TEST 2 Flashcards by Lauren Wingard

Relative comparison

= anchoring

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Neoclassical economics

full international knowledge to make choices that reflect preferences

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GRAT beneficiaries

CANNOT change at all

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GSTT exemption

= $22,360,000

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High risk aversion

90% chance of winning or certain payment, choose certain payment

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Representative bias

“past performance does not predict future results”

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Longevity risk rule of thumb

30 years

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Social security

CANNOT collect before retirement age or reduction in benefits
*no amount is entitled to everyone

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Long-term capital gain

often 15% (but up to 28%)

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No liquidity risk

stock

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Completed gift

= remainder interest – all rights have to be given up (nothing stopping it)
** Revocable trust NOT a completed gift

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Underperform mutual funds

return chasing, weight more recent information

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Framing bias

o Gain frame = risk avoidant

o Loss frame = risk-seeking

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Reference dependence

specific $ amount

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Engagement letter changes?

only if client gives consent

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“unified system” of gift/ estate tax

= same exemption for gift & estate (NOT GST)

- applicable credit amount = lifetime/ death transfers

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GSTT

= grandchildren

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Computation of federal estate tax

= deduction/ credit interchangeable

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Not a taxable gift

= services (construction)

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Market anomalies

o Low volatility anomaly
o Value effect
o Small stock effect

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CAPM

= diversification
o Weak: technical, past performance
o Semi-strong: public information
o Strong: private information

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TWO Systems do NOT explain

neoclassical theory

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Behavioral finance

o Sunk cost
o Availability
o Confirmation

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No monte carlo

in step 3

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Converting retirement asset to retirement income

= NOT RMD o Bucket approach o Age-banded approach o Essential vs. discretionary (flooring)

Sub-optimal decisions

o Framing o Heuristics o Bias *NOT information

Disposition effect

= lock in gains on winning/ reference points, unwillingness to sell losing

Qualified distribution from a ROTH IRA

= prior to 59.5, taking out closing cost for first home up to $10,000

SSI/ Medicaid eligibility test

= all resources affect it (parents, gift, inheritance, trust, etc.)

Individuals can only have ONE ABLE account

ABLE account o Funds can only be used for disability expenses not covered by gov. program o Adjusted up to twice a year

Spousal support end

= payments end at payee’s death

Risk management

o Life insurance o Health insurance o Property & casualty

General partnership

= raise capital from others o Does NOT have to file documents with the state o Does NOT provide continuity of life of entity at death of owner

Section 6166 Installment payment of estate tax

first 10 are interest only

Child/ dependent care credit

limit $3,000 ($6,000 married) o For child under 13 or incapacitated o Dependent on AGI o Reduced for upper-income

Corporation

= reinvest earnings & defer income on individual federal income tax returns

single-parent home

= life insurance

Comprehensive financial planning

= client-oriented

Education/ child tax credits

o American opportunity fund credit o Lifetime learning fund credit o Child tax credit

Limited partnership

= equal control, significant capital, compensate passive owners

S corporation

= minimize risk & taxes , equal control

Continuity of life after business

o S corp o LLC o Limited partnership

GRAT

= estate freezing

Springing power of attorney

= not in effect until special needs is disabled/ incompetent

Nonrecognition rule of Sec. 1041

= apply to sale to a former spouse (not taxable)

Unlimited liability for damages of business activity

= sole proprietorship & general partnership

LLC

= members choose to be taxed as partnership | o Treated as self-employed

Prescription drug coverage

= available to all Medicare participants

Living will

= pull plug

Medical POA

= make decisions

POLST

= doctor order for life sustaining treatment

QTIP

= unlimited marital deduction for property | o Decide what happens to assets

Annual gift exclusion

= $15,000 per BENE

Provisional income NOT taxed

= less than $25,000

Want to take social security early

= increases by 8%

Exemptions for inclusion in estate

``` o 5% or $5,000 o HEMS (not direct cash to them) ```

Disclaimer effective

= say you don’t want assets to estate & walk away | ***in writing

2035

= add back into estate within 3 years (especially gift tax)

ILIT

= NO RIGHTS, CANNOT CHANGE o Grantor cannot change it (IRREVOCABLE) o Can only GIFT premiums o Only annual exclusion if Crummery provision (present interest) o Last for 3 years before moves out of estate

ROTH IRA

= low income/ tax bracket | *convert by Dec 31St of that year

Capital gain exclusion

= $250K or $500k couple for sale of home