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Flashcards in Quiz 7 Deck (60):

1. Tilly recently inherited a lot of personal property from her mother. She is concerned about her
property insurance. Which item(s) do you suggest she talk to her insurance agent about?
I. Gold coins
II. Old furniture and workable TVs in a separate structure down by the lake of her
III. Silverware
IV. Artwork bought on Amazon.com

1. B. Coins have a limitation of $200. Silverware has a limit of $2,500 for theft only. It does not
indicate they are collectible. But they are gold. The personal property in a separate structure is
covered. Artwork bought on the internet would be normal personal property.


2. A contribution to a Coverdell ESA is which of the following?
A. Deductible like an IRA (Coverdell ESAs were originally called 'educational IRAs.')
B. A completed gift qualifying for the annual exclusion
C. A completed gift of a future interest
D. An exempt gift
E. Deductible if the donor's AGI is under $190,000 (joint filers)

2. B. A Coverdell ESA is not deductible. AGI is a factor in phase out, but not in deductibility. It is a
gift of a present interest and not an exempt gift.


3. You receive a referral from a Mrs. Andrews. She works as the Medicare billing administrator at
a doctor's office. The doctor is your client. She has been divorced and lives week-to-week. She
called you about her daughter. Her daughter is married and having financial problems. She
asked you to meet with her daughter and son-in-law. You agree.
Her daughter, Leslie, and her husband Tommy have come to meet with you. Both are employed
in hourly jobs, have no savings, and fortunately have some health insurance. She is pregnant and
the expected due date is 2 months away. There is no other data to gather. They ask you what
you recommend they do?
A. Establish an emergency fund to cover 6 months fixed and variable expenses.
B. Tommy should buy cheap term life insurance of at least $500,000 or more.
C. You should ask Mrs. Adams how she is going to help them out.
D. You should ask them if they qualify for any local or state financial assistance, like food

3. B. Answer A is what they should have done but with two months and limited wages this is an
impossibility. A crib, baby clothes, diapers, etc. will eat up any savings. However, if he dies
before or after birth, she nor her mother can solve her immediate needs. She will probably end
up on financial aid. Answer C is incorrect because Mrs. Andrews is not the client. Although not
perfect, Answer B is the best choice. Is $500,000 arbitrary? Probably, but these people have
never bought insurance. How would they react if I said $2 million and would the carrier write $2
million? They and the carrier would think I was crazy. What is the mean wage in the USA?
$50,000. What is the normal rule for life insurance? 5 times. I used 10 times.


4. What are some of the drawbacks of RELPs?
I. A relatively limited secondary market (resale)
II. Can have large loads at issue
III. Liquidation in possibly 8 to 12 years
IV. Partnership losses cannot be deducted.
A. All of the above

4. A. RELPs are real estate limited partnerships. RELPs can only net their losses against RELP
income. In addition, each RELP has a specific set of properties associated with it. This can be
good or bad. Even though answers I-III are correct, you are forced into Answer A. For losses to
be deducted, the answer would have to say Partnership passive losses cannot be taken unless
the client has passive income.


5. Your ad on the internet is producing good and bad results. The latest inquiry is a husband/wife
client. They have come to your office today. They want you to develop a retirement plan
including retirement at 62, nice vacations, and a small mountain vacation home. They have
reasonable amounts of investments, IRAs, and qualified plan assets. In reviewing the total
assets available with a conservative inflation and income tax hedge, you realize this is impossible
to achieve. In the gathering data stage, you appraise the clients of your thoughts. Their
response catches you off guard. She says her mother is going to die and she will inherit about
$500,000 tax-free. They request you adjust your analysis using the $500,000. What would you
A. Do your analysis without the $500,000 but change the date of retirement to age 66.
B. Do your analysis with the $500,000 included based their request.
C. Contact her mother to talk about her planning and health.
D. Decline the client

5. B. What is the client requesting? Using the $500,000 for the analysis. You cannot contact the
mother. Doing Answer A, you are not using client data. You are imposing your thoughts on their
situation. Yes, Answer A is not a bad suggestion but it is not what the client requested. Decline
the client (Answer D)? Why? All they are asking for is a financial protection based on
conservative data. This is the new revised scope of the engagement. Unless it indicated that you
disagreed, then Answer B is what you should do.


6. Linda Lovely has been referred to you. You are a divorce and remarriage specialist, and Linda's
third husband has divorced her. Linda took him to the cleaners to get rid of her. Between all
three prior husbands she has walked away with about $5 million. She has studied divorce law
and income taxes. She let all her prior husbands keep the IRA and qualified plan assets. The $5
million is reasonably high basis quality investments. In the initial meeting, you came away
understanding that the scope of the engagement was for you to manage her investments. Now
she shows up at the second meeting with a 60-year old man in tow. He is calling her 'honey'
and she is pouring on with plenty of body language. After introducing him, she asks him to wait
outside. With a blink of the eye she is into prenup (for her) and how to get to his assets. What
should you do?
A. Consult to the best of your ability. This case is too good to give up. Someone will have to
invest her $5 million.
B. Decline her as a client. The moral issues are too much for you.
C. Suggest he obtain an attorney to represent him.
D. State you will help her within the legal limits of your profession and the original scope of the

6. D. This question has to do with the mutual agreement of the scope of the engagement and
potential adjustments. Answer B has moral issues and for the exam that might be important.
She cannot do C as he is not a client. NOTE: I believe legal issues are more important.


