Wrong Answer Box Flashcards
A wealthy client ($10 million) wants her two adult children to learn to manage money. Rather than yearly gifts, she gifted each of them $1 million to invest in 2016. Your instructions were to invest the money as they order. Neither has asked you for advice. Due to market downturns, withdrawals, and poor timing of speculative stocks, one of the two children has run his account down to $150,000. He tells you to send him the balance of the account because he has found a for-sure investment. What should you do or what should you have done in the past?
A. You should have never taken him on as a customer
В. You should call Mrs. Cain
C. You should have requested that at account inception that duplicate statements be mailed to Mrs. Cain
D. You should have had the children provide an investment policy statement at inception
E. You should send the son the remaining account balance
E. You should send the son the remaining account balance
Mrs. Cain is not the client. You must do as the son asks. That eliminates B and C.
Answer D doesn’t answer the question. In answer A, Mrs. Cain asked you to take her children on as clients. By sending the remaining balance you have terminated the relationship. (See CFP Standards)
Bob Hayes consults with you, a CFP® practitioner, on investments. He opens a joint account with his wife. Bob reviews the account on a periodic basis with you by telephone. Unexpectedly, he instructs you to break the joint account into two separate accounts. Bob and his wife have decided to separate. He informs you which stocks go into his account and then tells you to place the remainder in her account. You realize he is keeping the better performing stocks. What should you do?
A. Follow Bob’s advice
B. Consult Bob’s wife before doing anything
C. Consult your compliance department
D. Terminate the relationship
E. Tell Bob you need to meet with him and his wife before you can respond
E. Tell Bob you need to meet with him and his wife before you can respond
Due to the JTWROS account, BOTH Bob and his wife are your clients. There is a conflict of interest in Answer A.
Index funds are appropriate if an investor believes in which of the following?
A. Strong form of the EMH
B. Weak form of the EMH
C. Semi-strong form of the EMH
D. Modern portfolio theory
A. Strong form of the EMH
EMH advocates a passive investment strategy (like a Modern portfolio theory is the selecting of an optimal combination of assets so that the investor secures the highest return for a given level of risk (active).
An exchange traded fund is most similar to a(n)?
A. Closed-End Fund
B. Open-End Fund
C. UIT
D. No-load Balanced Mutual Fund
E. Mostly an open-end fund but could be a closed-end fund
E. Mostly an open-end fund but could be a closed-end fund
An ETF may be an open-end or closed- end fund. Most ETFs are traded on a major exchange. It is possible to find a secondary market for UlTs units among brokers and dealers.
When compared against traditional index mutual funds, ETFs have which of the following advantages?
I. ETFs can be bought on margin.
II. ETFs can be sold short.
III. ETFs can be bought or sold throughout the trading day.
IV. Trading orders can include stop-loss and limit orders.
All of the Above
The ability to trade at market pricing, margin, and/or sell short are advantages to ETFs that mutual funds do not provide.
Modern portfolio theory expresses a risk-return relationship based on which of the following?
A. Weighted beta
B. Correlated coefficient
C. Alpha
D. Capital Market Line
E. Security Market Line
D. Capital Market Line
This is the best answer based on the following. The CML specifies the relationship between the risk and return on a variably weighted market portfolio consisting of all risky assets. When you read the material on chapter 7 page 1, this sounds like the CML. However, it is a difficult question to answer.
What is the most important consideration relative to the Markowitz efficient frontier?
A. Return
B. Covariance
C. Risk
D. Correlation
C. Risk
Answers A, B, and D play a supporting role in determining the efficient frontier. But answer C is the most fundamental, distinguishing characteristic of the efficient frontier.
The Random Walk Hypothesis suggests which of the following:
A. That technical analysts can outperform the market.
B. That fundamental analysts can outperform the market.
C. That the next price change of a stock is unrelated to the last price.
D. That security pricing reflects all known information.
C. That the next price change of a stock is unrelated to the last price.
If prices move randomly, technical analysis is useless.
Weak form is related to, but not identical with, random walk; therefore, fundamental analysis could be an answer.
Answer C is the definition of random walk, and Answer D is the definition of EMH.
Which of the following statements is true about Dow Theory?
A. The theory considers EMH principles.
B. It presumes that the most important price movement is inter-day fluctuations.
C. It is a method that is presumed to identify the top of a bull market and the bottom of a bear market.
D. It presumes that primary price movements are based on Modern Portfolio Theory.
C. It is a method that is presumed to identify the top of a bull market and the bottom of a bear market.
The Dow Theory contradicts Modern Portfolio Theory and the EMH. It is based on trends, not day to day fluctuations.
In what way is a financial ratio considered to be the most useful?
A. A single ratio across different industries over time
B. A single ratio within the same industry over time
C. Several ratios across different industries over time
D. Several ratios with the same industry over time
D. Several ratios with the same industry over time
To identify the most promising stock within a particular industry, several ratios within the same industry can be compared.
One ratio by itself means little (Answer B), but several ratios together may give a clear picture of the firm’s strengths and weaknesses.
Then they may be compared at a given time for several firms within the same industry.
Which of the following is true about the arbitrage pricing theory?
A. Security movements are explained by a relationship between risk and return.
B. The expected value of each factor is zero.
C. Pricing of securities in different markets can differ for significant lengths of time.
D. Unexpected changes in inflation and anticipated shifts in risk premium will influence security prices.
B. The expected value of each factor is zero.
APT argues that unanticipated shifts in risk premium will influence security prices. Answer D says anticipated shifts. This is incorrect for APT.
When a factor is zero, the factor has no impact on the return because it is expected or anticipated.
