will be the amount of
the recapture tax she will be subject to?
A. None, she has attained age 59 ---.
B. None, she ceased receiving payments.
C. The recapture amount will be 10% of the total annual payments received before she
attained age 59 --- , and interest.
D. The recapture amount will be 10% of the three payments, and interest.
E. The recapture amount will be 10% of the value of the IRA, and interest.
46. C. Wow. You probably selected Answer D. But this is a textbook answer (in two sources and the
IRA answer book). The penalty only applies to distributions that were made before age 59---. This
is spelled out on Retirement page R-32.
47. Mrs. Tuttle spent 110 days in a skilled care facility. She qualified for her stay under Medicare.
The facility cost was $252.00 per day and the Medicare specified amount is $152.00 per day.
How much did Medicare pay? NOTE: The Medicare specified amount will be given on the exam
if they ask you for this type of calculation.
47. B. Medicare will pay the first 20 days in full @ $252.00 plus $100 (everything above $152.00) for
the next 80 days.
There is no coverage after 100 days.
20 days @ $252.00 = $5,040
80 more days @$100 = $8,000
48. Last night you, a CFP practitioner, went to meet two potential new clients. Jack (age 35) and Jill
(age 30) had been referred to you by Jill's sister, with whom you've recently done some
insurance business. She warned you that they would have some special issues. At the initial
meeting Jack and Jill were quite forthcoming: some years ago they were both convicted of
Medicare fraud, and did Federal prison time. They remain convicted felons, and have a single
$500,000 Federal judgment against each of them. This judgment will last for 20 years. Since the
clock began in 2007, they have 14 years to go. Any Federal payment they might be due to
receive will be confiscated Ð meaning they'll never see an income tax refund.
Jack and Jill want to do the usual things young couples want to do Ð purchase a home and save
for their son's education. They were recently approved for a mortgage, but shortly before
closing the lending bank backed out of the transaction.
This is all new territory to you. You explain this to your clients Ð that at the moment your answer
is, I don't know what, if anything, I can do for you. You give them a short explanation of the
securities and insurance regulatory environments.
You request a copy of the Federal judgment, which they promise to email you. While waiting to
see that document you call your compliance departments, having first secured Jack's and Jill's
permission to do so.
Insurance Compliance tells you that since they are six years away from the conviction they
would consider a policy. Seems like they should at the very least purchase $500K 15 year term
policies on each other, so that if one of them dies the surviving spouse will be able to get out
from under. You don't know if any type of cash value policy would be permissible.
Securities Compliance tells you that they would have to scrub their social security numbers
against Federal databases once an application had been submitted to see if setting up a
brokerage account were even permissible.
Meanwhile, they have $30,000 they want to invest. They are willing to do college savings in a
Which combination of Domain, Principles, and Practice Standards has the CFP practitioner
evidenced in this exchange?
A. Gathering Information necessary to Fulfill the Engagement; Principles of Integrity and
Competence; Practice Standard 300 Series
B. Establishing and Defining the Client-Planner Relationship; Principles of Fairness and
Diligence; Practice Standard 100 and 200 Series
C. Establishing and Defining the Client-Planner Relationship; Principle of Integrity; Practice
Standard 100 and 200 Series
D. Analyzing and Evaluating the Client's Current Financial Status; Principles of Integrity and
Objectivity; Practice Standard 100, 200, and 300 Series.
48. C. The CFP licensee is still in the process of Establishing and Defining the Client-Planner
Relationship. He doesn't know at this point if there can even be a relationship. In doing his due
diligence with compliance, he is exhibiting the principle of Integrity. He probably could write
business with a family member taking ownership, but won't.
The 100-Series Practice Standards address the scope of the engagement. The Planner is trying to
determine this scope and, indeed, if there can even be an engagement. The 200 Series address
obtaining quantitative and qualitative information. The extent of the Federal judgment is an
example of both types of information.