7. Which of the following is (are) true about income taxes?
I. Income taxes are collected on a pay-as-you-go basis.
II. Quarterly payments are due March 15th, June 15th, September 15th, and December
III. Your estimated tax must also include liabilities for self-employment tax and AMT.
IV. Income taxes withheld by a company are due to the IRS on varying schedules
depending on the size of the deposit to be made.
C. I, II

7. B. Income taxes are collected on a pay-as-you-go basis through withholding as well as collected
quarterly (April 15th, June 15th, September 15th and January 15th). Income taxes are due on a
monthly basis (pay-as-you-go). Answer IV is true. They depend on the size of the deposit.
Income taxes, withheld are due monthly, semi-monthly or the next day.


8. A client, who is in the maximum federal estate tax bracket, is considering transferring
$10,000,000 worth of appreciated stock to a charitable remainder annuity trust. The client plans
to retain a 5% annuity interest for herself. After her death, the assets would pass to a charity of
her choice. If she had not created the trust, her heirs would have inherited an amount of
approximately $6,500,000. However, the principal drawback to the plan is the loss of the
$6,500,000 inheritance to her family. What other planning should she do?
C. A wealth replacement trust
E. A revocable trust

8. C. A wealth replacement trust is another name for an ILIT. The idea is that some of the income
paid by the CRAT can be used to pay premiums on insurance on the donor's life. The insurance
benefit would ultimately be distributed to family members to replace the wealth given to


9. In regard to income in respect of a decedent (IRD), which of the following is true?
I. If an estate receives IRD, it must be included in income.
II. If a beneficiary receives IRD directly, the beneficiary is taxed on it.
III. IRD is included in the gross estate of the decedent.
IV. The recipient of IRD is entitled to an income tax deduction attributable to the estate
taxes paid on the net value of the IRD.
A. All of the above
E. I

9. A. The unique characteristic about IRD is its dual taxation. NOTE: In answer II, there is no
indication who the spouse is. It could be a spouse but it does not say that. Why is this
important? Because if there was a spouse who received the asset, there would be no estate tax.
This is covered in the Live Review Estate section. There is no calculation here, just a concept
question (difficult question).


10. There are various definitions of money supply. The most common is known as M1, which is all
cash and coin in circulation outside the banks, and all accounts in depository institutions that
are subject to withdrawal by check. If the federal government wanted to increase the money
supply, what would it most likely do?
F. Sell government bonds
G. Reduce taxes
H. Buy government bonds
I. Reduce the balance of trade

10. B. The Federal Reserve would do Answer C, but the question is asking what the federal
government would do. What else could the federal government do? Print more money Unsure if
Answer D is true or not, but reduced taxes definitely increase the cash in circulation.


11. You receive a referral from a Mrs. Andrews. Sue works as the Medicare billing administrator at
a doctor's office. The doctor is your client. She has been divorced and lives week-to-week. She
called you about her daughter. Her daughter is married and having financial problems. She
asked you to meet with her daughter and son-in-law. You agree.
Her daughter, Leslie, and her husband Tommy have come to meet with you. Both are employed
in hourly jobs, have no savings, and fortunately have some health insurance. She is pregnant
and the expected due date is 2 months away. There is no other data to gather. They ask you
what you recommend they do?
A. Establish an emergency fun to cover 6 months fixed and variable expenses.
B. Tommy should buy cheap term life insurance of at least $500,000 or more.
C. You should ask Mrs. Andrews how she is going to help them out.
D. You should ask them if they qualify for any local or state financial assistance, like food

11. B. Answer A is what they should have done but with two months and limited wages this is
impossible. However, if he dies before or after birth, she nor her mother can solve her
immediate needs. She will probably end up on financial aid. Answer C is incorrect because Mrs.
Andrews is not the client.


12. Tom and Estell Singer have been referred to you. As you review their cash flow statement you
become confused. The statement shows they are saving money but their statement of financial
condition shows an only small amount in their checking account and some 401(k) (his) and
403(b) (hers) assets. In reviewing their mortgage you find out it was taken out some years ago.
After further investigation you find out they have huge credit card debt (not shown). Then they
tell you the truth that they are spending more than they are making. What would you suggest
they do?
A. Create a budget a reduce their spending and pay off the credit card debt.
B. Suggest they refinance their mortgage at new 30-year low interest rates, pay off their credit
cards and begin funding savings.
C. Find out which spouse is the spender and cut up their credit cards to stop the bleeding.
D. Suggest they meet with a mortgage broker.

12. A. Answer A is the first step in the planning process with this client. The clients have a negative
cash flow. A new mortgage, even though for more, will probably reduce their payments. Then
the credit cards could be paid off. True, but lenders probably are not going to loan money to a
client with their spending habits. Do you think Answer C can be done? Doubtful. Answer D is not
a complete answer.


13. Arthur is looking to buy a stock for $100. The current dividend is $2. The stock is expected to
grow its dividend by 6% for three years, and then by 8% thereafter. Arthur's required rate of
return on this stock is 10%. Should he buy the stock?
A. No, the stock is probably overvalued based on the DDM.
B. Yes, the stock is probably undervalued based on the DDM.
C. Yes, it does meet his required rate of return.
D. Yes, the dividends would only be taxed at 15%.