Binomial option pricing is a __________________ model
A. pricing
B. valuation
C. volatility
D. variability
B. valuation
Like the Black-Scholes model, binominal options pricing is a valuation model.
Prices are established through the action of buyers and sellers; investors and analysts use valuation models to estimate what those prices should be.
When John dies, he wants his wife to have annual income of $36,000 that will increase with inflation (4%). She can realize an after-tax return of 7%. Using a capital retention calculation, how much insurance he should purchase to cover her needs?
A. $514,285
B. $852,000
C. $1,200,000
D. $1,236, 000
E. $1, 248,007
Answer: D
This is not a time value question because there is no third variable - time.
- 7% - 4% = 3%
- $36,000 / .03 - $1,200,000
- Plus beginning of year 1 money +$36,000
Total $ 1,236,000
New clients walk into your office. They have a baby. They have done no planning.
They own limited assets, carry a reasonable amount of credit card debt, and a fair amount of college debt. They are confused and seeking your help. What should they do first?
A. Buy medical insurance.
B. Buy a lot of term life insurance.
C. Establish a 6 month emergency fund.
D. Consult an attorney to establish a guardianship because they are not married.
E. Establish a Coverdell ESA for grade school.
A. Buy medical insurance.
Answer A addresses the most serious and immediate concern. Nothing says that they are married.
What are the obligations of an agent to the principal?
I. Loyalty
II. Accuracy
III. Full disclosure
IV. Honesty
A. All of the above
B. ІІ, III
C. III, IV
D. IV
A. All of the above
All the answers are correct, even loyalty. For example, a company (the principal) may forbid an agent to write a certain type of coverage. However, if the agent wrote that kind of coverage for a friend, the company would be liable for any loss that occurred.
Ted and Hallie Fisher have been your clients for 25 years. They recently told you that due to medical problems they both have to move into an assisted living facility. They have about $500,000+ in their investment account. Most of that came from to the sale of their home two years ago. Their Social Security retirement payments total about $1,500 a month due to taking benefits at age 62. What should you recommend they do?
A. Determine how much the assisted living facility will cost.
B. See an elder care attorney.
C. Execute a living will.
D. Name a family member who can handle their financial affairs.
E. Reposition their account for more liquidity and income.
B. See an elder care attorney.
The Fishers need expert legal advice before making decisions about assisted living and other matters.
A company owns whole life policies on key employees. The company is considering borrowing the cash value of the policies for business reasons. The company must to pay the interest on the loans. Is the interest an eligible business deduction?
A. No, after 1986, life insurance interest isn’t deductible.
B. No, it is not a normal business expense.
C. Yes, but it is limited to a $50,000 loan on each policy.
C. Yes, but it is limited to a $50,000 loan on each policy.
A business may deduct a limited amount of interest paid on contracts covering a “key person” to the extent that each loan doesn’t exceed $50,000.
Phillip was V. P. of sales with Glamour, Inc. Glamour owned an endorsement method split-dollar policy on his life. He decided to buy the policy from Glamour and transfer it to a new company that he was starting with two other people (33% each). If Phillip dies suddenly, will the death benefit be included in his estate?
A. No, this is what “transfer for value” avoids.
В. No, Dan gifted the policy to the new corporation (not a sale).
C. Yes, if he dies within three years of the transfer.
D. No, it will only be included if he changed the beneficiary.
C. Yes, if he dies within three years of the transfer.
At the time of the transfer, Phillip had an incident of ownership (right to name the beneficiary). The three-year inclusion rule is in effect. Answer A is true, but Phillip buying his policy doesn’t trigger a “transfer for value”.
Which type of employer group coverage is not tax deductible by the employer?
A. Group life
B. Group legal
C. Code section 125
D. Group disability
C. Code section 125
Flexible spending accounts (Section 125) are funded solely by the employee. The other plans are normally paid for by the employer (tax deductible). Code Section 125 is not group coverage, it is a cafeteria plan.
What type of company is most likely to use stop-loss coverage to partially self-insure its employee medical insurance program?
A. Large companies
B. Medium-to-large companies
C. Companies with as few as 100 employees
D. Not-for-profit associations
C. Companies with as few as 100 employees
For example, a relatively small company could self-insure employee claims to $250,000 per claim.
Claims above $250,000 in aggregate would then be paid by an insurance company.
Claims under $250,000 in aggregate would be financed by the employee, employer contributions, and potentially reduced health insurance premium costs.
Which of the following is not a source of information generally used during the underwriting process?
A. Information from the broker
B. Cost-benefit analysis
C. Physical examinations
D. Investigations
B. Cost-benefit analysis
The applicant, rather than the underwriter, would perform cost-benefit analysis. The other answers are correct.
Bill Yates was involved in a not-at-fault auto accident. He was hurt, and his car was damaged. A hit-and-run vehicle left the scene of the accident before Bill could get the driver’s name or license number.
Under which parts of his auto policy (he has A, B, C, and D coverage) can he collect?
I. Bodily injury/property damage
II. Medical payments
III. Uninsured motorist
IV. Collision
V. Other than collision
A. I, II, III
B. II, III, IV
C. II, V
D. III, IV
E. IV
B. II, III, IV
Medical payments and collision coverages apply. Answer III protects him when he gets sued, but Bill was not at fault. Bill must file a claim against his own insurer to collect under the uninsured motorist provision. Basically, he sues himself. This presumes the hit-and-run driver cannot be identified. Item I is incorrect because Coverage A would apply if Bill were at fault and if the other party were injured or his/her property were damaged.
Which of the following statements about umbrella liability insurance policy coverage are true?