49. Mr. Ball and Mr. Desmond are both attorneys. Their business, BaDe, PC (Professional
corporation) does not have a retirement plan. They want to establish a qualified plan. They
want a plan that they do not personally contribute to and that BaDe, PC would not have to
contribute to each year. They currently have only two other employees (part-time) and plan to
hire another attorney. Which of the following plans would you recommend?
A. No plan fits.
C. Profit-sharing plan
D. Profit-sharing 401(k) plan
E. Defined-benefit plan
49. C. Since no ages or salaries were given, I eliminated the defined-benefit plan. The wording may
be poor in that they would not have to contribute means they didn't want to defer personal
income. This eliminates the 401(k). I eliminated the SEP based on the wording: qualified plan
and having part-time employees.
The ERISA 1,000-hour rule would eliminate the part-time employees.
50. Mr. Smith purchased and sold the following stocks during a two-year period. Which
purchase/sale created a 'wash' sale?
NOTE: All transactions are 100 shares.
I. March 1st purchased ABC @ $15; December 1st purchased ABC @ $10; December
31st sold ABC @ $10
II. November 30th purchased LMN @ $50; December 15th purchased LMN @ $52;
December 29th sold LMN @ $54
III. January 1st purchased XYZ @ $60; February 15th sold XYZ @ $50; March 16th
purchased XYZ at $52
A. I, II, III
B. I, III
50. B. No loss deduction is allowed for any loss from any sale or other disposition of stock within a
period beginning 30 days before and ending 30 days after the date of the sale or disposition.
Both answers I and III create losses. For example, in answer A the $10 sale goes against the $15
purchase. Answer II creates at gain.
Both I and III would create a loss if they were not deemed a wash sale. A gain is never a wash
sale, only a loss.
--ABC's basis is $10 cost plus $5 recognized loss. (December 1st and December 31st)
--XYZ's basis is $52 cost plus $10 recognized loss. (February 15 and March 16) There are only
28/29 days in February.
--LMN was sold for a gain.
51. Tom, age 51, works for a not-for-profit organization. He contributes $17,500 annually to a
403(b). Tom's wife, Melinda (age 48), works for another not-for-profit organization. She
contributes $5,000 annually to a 457. If he earns $100,000 a year and Melinda earns $50,000 a
year, how much can he and she contribute and deduct to a regular IRA in 2014?
51. B. The 403(b) retirement plan makes him an active participant. The nongovernmental 457 does
not trigger active participation for her. Their combined AGI is $150,000. She can do a deductible
IRA under the spousal rules (less than 181,000). He is subject to phaseout ($96,000 - 116,000).
52. During the first interview with your client, Charles, he says he lives an alternative lifestyle.
While he tells you that he does not make eye contact with you and is fidgeting with his cell
phone. What would be the most appropriate response, from you, the CFP practitioner under
A. Let the comment ride Charles' (alternative lifestyle' would have little, if any impact on his
B. In a nonjudgmental tone, ask Charles to explain what he means by 'alternative lifestyle'.
C. Research 'alternative lifestyle' on the Internet to learn what Charles was communicating
while not upsetting his comfort zone.
D. Ask a mutual acquaintance of yours and Charles' to explain his self-stated 'alternative
52. B. It is important that client and planner understand each other and that the client understand
the planner is there to serve and not judge. Charles' lifestyle could indeed impact the financial
plan relative to asset ownership, beneficiary designations, incapacity planning, and more.
Discussing with third parties information Charles shared with you in your capacity as his financial
planner clearly violated the Principle of Confidentiality.
53. A home has a FMV of $450,000. The land is worth $100,000. The home is partially destroyed by
fire. Damages are $100,000. The home is insured for $250,000 with replacement cost coverage.
How much will the homeowner get (ignore deductible)?
53. D. The land is not insured. The replacement value of the home is $350,000. ($450,000 FMV less
$100,000 land) Landowners always uses 80% of replacement value.
$250,000 divided by 80% of 350,000 multiplied by 100,000 equals $89,286
Reference: Live Review Insurance page I-9 through I-11 if you have problems.