13. B. By simply using the DDM, we know the value ($100) is less than $108.00.
V = $2 (1 + .08) = $2.16 = $108.00
.10 - .08 .02
In the Prestudy you will find the method to calculate split growth rates. Sometimes it is on the
exam. In the formula above, the 2nd growth rate is used to calculate the value. Then the answer
is $108. See prestudy Investment 6-8.


14. Mr. Harris is about to retire at age 65. He is covered under his employer's plan. He wants to
enroll in the most cost effective broadest health insurance coverage. Which of the following
coverages should he consider?
A. Enroll in Medicare A and keep COBRA with his former employer
B. Enroll in Medicare A and a Medigap policy
C. Enroll in Medicare B and a Medigap policy
D. Enroll in Medicare A and B

14. D. Answer A would be the most expensive  (COBRA at 65), but may be the broadest. You
must apply for Medicare A. Just applying for B does not mean you enrolled in Medicare A.
Unlikely you can get Medicare B without Medicare A. Picky.


15. Mrs. Able has set up a Generation Skipping Trust. At Mrs. Able's death in the future,
$10,680,000 will be put into the trust. After her death, the trust will pay income to her son. At
her son's death, all remaining principal will be distributed to her grandchildren. Who or what
pays the GSTT?
A. At Mrs. Able's death, the GSTT is due. Her estate will pay the tax.
B. At her son's death, the GSTT is due. The trustee will pay the tax.
C. Neither Mrs. Able nor her son will pay the GSTT. The grandchildren will pay the tax.
D. Mrs. Able will have to pay the GSTT now.

15. B. The trust is an indirect skip (taxable termination). The exemption will be used, but the assets
will be in excess of GST exclusion. The trustee will pay the GST tax at termination from the trust


16. What is/are one of the advantages of buying preferred stock?
A. Warrants can be attached, adding long-term value to the preferred stock.
B. Rights can be attached, adding short-term value to the preferred stock.
C. 70% of the dividends received by a domestic corporation are tax exempt.
D. Both A and C

16. D. A subscription warrant can be issued with a bond or preferred stock offering. It entitles the
holder to buy a proportionate amount of common stock at a specific price. A warrant is usually
issued as a sweetener to make the issue more attractive. Preemptive right: If the corporation
wishes to issue more shares, common stock holders have the right to buy these shares before
anyone else. There are no ownership percentage requirements for the 70%. The 80% and 100%
rule have ownership requirements.
A domestic corporation is a regular corporation. A corporation is an S corporation only if the
material says it is an S corporation.


17. Mr. B receives 10,000 ISOs to purchase LMN Corporation stock at $10 per share. Within two
years of the grant date, he exercises them at $25 per share. Several years later, he sells the
10,000 shares of LMN for $100 per share. Which of the following are true?
I. There is no taxable event on the grant of the options.
II. Mr. B will have $150,000 of additional income for regular tax purposes upon exercise.
III. Mr. B will have a long-term capital gain of $900,000 when he sells the stock.
IV. Mr. B will have a long-term capital gain of $750,000 when he sells the stock.
B. I, II, IV
D. I, IV

17. C. Remember it is 1) grant to sale (2 years) 2) exercise to sale (1 year). Before selling the
exercised ISO shares, he held them at least one year from the date of exercise and at least two
years from the grant date. This is a qualified disposition. He exercised them $10 per share or
$100,000 (his basis). The bargain element (an AMT preference item) is $15 per share. Since it is
not part of the answer, we do not know if it triggered a AMT or not (affected basis). The gain
long-term at the time of the sale is $90 per share. REMEMBER: Only the first $100,000 worth of
ISOs granted to any employee that vest in one calendar year is entitled to favorable ISO
treatment. There is no mention of exercise price in the statement. It is the grant price that
affects the ISO.


18. What does rule 3.2 pertain to?
A. Protect the security of client information and property
B. Summarize likely conflicts of interest
C. Treating prospective clients fairly
D. Exercising reasonable and prudent professional judgment in providing professional services

18. A. Remember RIPOOO. Rule 3 pertains to property of the client. Sometimes simple answers are


19. Mrs. Baldwin, age 56, just went through a messy divorce. Mr. and Mrs. Baldwin never saved
very much. She ended up with her 401(k) from her prior employer. The divorce caused her to
quit her job. Due to physical and mental problems she is considered disabled under Social
Security and Medicare. She hopes to go back to work eventually but she is not sure when. She
needs to generate additional replacement income. What do you suggest she do?
A. Find an occupation she can do from home to make additional income
B. Take distributions from her 401(k)
C. Take substantially equal payments from the 401(k) to avoid the 10% penalty
D. Apply for food stamps, unemployment, and other benefits

19. B. If she does Answer A she could lose her Social Security and Medicare benefits (she is
disabled). If she does answer C she is locked into equal payments for 5 years. She can do all of
Answer D. She quit her job. Answer B is penalty free (disablity) and will not require continued
payments if the client goes back to work. The question says 'she is considered disabled under
Social Security and Medicare.' That doesn't mean she can never go back to work. Some 'total
disabilities' can turn into recovery.