I. It provides excess coverage when the limits of the insured’s basic liability coverage are adequate.
II. It provides excess coverage when the limits of the insured’s basic liability coverage are inadequate.
III. It provides broader coverage than basic underlying policies.
A. I, II, III
B. I, III
C. II, III
D. I, II
A. I, II, III
The material shows that the umbrella even provides benefits when the client has inadequate coverage. The insured is responsible for gaps in coverage. For the CFP Board Certification Examination, the client should have umbrella liability coverage.
Which of the following employer paid insurance premiums or costs are tax-deductible?
I. Business owner’s insurance
II. Key employee life insurance
III. Workers’ compensation insurance
IV. Federal unemployment tax
V. Directors and officer’s liability insurance
A. I, III, IV, V
B. I, II, III
C. II, IV
D. III, IV, V
E. III, V
A. I, III, IV, V
Premiums for I, III, IV, and V are business deductions. Unemployment benefits are taxable income. Answer Il is not tax-deductible. Federal unemployment tax is FUTA and is deductible.
For how many days does the COBRA election period last?
A. 30 days after termination
B. 30 days after the actual notice of the event to the qualified beneficiary by the plan administrator
C. 60 days after termination
D. 60 days after the actual notice of the event to the qualified beneficiary by the plan administrator
D. 60 days after the actual notice of the event to the qualified beneficiary by the plan administrator
The COBRA election period starts with the date of the notification and lasts for 60 days.
When Phyllis became ill (but not disabled) for a few weeks, she and her husband experienced a negative cash flow.
Although both are covered under disability insurance plans, they feel that the amount of existing coverage will be insufficient to maintain their current lifestyle. What would a CFP® professional most likely advise?
A. Both spouses should increase their existing individual disability plans to maximum benefits permitted by law.
B. Both spouses should take out additional life insurance and add disability waiver of premium
endorsements.
C. Both spouses should take out hospital and surgical indemnity policies.
D. Both spouses should take out an LTC policy with home health care coverage.
E. Both spouses should apply for additional individual disability policies with SIS benefits and guaranteed insurability options.
E. Both spouses should apply for additional individual disability policies with SIS benefits and guaranteed insurability options.
Both spouses need additional policies. One cannot increase the benefits on an existing policy. Even with a guaranteed insurability rider, a new additional policy would need to be issued.
Otis would like to purchase a disability insurance policy, but premium cost is a problem. What can he do to reduce the premium costs?
I. Increase the elimination period
II. Delete the presumptive disability coverage
III. Delete the continuance provision
IV. Not buy the COLA rider
V. Purchase a guaranteed renewable policy
A. I, IV, V
B. II, III
C. I, III, IV
D. II, III, V
E. IV, V
A. I, IV, V
Otis can reduce the premium by electing a longer elimination period and/or choosing a policy with a guaranteed renewable rather than non-cancellable provision.
The presumptive disability clause and the continuance provision clause are included in the policy.
COLA is a rider (extra cost).
Lester owns a whole life contract. Unknowingly, he ‘MEC’ed the contract by paying too much premium. Lester is now concerned about the dividends being paid by the contract. Under what types of distributions are dividends paid by this contract taxable?
I. They are received in cash.
Il. They are used to reduce premium.
III. They are used to purchase paid-up additions.
IV. They are kept with company and accumulate with interest.
V. They are used to pay off a policy loan.
A. Dividends from participating policies are never taxable because they represent return of basis.
B. All of the above
C. I, II, V
D. III, V
E. II, V
C. I, II, V
Participating policy dividends from MECs become subject to current-year income tax when they are received in cash or used like cash to reduce upcoming premiums or to pay back policy loans.
The policy dividends aren’t taxable when they accumulate with interest. However, the interest paid on the dividends is taxable.
The contract is a MEC.
A non-key employee in discriminatory group term life insurance can exclude the taxable cost of the first of coverage?
A. $0
B. $50,000
C. One-time salary
D. Two-times salary
B. $50,000
The non-key employees may exclude the premium that is attributable to the first $50,000 of coverage in a group-term life insurance program.
Which of the following group type insurance policies do not offer a conversion feature?
I. Life
Il. Health
III. Short-term disability
IV. Long-term disability
A. I, II
B. II, III
C. II, IV
D. III, IV
E. IV
D. III, IV
Life and health group insurance coverage provides conversion features. See end of Chapter 4 Insurance for group health convertibility.
Group disability is not convertible.
Jack is age 50 and divorced. He no longer has to pay alimony or child support. His son is 28 and on his own. Jack has two life insurance policies: $60,000 of group term (son is the beneficiary) and $250,000 of whole life (estate is the beneficiary). He has been paying $3,000 of premium annually for 10 years on the $250,000 policy and can afford to continue to pay premiums. He wants to maximize his retirement benefits, and he believes he does not need as much life insurance as he now carries.
When Jack retires, should he convert his group term policy? If he converts, which kind of policy can he convert to? The Question 14 facts remain unchanged except Jack is now age 65.
A. Convert to decreasing term
B. Convert to a whole life policy
C. Terminate the coverage at age 65
D. Convert to a variable annuity
B. Convert to a whole life policy
Jack does not need much life insurance at age 50. Answer 14 does not indicate no need. The $60,000 of group term is not a large policy. Conversion to whole life seems to fit the question best. He cannot convert a group term policy to an annuity.
Which of the following statements concerning Medicare Part A benefits is correct?
A. To be eligible, the insured must be at least age 65.
B. Home health care visits are covered under Part D.
C. Hospice care is specifically excluded.
D. Benefits are subject to both a deductible and co-payments provisions for inpatient hospital care.
D. Benefits are subject to both a deductible and co-payments provisions for inpatient hospital care.
Part A benefits are subject to a deductible and copayments. Disabled workers, for example, can be covered under age 65. Hospice care is covered under Part A. Medicare Part D is for drugs.