54. Bob, age 63+, is debating retirement and taking Social Security benefit 36 months early. He is a
fully insured worker. Which of the following is true?
I. He will be eligible for Medicare.
II. He will receive 80% of his normal retirement age benefit.
III. If he works part-time, his benefits will be reduced by 20%.
IV. If he works part-time, his benefits will be reduced $1 for every $3 he earns above a
specific earnings threshold.
V. If he does not work, his benefits may or may not be subject to federal income
A. I, II, III, IV
B. II, IV, V
C. III, IV
D. II, V
54. D. He will not be eligible for Medicare until age 65 (Answer I). If he works part-time, his benefits
will be reduced 1 for every $2 he earns above a specific threshold before his benefits (Answer III
and IV). $1 for $3 during age 65-66. His age is 63+. His benefits will be subject to federal income
tax if his AGI plus --- of his benefits exceed $25,000+. Answer V is right because of may We do
not have his AGI. If V said will, then the answer would be incorrect. You need to back into the
answer. Answers I, III and IV are incorrect. 36 months is 80% (36/180).
55. Mr. Todd, single, age 70, died. At death his estate was worth $8 million. He was extremely
concerned about the economy. He had 40% of his asset in gold mining stocks. When the estate
was filed the 6 month AVD of his estate was $6 million because gold mining stocks had lost 30%.
What could the AVD value affect?
A. The GST tax due
B. The gift tax due
C. The income tax due
55. A. Yes, it also affects the estate tax. But if the estate is inherited by his grandchildren (direct
skip), it reduces the GSTT. There is no gift tax. Long-term capital assets get a step-up in basis.
56. Which of the following would reduce the AMT payable in a given year?
I. Postpone state income tax payment until next year
II. Postpone charitable gifts until next year
III. Postpone exercising an ISO available this year until next year
IV. Accept a bonus this year
A. All of the above
B. I, II, IV
C. I, IV
D. II, IV
56. A. If you defer deductible expenses (Answers I andi II) into a later year, your regular taxes will be
higher. Postponing ISOs would reduce AMT. Accepting a bonus will increase your regular taxes;
thereby, reducing AMT payable. By postponing charitable giving, you pay more regular income
tax. There is a direct relationship between regular tax and AMT. See Live Review page T-30.
57. Sam purchased a property for $2,000,000. Sam let the property run down. Sam took
depreciation, and the adjusted basis is now $1,114,000. He decided to gift it to his son. Sam has
used his full gift tax exemption already. He had to pay $440,000 in gift tax (40% bracket). His
son, who is very handy and a hard worker, just sold the property for $1,500,000. What amount
of gain will his son have to report?
57. B. This is not loss property, but property that has been depreciated (CRD). The son's basis will be
Sam's adjusted basis ($1,114,000). The gain is $386,000 (see estate page 13). You have to used
the adjusted basis. The $14,000 annual gift exclusion never affects basis. The $14,000 was just in
the question to confuse you. The gift taxes paid would only adjust basis if the property had
appreciated. This is depreciated property, not appreciated property. The gift taxes paid do not
increase the basis which it only true if it is appreciated property as that is why Answer A is
incorrect. Pretty tough question.
58. Mr. Parker is in a 40% federal gift and GST tax bracket. He placed $1 million into an irrevocable
trust for the income benefit of his son with the remainder to his granddaughter. No GSTT
exemption was available (used $5,250,000 already) at the time of the transfer. What will
happen at his son's death?
A. No GSTT is due. Mr. Parker paid it at the time of transfer.
B. The GSTT will come out of the son's estate.
C. The GSTT will be paid before the trust assets are distributed to Mr. Parker's granddaughter.
D. The GSTT will be paid by Mr. Parker's granddaughter.
58. C. This is a taxable termination. The trustee pays the tax out of the trust assets.
59. Corporate annual reports do not include which of the following?
A. Depreciation methods
B. Stock options
C. Profitability projections
D. Inventory methods
E. Outlook for the firm's products in various industries in which it operates
59. C. Profitability projections are not included.