20. What would the Federal Reserve and Congress do when unemployment is rising, consumer
spending is declining, and stock prices are rising?
I. Decrease interest rates
II. Decrease margin requirements
III. Increase repo agreements
IV. Decrease repo agreements
V. Increase government spending
A. I, II, III, V
B. I, II, IV, V
C. I, III, V
D. I, IV, V
E. I, II, IV

20. C. The Federal Reserve would decrease interest rates and buy securities (repo/expansionary
easy money policy). The Congress would increase spending. Decreasing margin requirements
(30% versus current 50%) would just increase stock market speculation.
The Fed is more likely to increase margin requirements. If Reg. T is 50%, a decrease in margin to
30% would allow speculators to buy more stock not less.


21. The American Opportunity credit is which of the following?
A. 100% of the first $1,200 of qualified expenses and 50% of the next $1,200 of qualified
expenses incurred during college
B. $2,000 maximum
C. applied to the first $2,400 of qualified expenses incurred for the first two years of college
D. 100% of the first qualified expenses $2K and 25% of the next $2K qualified expenses
incurred during college

21. D. Answer A is wrong because it is referring to Hope credit numbers. Answer B is wrong because
it is $2,500 maximum. Answer C is wrong because it applies to the first $4,000 of expenses
during all 4 years. Answer D is correct.


22. Suzanna York, age 5, was hurt by faulty playground equipment. She received a $1,000,000
compensatory structured settlement to be paid out over 40 years. Unfortunately, Suzanna died
during the early stages of the settlement process. What will happen to the structured
A. It ceases at her death.
B. Payments continue, but they change from being income tax free to being income taxable.
C. The present value of the remaining periodic payments is included in her estate.
D. Payments continue to her estate for the remainder of the 40 years.

22. C. Suzanna's applicable credit would probably exceed any tentative tax, but the present value
would be included. Nothing indicates the settlement ceases at death (Answer A).


23. Under Coverdell ESAs, which of the following are qualified elementary and secondary school
I. Academic tutoring
II. Extended day programs
III. Uniforms
IV. Computer software primarily involving sports
V. Intramural sports equipment
D. II, IV, V
E. IV, V

23. A. Computer software will only qualify if it is educational in nature. Uniforms are covered but
not intramural sports equipment.


24. Mr. and Mrs. Pathe have two children and six grandchildren. They want to make a maximum
gift to 529 plans using their annual exclusion. What is the maximum amount of the gift possible
for 2014?
A. $28,000
B. $70,000
C. $140,000
D. $1,040,000
E. $1,120,000

24. E. There are few restrictions as to who can participate in a 529 plan. There are no income or age
limitations on either the account owner, the contributor, or the designated beneficiary.8 x
$70,000 x 2 = $1,120,000


25. June, age 73, went into the hospital because she fell down and broke her hip. After the hip
replacement (5 days in the hospital), she refused to go to a skilled nursing facility. Instead, she
hired a full-time nurse and a physical therapist. Will Medicare pay for the nurse and physical
A. No, she had to go into a skilled nursing facility for Medicare to pay.
B. Yes because she had a three-consecutive-day stay in the hospital
C. No, she had to go into a skilled nursing facility before going home Medicare to pay.
D. No, Medicare coverage is limited to necessary part-time or intermittent skilled care and
physical therapy.
E. No, there is no Medicare provision for home health care.

25. D. The question is whether the full-time nurse and physical therapist will be covered by
Medicare if she goes home rather than to a skilled nursing facility.


26. Which one of the following surviving spouses of a deceased insured worker would not be
eligible for Social Security benefits?
A. A surviving spouse, age 59, with a 17-year-old daughter in high school
B. A surviving spouse, age 62
C. A surviving spouse, age 57, with a child who became disabled before age 22
D. A surviving spouse, age 62, still working

26. A. The child has to be under age 16 for the spouse to have a child in care. The question asked
about the surviving spouses, not the children. Yes, answer D is debatable. It does not say how
much she is making. Under the threshold, there is no reduction in benefits.


27. While monitoring your client's activities, you discover that the client has become incompetent
and is about to reposition all his assets. Whom should you call?
A. Your broker-dealer
B. His attorney
C. His children
D. His doctor
E. His investment advisor

27. B. It does not say his investments are with your broker-dealer. His children are not your clients.
The client's doctor may or may not be a good answer. The client's investment advisor could be a
crook. I think Answer B is the best answer.


28. Section 179 is which of the following?
I. Depreciation method
II. Election to expense
III. For tangible personal property
IV. For intangible personal property
B. I, IV

28. C. It is an election to expense to tangible personal property (1245).


29. You own a business worth $2,000,000. If you require a 12% return based on Offer 2 payments,
what is your business actually worth?
Offer 1 (beginning of year)
Offer 2 (end of year)
A. $1,795,131
B. $1,885,869
C. $2,112,173
D. - $114,131

29. B. You must use a zero in the first year to solve for the present value. Offer #1 was just there to
confuse you. This is an unequal cash flow question.
BA II Plus
0 CFj
0 g CFo
Press CF/Press 2nd CLR WORK
400,000 CFj
400,000 g CFj
0, enter, -
450,000 CFj
450,000 g CFj
400,000, enter, --
550,000 CFj
550,000 g CFj
450,000, enter, --
600,000 CFj
600,000 g CFj
550,000, enter, --
700,000 CFj
600,000 g CFj
600,000, enter, --
12 I
700,000 g CFj
700,000, enter --
gold NPV
12 I
Press NPV, I, 12, enter, - @PT