Sam’s knee problem makes him nervous about his disability insurance. Sam is a regional sales manager for Hyper-Tech, Inc. He earns $200,000 in salary plus a $200,000 (estimated) bonus. This is a perfect job for him, and he doubts he can duplicate this job and money with any other employer. How should he cover himself for disability considering his current coverage?
I. He should opt-out of his current group disability plan and purchase the maximum amount of individual disability coverage.
II. He should supplement his group disability plan with a new individual plan with own occupation coverage up to age 65.
III. He should build up an emergency fund and self-insure for a reasonably long waiting period with a new individual policy.
IV. He should buy a guaranteed insurability rider in the new individual policy. He can exercise the option if he loses his job for any reason.
V. He should buy a partial disability rider in the new individual policy. This benefit will be paid until age 65
if he is partially disabled.
A. I
В. II, III, IV, V
C. II, III, IV
D. II, III
E. lI
D. II, III
If possible, Sam should supplement his current plan. The group plan definition of disability is his own occupation for 5 years. He doesn’t have much spendable income. It makes sense to keep the group plan and build up his emergency fund.
Answer IV is false. To exercise a guaranteed insurable option, he must show proof of higher earnings.
Answer V is false. This defines the residual disability rider. The partial disability rider is normally free.
Mr. and Mrs. Apple, New Jersey residents, have a daughter who attends Cornell University in New York State.
They give her a car while she is a college student. After college, she takes a job and will live in Manhattan. Is her car still eligible for coverage under the parents’ PAP policy?
A. No
B. Yes
C. It depends on whether she can be claimed as a dependent.
D. She will not be protected for out of state coverage.
A. No
While away at college, the daughter is still considered a resident of her parents’ home (a dependent). After taking a job and residing in New York, she must license and insure the car in New York.
Sharon purchases a home for $330,000. The value of the land is $50,000. The mortgage is $260,000. The property is covered for fire-related perils by XYZ Insurance Company to $225,000 with an 80% coinsurance provision and a $1,000 deductible. Does Sharon have sufficient coinsurance coverage for the home?
A. Yes
B. No
C. The client may suffer a penalty due to a partial loss.
D. If the property is a total loss, the mortgage will not be completely paid off.
Question 35: A
The replacement value of the home is $280,000. The insurance is $225,000. Sharon is insured for 80%. 80% of $280,000 is $224,000. The mortgage does not factor into this question.
Sally (age 35) and Hy (age 36) want to fund a buy-sell agreement with life insurance. The insurance carrier is willing to offer life insurance on Hy but only with a rating (extra premium). Which option should Sally and Hy choose to achieve the greatest mutual benefit?
A. They should use a cross-purchase type buy-sell: They should each purchase a level-term policy even if
Hy is rated. Hy may have to pay more.
B. They should use a cross-purchase type buy-sell. They should each purchase variable universal life on each other’s lives. Some of Hy’s premium rating (out-of-pocket cost) could be reduced by wise investment choices.
C. They should use a redemption agreement type buy-sell. Their company should purchase 2 universal life policies.
D. They should use a redemption agreement type buy-sell. Their company should purchase 2 limited-pay whole life policies. The policies would be creditor proof.
B. They should use a cross-purchase type buy-sell. They should each purchase variable universal life on each other’s lives. Some of Hy’s premium rating (out-of-pocket cost) could be reduced by wise investment choices.
In a cross-purchase arrangement, Sally would purchase Hy’s policy (the higher premium.) She would pay the higher premium. With good investment performance the variable policy may be less costly. Answer C is wrong.
Corporate ownership of policies makes them subject to the corporation’s creditors. A cross-purchase agreement gives the survivor a tax advantage (step-up in basis). Hy has a shortened life expectancy, step-up in basis is more important to him than minimizing premiums.
Which of the following statements is/are true about John’s group term life insurance contract?
I. He can make an absolute assignment to Helen as the beneficiary and remove the policy from his estate.
II. He owns the contract.
III. He makes no contribution to the premium.
IV. The $120,000 is included in his estate although it passes through to Helen under the marital deduction.
V. At John’s death, Helen must pay income tax on the $70,000 excess death benefit.
A. I, II, III, IV
B. I, II, IV
C. I, III, IV
D. IV, V
E. IV
Question 46: C
Answer l is true because making an absolute assignment of a policy will remove the policy from his estate subject to the 3-year rule.
Answer Il is false. The company owns the policy.
Answer Ill is true. He is charged with income (W2) for the excess benefits (above $50,000), but he doesn’t pay the premium.
Answer V is false.
John will be charged with the Table I cost on premiums attributable to benefits above $50,000 ($120,000 -
50,000 = $70,000). Because he is charged with the premium, the benefits received are income tax free.
NOTE: Although the company owns the policy, because he named the beneficiary (Helen), according to the Internal Revenue Code he holds “incidents of ownership” in the policy for federal estate tax purposes.
What are Bob’s options for health insurance?
I. He can get up to 36 months of COBRA.
II. He can convert the group coverage to an individual health plan.
III. He can elect a HIPAA option.
V. He might be able to continue under his father’s plan.
V. He can apply for group insurance when he starts his own business.
A. I, III, IV
B. II, III, IV, V
C. III, IV, V
D. III, IV
E. V
B. II, III, IV, V
COBRA is not an option because the business has only 10 employees. He has a conversion option under his father’s policy. (No evidence of insurability is required.) HIPAA is an option. As long as he is a dependent of his father, Bob can continue under his father’s plan until age 26. If Bob starts his own business, he can apply for group insurance. Under Affordable Care Act, Bob cannot be denied coverage due to a pre-existing condition.
In case Mark or Mary dies, what type of advanced business planning should they implement?
I. Entity purchase buy-sell
II. Cross-purchase buy-sell
III. Key person life insurance on Mark
IV. Split-dollar life insurance on Mark
V. Non-qualified deferred comp for Mark
A. I, III, IV, V
B. II, III, IV, V
C. I, III
D. II, III
E. III, IV, V
Question 59: D
The company is owned 50/50. Mark’s children do not like Mary. Mark and Mary should choose a cross-purchase buy sell agreement. The business should buy a key-employee policy on Mark. The agency relies on Mark’s selling ability. Split dollar and non-qualified deferred compensation reflect personal planning rather than business planning. Mark already has an existing split-dollar policy. Cross-purchase is a better choice than entity purchase for Mary. She can buy Mark’s stock at his death. Otherwise, his children will get his stock.
Mark is concerned about becoming disabled and his company subsequently failing. If he purchases a BOE policy (business overhead expense), which of the following statements is true?
A. The premium is not deductible, but the benefits are received tax- free.
B. The premium is deductible, but the benefits are taxable income to the business.
C. The premium is deductible, and the benefits are received tax-free.
D. The premium is not deductible, and the benefits are taxable income.
E. Only self-employed persons can purchase BOE policies.
A. The premium is not deductible, but the benefits are received tax- free.
The corporation cannot deduct the premium, but it can exclude the benefits from its gross income.
What type of benefit plans can Richard install at RC, Inc. that
- Will not cost RC, Inc. very much money and
- Will help retain employees?
I. Nonqualified deferred compensation
II. Section 125 plan
III. Endorsement method split-dollar life insurance
IV. Group life insurance up to $50,000 of death benefits
V. Group dental plan (basic benefits)
A. I, II, IV, V
B. II, III, IV, V
C. I, III
D. II, IV, V
E. II
D. II, IV, V
Fringe benefits like a Section 125 plan, group life insurance up to $50,000 death benefit, and group dental are relatively inexpensive. NQDC is too expensive to implement.
Dr. Jeffrey is retired but bored. He is considering purchasing an antique refurbishing business. The business experienced marginal profits in the past. He has a knowledge of antiques and plans to upgrade the equipment and building. He feels that after losing money (due to upgrades), the business will be profitable. Dr. Jeffrey plans to put up all the capital.
Which of the following business forms is the most appropriate?
A. Sole proprietorship
B. Limited partnership
C. Personal Service Corp.
D. S corporation
E. C corporation
D. S corporation
Dr. Jeffrey needs the limited liability associated with the corporate form. With an S corporation, he can take losses up to his investment (basis).
When he files his Form 1040, Thomas will report the following income and losses for the year:
- $5,000 loss from ownership (%) in a limited partnership
- $10,000 loss from active participation in a strip shopping center (100% ownership)
- $8,000 loss from a 10% interest in an S-corporation in which he is a manager
- $75,000 of salary as the manager of the S-corporation
What is Thomas’ adjusted gross income for the current tax year?
A. $52,000
B. $57,000
C. $65,000
D. $70,000
E. $75,000
B. $57,000
Salary ($75,000) - [Active participation (-10,000) + S-Corp loss (-8,000)] = AGI ($57,000).
The exception to the
passive rules is active participation in real estate.
The S-Corp income is active. He manages the business.
Question 2
Joe Silver has active income of $300,000 per year and substantial unused passive losses from a non-publicly traded limited partnership.
He would like to find an investment that would allow him to utilize his passive losses. Which of the following are the most appropriate investments for Joe?
I. An active participation rental real estate activity generating income on the Schedule E
II. A master limited partnership (MLP) generating income
Ill. Certificates of deposit generating portfolio income
IV. A non-publicly traded limited partnership generating income
A. I,Il
B. I, IV
C. III, IV
D. I, II, IV
E. I, II, III, IV
B. I, IV
Schedule E income from active participation in rental activities can be used to offset other passive losses.
The non-publicly traded limited partnership losses may not offset income from a publicly traded partnership (the MLP) or portfolio income.
All of the choices include Answer I. Knowing IV was right leads to the correct response to the question.
MLPs are publicly traded
Which of the following phrases best applies to the AMT exemption?
A. Subject to phaseout
B. Usable by corporations only
C. Deductible
D. Always deductible
A. Subject to phaseout
The AMT exemption is subject to phaseout rules.
Which of the following strategies should be considered to avoid or reduce exposure to the AMT tax?
A. Exercise of ISOs in one year
B. If you are the owner of a small corporation, pay yourself a large bonus
C. Defer paying property taxes until next year
D. Buy private activity municipal bonds rather than public purpose municipal bonds
B. If you are the owner of a small corporation, pay yourself a large bonus
Increasing 1040 income tax decreases AMT exposure.
Answer D should read: Buy public purpose municipal bonds (because the interest is not a preference item rather than private purpose bonds (because the interest is a preference item).
Which of the following are preference items or add-back items for purposes of the individual alternative minimum tax?
I. Qualified private-activity municipal bond interest
II. The property tax itemized deduction
Ill. The excess of percentage depletion over the property’s adjusted basis
IV. Cost depletion deductions
A. I, III
B. I, IV
C. I, II, III
D. II, III, IV
E. All of the above
C. I, II, III
Cost depletion is not a preference item. Property tax is not a deduction for the AMT. It is added back to calculate the AMT (an adjustment).
A partnership trades an old piece of equipment having an adjusted basis of $10,000 plus cash of $2,000 for a new machine with a fair market value of $15,000. What is the recognized gain, and what is the basis of the new machine?