30. Mr. Lang realizes that due to health reasons he only has a few years to live. He would like to
transfer appreciated assets to his children to minimize estate taxes. He is in the maximum
estate tax bracket. He would also like to avoid gift taxes or using the $5,340,000 exemption.
Although he would like to receive income from the assets transferred, he would like to minimize
his income taxes. He is in the maximum income tax bracket. Which of the following wealth
transfer methods should he consider?
B. Private annuity
D. Family limited partnership

30. A. The SCIN and private annuity are very similar. However, the SCIN is an installment sale. Gain
would be subject to capital gain rates. Done in contemplation of death, the SCIN can be
unwound. The private annuity concept has been reviewed by the IRS. Private annuities are no
longer usable. A SCIN is probably the best answer.
Why not FLP? Under a FLP he can only gift away $28,000 per beneficiary per year (using a 50%
discount). It only says children, not how many. He only has a few years to live. The FLP needs
lots of beneficiaries and lots of years to work. The SCIN is gone from his estate and he gets
installment payments until he dies. Please refer to the Live Review material.


31. Three years ago, Lori purchased a house in California. Lori married Bob this year. After their
wedding, Lori sold her house because they moved to Florida. Her gain from selling the house
was $300,000. Will her gain be taxable?
A. No, when she married Bob, the property became community property, allowing for an
exclusion of up to $500,000.
B. No, if she files jointly with Bob this year, she will be allowed an exclusion of up to $500,000.
C. Yes, she will only be allowed a $250,000 exclusion.
D. Yes, she will be responsible for the full gain because she didn't own the home for five years.
E. Yes, she will only be allowed a $250,000 exclusion because the special exception
'unforeseen circumstances' doesn't include relocation due to marriage.

31. C. Both spouses must have lived in the house for at least two years. The property never became
community property. The rule is that she had to own the home for two years (which she did).
That makes answers D and E incorrect. Marriages fall under the 'unforeseen circumstance' rule.
He did not own the home for two years. She gets the single rate.


32. Lenny was divorced, with two daughters by his first wife. A few years before his death, he
married Marilyn (second wife). He set up a trust for Marilyn. The trust provisions gave Marilyn
the right to trust income limited to HEMS. She was also given a discretionary right to principal,
limited to the same HEMS standard, but which also required exhaustion of other resources of
hers first. After her death, the trust passes to his children. What type of trust did he set up?
C. Bypass
D. Power of appointment
E. Estate

32. C. The right to income limited to HEMS is not a right to all income from the trust. It does not say
LAME (see Live Review book page 28). The lifetime income (LAME) is missing from the question.
Also, the QTIP cannot use the $5,340,000 exemption.


33. What is the client's required rate of return if
R = rf + (rm - rf) B
-- Rf is4%
-- his/her market risk premium is 3%
-- the security has a beta of 1.5?
HINT: Which part of the formula is the market risk premium?
A. No solution
B. 6%
C. 7%
D. 8.5%
E. 10.5%

33. D. The term market risk premium is rm - rf . This is covered to Live Review book Investments IV-50. When you plug the numbers into the formula, rm- rf is already known. R = rf + (rm - rf ) B = 4%
+ (3%) 1.5 = 8.5%
NOTE: The whole formula will be given on the exam, but you may be asked about the market
risk premium.


34. Which of the following is not true about brokered CDs?
A. They may pay more interest.
B. They are FDIC insured.
C. They can be sold prematurely without a loss of principle.
D. Dealers take a market in these unmatured CDs.

34. C. If sold prematurely, they will be marked to the market (like bonds). This means they may be
sold at a gain or a loss (penalty). Reference: Google brokered CDs


35. How many different income tax filing options does a widow have in filing for the year of her
husband's death?
I. Single
II. Married filing jointly
III. Married filing separately
IV. Head of household
V. Qualifying widow
A. I, III, IV, V
C. I, IV, V
E. I, V

35. B. The return due in the year after death is the return for the year in which the husband
died.She could file jointly or separately. For the year after death (the next year), she could file as
a qualifying widow if she meets one of the following four tests. She maintains a home / has a
dependent child/filed a joint return the prior year/ did not remarry. She could also file as head
of household, but she would have to have children in the home. The dependency exemption
closes the loop on the 4 tests.


36. Under Medicare Part B, are shots (vaccinations) covered at no cost to the patient?
A. No.
B. A flu shot once a year is covered.
C. A pneumococcal shot is covered.
D. Answers B and C
E. No, only drugs administered by a physician are covered.

36. D. Both flu shots and pneumonia shots are covered at no cost to the patient.


37. Practice standard 400-2 refers to which of the following?
A. Objectivity
B. Competence
C. Developing the financial planning recommendations
D. Identifying and evaluating financial planning alternatives

37. C. Practice standards refer to steps in the personal financial planning process. 400-2 Developing
financial planning Recommendations. Answer D is 400-1. Just how picky the exam could be?


38. Mr. Pate, a widower, is age 65. He is in poor health due to emphysema and a heart condition.
Unless his neighbors get his mail at the post office, it just piles up. He is concerned about his life
insurance policy premiums. Which of these life policy provisions will help keep the policy in
I. Renewability
III. Reinstatement
IV. Disability waiver
V. Grace period
B. I, V
D. II, V

38. D. APL refers to automatic premium loan. This provision will pay the premium if it goes unpaid
beyond the grace period. If he had claimed disability waiver, there would be no premium notice.
A waiver continues to pay premium for the life of the contract with no premium notices.
Reinstatement means that he would have to provide medical information to reinstate the policy
if it lapses. Due to the medical information given, this seems doubtful.


39. Your mother bought a stock at the height of the dot.com market in 2000. Today, it is still trading
at 50% of her purchase price. Your mother, age 75, is in poor health. What would you suggest
she do?
A. Sell it, take the loss, and invest in CDs.
B. Sell it, take the loss, and invest in REITs.
C. Gift the stock to her favorite charity and take a charitable deduction for the original
purchase price.
D. Gift the stock to you so you can sell it for a loss.

39. A. Answer B is not a bad answer. Your mother may need liquidity if her health is poor. Answer C
is incorrect. The tax deduction would be based on the stock's value today. Answer D, like
Answer C, the loss (50%) cannot be deducted. This is loss property.


40. American Insurance Company instructs its agents not to write liability coverage for day care
centers. Ted, an agent for the company, binds coverage on Apex Day Care Center. Is Apex
A. No, American withdrew the authority to bind coverage (express authority).
B. Yes, Apex is covered.
C. Yes, Ted had the implied authority to temporarily bind any coverage (for 30 days).
D. No, the binder will not hold up in court. Only the actual policy provides coverage.

40. B. An agent's acts may bind the principal even if (1) those acts are outside the scope of the
agent's express or implied authority, or (2) the acts are within the agent's apparent authority.
Apex believes they have coverage. American Insurance instructed (expressed) not to write.


41. Mrs. Davis gave her daughter stock worth $100,000 (assume $14,000 gift tax exclusion) with a
basis of $40,000. Because Mrs. Davis had gifted $5,250,000 already, she had to pay a gift tax of
$34,400 (40% gift tax bracket). What will be the daughter's basis if she sells the stock?
HINT: Use 4 decimal places
A. $34,400
B. $40,000
C. $60,000
D. $64,000
E. $94,400

41. D. Basis plus appreciation attributable to the gift ($40,000 + $24,000). To get the correct answer
see below two different ways. $60,000 (appreciation) x $34,400 (tax) = $24,000 (used .6977)
$86,000 (taxable gift) Shortcut: $60,000 x .40 = $24,000


42. Mr. and Mrs. Pell established a Charitable Lead Trust (CLUT) with $2,000,000. The trust assets
increased by 7% this year. How much must the trust pay out to the charitable beneficiary to
avoid tax penalties?
F. Must be not less than 5% of the initial trust value
G. Must be not less than 5% of the trust assets each year
H. Must be not less than 7% of the trust assets each year
I. Can be any amount or nothing at all

42. D. Unlike the CRT (which has a 5% minimum), there are no minimum or maximum CLUT
percentages with a lead trust. It is possible (at least theoretically) to select any percentage,
including less than 5%.


43. There are many factors that affect bonds. When consulting a client, what should you stress as
the greatest risk of investing in bonds? Subjective
A. Market interest rates
B. Volatility
C. Call protection
D. Bond rating

43. B. It is certainly important to understand the potential change in bond prices (duration). A
bond's volatility can be estimated using duration. Interest rate risk is a big risk. Bond rating can
affect risk. Answer B answers the question better than any of the answers. The rationale/answer
is the writer's choice.


44. Josh Turner, a client for 5 years, calls you desperately on Monday morning. He needs a cash
infusion to help his unemployed daughter, his entrepreneurial brother, and to replace the air
conditioning system. His credit score is terrible. He has already called his bank and been turned
down for short or long term loans. The only investments that remain that you know about are a
small IRA, his wife's medium-sized Roth IRA, and his $100,000 401(k) at work. He is in panic
mode, practically crying. In the background, you can hear his wife yelling at him. What would
you suggest?
A. You should figure out the real reason behind these needs, like asking about spending habits,
family dynamics, or why he had to buy that new 4x4 truck.
B. You should ask the client to assess for themselves whether their problem is really short-
term or systemic.
C. You should determine if the need is short term or long term. If it is long term, remove all of
his wife's Roth's contribution to solve the problem.
D. Cash out his IRA today.
E. You should have him call up the 401(k) plan administrator and ask for a maximum loan.

44. E. Answers A and B do not solve his today problem but are worthwhile future planning. Answer
C (contributions) would be tax-free. It is not a bad answer but we do not know the dollar
amount of contributions. Answer D is subject to ordinary income plus a 10% penalty. With
Answer E he can get up to $50,000 (50%) and the pay back is 5 years. It is tax and interest free.
The actual dollar amount needed is unknown except for replacing an air conditioning system
(expensive).It is unknown about his credit card situation but his credit score is terrible. That
should answer his credit card situation (used-up).


45. Joan began helping her mother with direct cash payments (totaling $10,000) this year. Her
mother lives on a limited fixed income plus Social Security benefits ($6,000 yearly). Could Joan
get any tax deductions for the direct cash payments?
A. No, they are considered gifts.
B. No, only gifts to a public or private charity are deductible.
C. Yes; if her mother's limited fixed income is gross taxable income and less than $3,950 yearly
(2014), then Joan can claim her mother as a dependent.
D. Yes, as long as Joan provides more than half of her mother's support

45. C. Generally, a dependent cannot have taxable yearly income over $3,950 in 2014. In cases of
low income, this does not include Social Security. Yes, Answer D is true; however, Answer D is
not the most complete answer. The most complete answer is Answer C. She gets an exemption
deduction for her mother. That is a tax deduction. If her mother's taxable income is less than
$3,950 and her Social Security benefits are $6,000, that's a total of less than $10,000 of income,
then the Social Security income cannot be taxable (under $25,000 threshold).
There is no requirement that Joan's mother lives with her. In fact, she could be living in an
assisted living facility.