A. Gain $0; Basis: $12,000
B. Gain $0; Basis: $10,000
C. Gain $2,000; Basis: $15,000
D. Gain $3,000; Basis: $12,000
A. Gain $0; Basis: $12,000
This is NOT a 1031 exchange. The old basis and the cash become the new basis. 1031 exchanges are no longer available for equipment but only for real property.
Tim and Maggie Butler, who are married, sold their residence in June.
The realized gain over the eight years they owned the home is $350,000. Instead of buying a new home, they decide to rent a condo. Which of the following statements is true?
A. The gain must be reported on the tax return for the year of the sale.
B. There is no taxable gain; therefore, no tax forms need to be filed.
C. The amount of the gain is more than exclusion. No tax forms need to be filed.
D. A Schedule D and Form 2119 must be filed.
B. There is no taxable gain; therefore, no tax forms need to be filed.
The $350,000 realized gain is completely excluded by the $500,000 exclusion. No return needs to be filed because there is no recognized gain.
Nick owns a warehouse with a fair market value of $200,000 and an adjusted basis of $50,000. He wants to acquire Jim’s strip shopping center which has a fair market value of $300,000 and adjusted basis of $100,000. In the exchange, Nick will pay Jim $75,000.
What is the amount of gain realized by Nick in the exchange?
A. $75,000
B. $125,000
C. $175,000
D. $300,000
C. $175,000
Total value received minus new adjusted basis
FMV of property acquired
($300,000) + Boot ($0) = $300,000
[Minus]
Adjusted basis of property ($50,000 $75,000) = $125,000
Lance creates an irrevocable life insurance trust that will pay income to his ex-wife for life and then to his children.
Lance transfers a $1,000,000 term policy and $100,000 of high yield bonds to the trusten te income from the bonds will be used to pay the premiums on the policy, and all remaining income will be paid to family members.
Regarding the income from the trust, which of the following statements is correct?
A. During Lance’s lifetime, the income of the trust will be taxable to Lance.
B. During Lance’s lifetime, income from the trust will be taxable at the trust rates.
C. During Lance’s lifetime, the income of the trust will be split with the amount paid for insurance premiums taxable to the trust and the amount paid to the family members taxable to Lance.
D. The income from the trust will be taxable to the beneficiaries under the beneficial enjoyment rule.
A. During Lance’s lifetime, the income of the trust will be taxable to Lance.
This grantor trust is tainted because trust income will be used to pay life insurance premiums. Per the question only a portion of the trust income is being used to pay the premiums on the policy. The remainder is being paid to family members and will be taxable to them (DNI principle).
Under a divorce settlement, Mr. O’Toole was required to establish a trust to provide support for his minor children. The income generated by the trust will be taxed to which of the following parties?
A. Mr. O’Toole
B. The trust
C. Mr. O’Toole’s children
D. Mrs. O’Toole as child support payments
A. Mr. O’Toole
If the trust income is used to satisfy a grantor’s legal support obligation, the trust income will be taxed to the grantor.
Pete operates his landscaping business as a sole proprietorship. The business produces annual net earnings of $400,000. Pete read an article in the Sunday paper about incorporating to limit a business owner’s personal liability. He comes to you for advice. Which of the following statements would be proper advice for a CFP professional to tell Pete?
I. Pete should not incorporate his business because the top corporate income tax bracket is 21%.
II. A limited partnership would also protect him from liability.
III. An S corporation would save accounting costs because it does not have to file income tax returns.
IV. Pete can reduce his current income tax liability by splitting his income between himself and a C corporation.
V. If he gives them stock, an S corporation could allow Pete to shift income to his children.
A. II, III
В. I
C. II, V
D. IV, V
E. III, IV
D. IV, V
The corporate tax rate is 21%. As an active participant (general partner) the limited partnership would not limit Pete’s personal liability relative to the business. If Pete took a salary of $400,000, his marginal tax bracket is 35%. This way Pete could reduce his income tax liability. An S corporation could shift income.
Dr. K, Dr. L, and Dr. M own a successful medical corporation. At year-end, a profit of $150,000 is left in the corporation. How will the earnings be taxed?
A. To the individual doctors at their tax rate.
B. At the corporate graduated rates.
C. $100,000 at 20%.
D. At a flat 21%.
D. At a flat 21%.
HALE (Health) corporations are PSCs and taxed at 21%.
A PSC with accumulated earnings exceeding $150,000 will be exposed to a 20% accumulated earnings tax.
Which of the following filing statuses could help a business owner reduce his/her taxes?
A. File as a self-employed individual
B. File as an S corporation (Form 1120S).
C. File as a regular corporation (Form 1120).
D. File as an LLC.
Question 8: C
Answers A, B and D are conduit entities.
A regular corporation will provide the owner with a separate tax entity.
Money left in a corporation is taxed at 21%.
The OKA Corporation owns 25% of the stock of DEC Corporation. For the current tax year, OKA receives $10,000 in dividends from DEC. What is the amount of OKA’s dividend-received deduction?
A. $0
B. $2,000
C. $2,500
D. $6,500
E. $10,000
D. $6,500
65% of the dividend received is excluded because OKA owns 20% or more of DEC. Otherwise, the deduction is limited to 50% of the dividend received when a company owns less than 20% of the paying company.
If a company elects the FIFO method of inventory control, how will the inventory be reflected on the balance sheet?
A. It will be understated.
B. It will reflect current cost.
C. It will be based on the accrual method.
D. It will be based on the cash method.
B. It will reflect current cost.
The FIFO method of inventory valuation reflects current cost.
Which type of business entity cannot adjust future years’ income due to prior year(s) NOL?