46. What are the similarities and differences for post death RMD rules for traditional IRAs and Roth
IRAs when the beneficiary is a child?
I. The IRA distributions will likely be taxable; the Roth distributions will likely be income
tax free.
II. For both the IRA and the Roth IRA, the child may elect to take distributions over a
period not to exceed his or her life expectancy.
III. For both the IRA and the Roth IRA, the child may elect a five-year option (must be
depleted by 12/31 of the fifth year).
IV. The IRA distributions can be delayed until the parent would have reached 70 ---; the
Roth distributions can be delayed until the child will reach 70 ---.

46. A. Statement IV is a bunch of nonsense. Statement I is true. Statements II and III are true.
(reference Live Review page 42 and 43)


47. Competence requires continuing education. How many CE credits are normally required to
meet CFP Board's continuing education requirement?
A. 30 hours every year
B. 30 hours every two years
C. 60 hours every two years
D. 45 hours every three years

47. B. The only exception could be the initial period after certification where the hours could be
prorata less than 30.


48. What is the major advantage of cross-purchase over entity purchase buy-sell with multiple
A. The cost of life insurance is less.
B. Fewer life insurance policies need to be purchased.
C. The surviving owners will get a step-up in basis.
D. The cross-purchase life insurance is not subject to transfer-for-value.

48. C. The cost of insurance will be the same. With multiple owners, more policies need to be
purchased (a disadvantage). Cross-purchase life insurance can be subject to transfer-for-value
with multiple owners (more than 2). This is covered in the prestudy under buy-sell/transfer-for-


49. Mr. Ronald Carlisle, a Canadian citizen, is married to Judith, a U.S. citizen. If he dies first, what
deductions are available to his estate to reduce the estate taxes due?
I. Marital
II. Exemption of $5,340,000
A. All of the above
C. I, II

49. C. He does not need a QDT; Judith is a U.S. citizen. She gets the marital. She needs QDT if she
died first. Answers I and II reduce estate taxes at his death. A QTIP is not needed. There is no
estate tax if his estate uses Answers I and II.


50. To sell her property, your client must have the property graded level, seeded, and surveyed.
The cost is $20,000. Which of the following is true?
A. The $20,000 can be expensed.
B. The $20,000 must be capitalized.
C. The $20,000 can be expensed using Section 179.
D. The $20,000 can be expensed using Section 197 (amortization).

50. B. Improvements that add to the value of land or adapt it to new uses are capital improvements.
Capital improvements add to basis.


51. Elise Hawkins, age 60 single, has chronic health problems. She has managed to keep her job. By
only working 4 days a week (32 hours) and using all of her sick and vacation time to stay healthy
enough to work. This has allowed her to keep her health insurance. The company she works for
has an additional 18 full-time and 8 part-time workers. Her goal is to work until age 62---. Then,
she plans to elect COBRA to 65 when she will qualify for Medicare. But she is concerned because
her employer has had some financial ups and downs. Employee numbers have varied through
the years. Which of the following may not enable her to have the COBRA option available to her
when she turns 62---?
I. The company fires some full-time employees and hires some part-time employees.
II. Her position is changed from full-time to part-time.
III. The company goes out of business.
IV. The number of part-time employees increases.
V. Obamacare provisions for COBRA increase the full-time requirement from 20 to 50
employees in 2014.
A. All of the above.
B. I, II, III, V

51. C. Answer V is nonsense. Answer IV doesn't say the number of full-time employees has
decreased. A company failure stops all medical insurance.


52. Mr. and Mrs. Bond want to set up a scholarship program for needy children. They would like to
get a tax deduction for their contributions to the scholarship program. They would also like to
control to the fullest extent possible the use of the charitable dollars. Which of the following
would be the best way to do the program?
A. A revocable trust in their name
C. A private foundation

52. C. A scholarship program may be established using a private foundation. Care must be taken so
the program meets IRS approval. With a GRAT or a CRAT, the beneficiary is normally the donor.
With a CLUT, the beneficiary is a charity.


53. Thomas has been a client of yours for years. He owns a small business. He contributes to a SEP
program irregularly due to business cash flow problems. Besides a SEP he has some additional
investments with you. Between stock market volatility and business concerns, you find out his
adult daughter just got divorced. The daughter just got divorced. The daughter has a teenage
son. Thomas now has to support his daughter and her son. He says to you 'I cannot take it
anymore, when can I retire?'. How should you proceed??
A. Review the client's current and potential income streams to identify ways to solve his
immediate cash flow problem.
B. Change his investment asset allocation to produce more income and suggest he move his
daughter and her son into his home.
C. Review his goals and prioritize them before continuing the financial planning process.
D. Make the client aware that his retirement goals are unrealistic that he will never be able to

53. C. This is a practice standards type question. The client needs to reassess his priorities before
you can proceed. Answer A does not answer the question. Answer B is not bad as a
recommendation, but Answer C follows the steps in planning. Answer D is a terrible


54. Adam Brooks, age 60 married, died yesterday. He owned a $500,000 universal life option B
policy. Adam bought the policy 6 years ago by making a $50,000 single premium payment. The
carrier at the time of the purchase had informed him that the policy was a MEC. At the time of
death, the cash value had grown to $70,000. His wife Jane, age 59, is the beneficiary. She has
asked you how much of the death proceeds will be included in Adam's gross estate?
A. Zero, the policy passes by the marital deduction to Jane estate tax free.
B. $20,000 ($70,000-$50,000) plus a 10% penalty because the policy is a MEC and she is under
C. $550,000
D. $570,000

54. D. Principle 4 (Fairness) and Principle 6 (Professionalism) miss the point of the question. But
Principle 7 (Diligence) Rule 1.2 (Obligations) and Rule 4.6 (Supervison) do apply. This is different
than the live review question GP-4.  There is no one standing at the water cooler talking
about the plan. Different situation, different answer.


55. John and Pamela Underton wrote a check for $500,000 to their daughter on January 1st of this
year (a gift). They wrote the check out of their joint money market account. John called his CPA
to inform him that the gift had been made and requested that the CPA do two 709's using gift
splitting. Before the 709 was complete, John died. What will be the result?
A. The gift will be considered a gift of a future interest.
B. The gift will be considered an uncompleted gift.
C. The gift will be charged to Pamela alone.
D. The gift can still be split.
E. Because John called his CPA, the gift can be split.

55. D. Gifts made before one spouse dies may be split even if that spouse dies before signing the
appropriate consent and election; the deceased spouse's executor can make the appropriate
election or consult. What happens if the check didn't clear before he died? The check was
written from a joint checking account and she is still alive.


56. Which is least risky if the price of a stock is flat?
A. Buying a straddle
B. Buying a call
C. Buying a put
D. Buying a spread
E. Buying a warrant

56. E. Warrants typically have maturities of at least several years whereas listed calls expire within
nine months. A spread, like a straddle, needs movement to work. There is no movement in this
question. If the stock is flat, all the options will expire. The answer is least risky.


57. Mrs. Basic is concerned about her son, age 13. Her husband is dead. Her only brother is
untrustworthy. She has about $1 million in assets plus some life insurance. She wants to do
something simple. You have suggested doing a revocable trust, but she is resistant to setting up
a trust. What else could she do if her son was very responsible?
A. Leave everything to an UTMA account with a bank as custodian
B. Leave everything to a Testamentary trust with her brother as trustee
C. Don't do anything and hope she lives long enough for her son to be able to manage his
D. Leave the money outright to her son

57. A. An UTMA allows a custodian to gift at death by permitting an executor to establish a
custodianship at death. The bank will be the custodian until he turns 21. This is a perfect UTMA
answer when a son is under age and is responsible. She says her brother is untrustworthy.
Although Answer A is basic, it is the best answer.


58. You are advising top management at a company. The company has hired a key employee. The
employee fits the company need and they want to retain him. Due to a background check the
company found out the employee, James White, filed for Chapter 7 bankruptcy and lost his
house to foreclosure. They have paid you to counsel him on this financial affairs.
In your meeting with James you find out that he is married with 3 small children. His wife is
currently staying at home (a 2 bedroom apartment) but she hopes to work professionally as
soon as they can afford day care. Since he basically has no investments or money, you are
reviewing the company benefits with him. The health insurance is a PPO plan. The cost of
family coverage is $400 per month. The disability is a 5-year own occupation, then modified
occupation to age 65 based on $5,000 per month maximum. The plan premium is 40%
contributory. The retirement plan is a 6% maximum deferral and a 3% match. How would you
prioritize his needs?
I. Sign up for the PPO plan
II. Sign up for the disability plan
III. Sign up for the 401(k) plan
IV. Establish a 6 month emergency fund
D. IV, II, I, IV

58. B. With a wife and 3 small children he needs health insurance. The last priority is contributing to
the 401(k). Is disability more important than an emergency fund? Answer B is the best choice.


59. Samuel Hall, age 69, is about to retire. He has a 403(b). He doesn't want to take RMDs. He
would like the proceeds of the 403(b) to pass to his children. Which of the following is an option
for him?
A. At retirement, roll the 403(b) into a Roth IRA
B. At retirement, take RMDs with his children as primary beneficiaries
C. At retirement, roll the 403(b) into an IRA and then into a Roth IRA
D. At retirement, take distributions

59. A. Distributions from tax-qualified retirement plans, TSAs [403(b)] and governmental 457s can
be rolled directly into a Roth IRA.


60. Advance Tech, a closely held S corporation, wants to provide an employee benefit that will help
it to retain employees (100+). The company is profitable but always short of liquidity. The
owners are not against the employees sharing in the company's growth. What employee
benefit would you recommend?
A. Profit-sharing/401(k) plan
B. Non-contributory stock purchase plan (ESOP)
C. Simple 401(k) plan
D. SEP plan
E. Money-purchase plan

60. B. Answer A is a good choice. There is no indication the employer is matching. There is no
indication of the employees being able to participate in the growth of the company. Answer B is
a better choice on that basis because the information says they have a lack of liquidity and want
the employee to participate. A stock purchase plan is a plan that allows distributions of
employer stock. I think the key (stem) is the owners are not against employees sharing in
company's growth and always short of liquidity. A ESOP is considered one person for S
corporation eligibility, no matter how many ESOP participants. This is covered in the Live Review
book. NOTE: The 100+ in parenthesis knocks out the SIMPLE 401(k).