A. Regular corporations
B. S corporations
C. Estates
D. Trusts
S corporations cannot utilize NOLs because they already pass-through annual losses.
Which of the following is (are) true about a personal casualty loss (federally declared disaster)?
I. If the property subject to the loss is not fully insured, the casualty loss is not deductible.
Il. The casualty loss is deducted on the Schedule A.
Ill. If a taxpayer incurs more than one personal casualty loss in a particular year, he must reduce the aggregate loss by 10% AGI.
IV. The $100 floor applies separately to the loss from each single casualty or loss.
V. Basis must be used when determining the value to calculate a casualty loss.
A. I, II
B. II, III, IV, V
C. II, III, IV
D. III, IV, V
E. III, IV
C. II, III, IV
The insurance diminishes the loss, but the loss is still deductible with limitations. The value is based on the lower of basis or FMV. The 10% of adjusted gross limitation is applied to all losses in one year.
For the current tax year, Bob Pearson, a single taxpayer with a $100,000 AGI, has $12,000 of investment interest expense and $8,500 of investment income. He has paid financial advisor fees of $1,500. What amount of investment interest expense, if any, may Bob deduct in the current tax year?
A. $0
B. $8,500
C. $10,000
D. $11,300
E. $12,000
B. $8,500
Investment interest expense is deductible up to the amount of that year’s net investment income. Bob’s net investment income is $8,500. The 2% of AGI limitation ($1,500) has been repealed under the TCJA.
In the current year, Tommy will declare the following income and expenses:
Ordinary dividend income. $8,000
Short-term capital gains. $4,000
Margin interest paid. $19,000
Mortgage interest received. $6,000
Interest rec’d on personal note. $5,000
Credit card interest. $3,000
What amount of margin interest expense can Tommy deduct on Schedule A?
A. $6,000
B. $16,000
C. $18,000
D. $19,000
E. $35,000
D. $19,000
Margin interest is only deductible up to investment income [interest ($6,000 + $5,000), ordinary dividends ($8,000), and STCG ($4,000)]. Investment income totals $23,000.
Margin interest paid was $19,000. Interest received is income.
Credit card interest is consumer interest (not deductible) rather than investment (margin) interest paid.
Mr. Parker, age 57, operates as a sole proprietor. He has no employees (just some 1099 workers). He hopes to retire by age 65.
Which retirement plans would you suggest?
I. Keogh
II. Uni- (k)
III. Defined benefit Keogh
IV. Defined contribution Keogh
A. I, II
B. II, III
С. III, IV
B. II, III
With a DB he can aggressively contribute through salary reduction and tax savings in 8 years.
The uni-(k) would also allow him to contribute up to $73,500 (with the catch-up contribution) in 2023. The plan selection depends on how much of his net profit he is willing to contribute.
He has no employees.
Answers I and IV are incomplete answers.
Bill Richblood owns Richblood, Inc. For years, although the business was profitable, Bill resisted providing a retirement plan. He did not want his business to assume all the paperwork and mandatory employer contributions.
Now the employees are leaving to work for competitors. Bill feels he has to offer some kind of retirement plan to retain key employees. He has consulted various financial planners and he wants to know which one gives the best advice.
Which of the following planner’s advice is the best for Bill?
A. #1 FP - Install a SEP because it can be integrated with Social Security. This means a bigger percentage of the company contribution will be made for Bill. In addition, the plan is simple to install.
B. #2 FP - Install a defined benefit plan because the largest contribution will be made for Bill
С. #3 FP - Install a SIMPLE because of the relatively small mandatory employer contributions
D. #4 FP - Install a cash-less ESOP because the company can contribute stock rather than cash
Answer:A
With a SEP there are no mandatory contributions, and it is easy to install.
A defined benefit plan is complicated and can require large, unpredictable mandatory contributions.
An ESOP means that Bill has to share stock with his employees. There is no indication he is willing do so.
There is no indication that the employees would want to contribute to a SIMPLE. Employer contributions are very limited to 3% of compensation.
The SEP will allow for higher employer contribution.
Gloria Goodtaste owns and operates an upscale gift shop. Revenue varies so much that she cannot hire many full-time employees or provide benefits. The gift shop employs only two full-time workers.
The remainder of her needs are met by several prior employees who only want to work part-time (400 hours per year at most).
What kind of benefits should Gloria offer to the full-time employees that may exclude the part-time employees?
I. Profit-sharing plan
II. SEP
III. Group health insurance
IV. SIMPLE 401 (k)
A. I, III, IV
B. I, III
C. I, IV
D. II, III
E. IV
Answer: A
Profit sharing and SIMPLE 401 (k)s are ERISA plans with the 500/1,000 hours per year service eligibility requirement.
Group health insurance plan participation normally requires 30 hours per week.
SEP eligibility requires the 3-year rule for which many of the part-time employees may already qualify.
Terrific Toys, Inc. reports under the accrual method of accounting. At year end (Christmas) they typically sell substantial amounts of inventory.
The concern is that although they “book” a lot of sales, they may not get the cash until the following year. They have problems funding the company’s profit-sharing plan.
What should the company do if it is reasonably profitable?
A. Change their accounting method from accrual to cash
B. If they cannot fund the plan by their tax filing date, borrow the necessary funds from a bank
C. Wait until next year and pay the corporate taxes due
D. File the corporate tax form showing an amount owed to the profit-sharing plan as a deduction
Answer: B
The company cannot change to a cash accounting system.
They can wait another year, but why not save 21% in taxes?
Answer D is not allowed, the cash must be contributed to the plan.
Success, Inc. has been informed by its plan administrator that its defined benefit plan is overfunded.
The plan administrator indicates that it may be a long time before additional employer contributions can be added to the plan.
What can Success, Inc. do to continue to contribute and deduct new money to the plan?
A. Nothing
B. Select life insurance and annuities to fully fund the plan
C. Continue to make contributions until the IRS sends a notice
D. Find a new plan administrator who will allow them to make new contributions
Answer: B
With a fully funded whole life DB plan, the employer can use the actuarial assumptions of the whole life contract.
The actuarial assumptions of the cash value insurance policy are normally lower than most other plan assumptions, allowing for additional contributions.
Business owners may choose to use qualified plan assets to purchase life insurance for estate planning purposes. (The most available assets to pay the premiums may be in the qualified plan. A popular planning strategy is to purchase a second-to-die insurance policy in a qualified plan.
Which of the following qualified plan (s) can hold second-to-die insurance?
A. Cash-balance plan
B. Profit-sharing plan
C. Money purchase plan
D. All of the above
Answer: B
Only profit-sharing plans can hold second-to-die insurance. Pension plans cannot.
Cash balance plans and money purchase plans are pension plans.
Art Klein just died at age 69. His wife, Patsy, is age 60.
She has worked for the Midwestern Railroad Company for 35 years and will be eligible for railroad retirement benefits of approximately $2,000 per month.
Art had been receiving Social Security retirement benefits of $800 per month.
What benefit is Patsy eligible for now?
A. She is eligible for the Social Security widow’s benefit.
B. She is eligible for Social Security retirement benefits based on her own years of employment.
C. She is eligible for Medicare benefits.
D. She is eligible for the $255 lump sum death benefit.
D. She is eligible for the $255 lump sum death benefit.
Surviving spouse railroad employees cannot get a Social Security widow’s benefit and receive railroad retirement benefits. She is not entitled to Medicare until age 65
Under a 401(k) hardship withdrawal rules, an employee can request an amount equal to which of the following.
I. The entire account balance
II. An amount equal to elective deferrals
III. An amount equal to vested profit sharing contributions
IV. An amount equal to the account earnings
A. I
B. II
C. II, III
D. III, IV
C. II, III
For hardship withdrawals, employee’s distributable amount is equal to the employee’s total elective deferrals and vested profit-sharing contributions.
Stanley participates in an ESOP funded with both company stock and mutual funds. He is concerned about phantom income when she retires and takes distributions from the ESOP. What should you advise him to do to reduce his phantom income exposure?
I. Take only a 72(t) distribution rather than a full distribution in the first year of retirement
II. Take a full distribution of the account balance
III. Take a distribution of the company stock
IV. Roll the whole account into an IRA
V. Roll the mutual funds into an IRA
A. I, IV
B. II
C. III, IV
D. III, V
A. I, IV
The IRA rollover of the entire account, which includes the employer stock and the 72(t) distribution eliminate phantom income.
However, the NUA tax break is lost.
Which of the following is not true about top-heavy plans?
A. A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits or account balances to key employees.
B. For defined contribution plans, employer contributions during a top-heavy year must be at least 3% of compensation.
С. If a defined benefit plan is top-heavy for a given year, it must provide more rapid vesting than generally required.
D. If the plan fails to correct its top-heavy status for 3 years in a row, the DOL can terminate the plan.
- D - If the plan violates the top-heavy rules, the plan will continue to be qualified but subject to the top-heavy rules (not terminated).
Karl, age 55, has developed a product that will make him millions over the next years. He has a corporation with two young employees. He is unhealthy and tried to purchase life insurance.
He declined the offer because he was rated and didn’t want to pay the premium. He would like to fund the maximum in a qualified plan to reduce income taxes, benefit his spouse, and have liability protection. Is there anything Karl can do to accomplish all his goals?
A. Install a defined benefit plan ERISA plan
B. Install a 412(e)3 plan [or 412i)] ERISA plan
C. Install a target benefit plan ERISA plan
- B - He could do a fully funded whole life DB plan. The plan can use the actuarial assumptions of the whole life contracts. These assumptions are normally lower than the plan assumptions (more contributions). The insurance premium will be paid by the plan.
If at Karl’s death, the difference between the cash surrender value and the face amount is treated as death proceed of life insurance, and is generally excluded from income tax, but only if the insurance cost under Table 2001 (standard rate) has been paid with nondeductible contributions or has been taxable to the employee.
Sue’s employer has a profit-sharing plan. The employer has not made a contribution for the prior year. In addition, there was no employee turnover. Sue’s salary was $85,000. Her W-2 shows that she wasn’t an active participant. Can she deduct her IRA contribution for last year?
A.Yes
B. No
C. Maybe
- A - Yes, if there were no annual additions to the account for the prior year (contributions or forfeitures), she could fund a deductible IRA. Sue’s W-2 would show she wasn’t a participant.
It is December 24th. The day has been full of phone calls and appointments. You are exhausted.
You are about to go on vacation when a smartly dressed lady, Kate, walks into your office. She was referred to you by your wealthiest client.
Kate’s husband died this year and she inherited his $2 million IRA. She wants to make a full Roth conversion this afternoon.
What is the most important information that you need before assisting Kate with her conversion?
A. Her age
B. Her AGI
С. Will she remarry?
D. Her CPA’s name
- A - Kate can’t convert the whole IRA to a Roth without taking a RMD if she is 73 or older. The first dollars withdrawn from the IRA are deemed to be the RMD until that amount is distributed. Once the RMD is withdrawn, then the remaining balance can be converted. Her age is important. (Pre-study)
Question 14
Cynthia’s final-average monthly salary is $4,800. To arrive at her benefit, multiply 1.25% by the $4,800 final-average monthly salary by 25 (the number of years of service). Cynthia’s monthly retirement benefit will be equal to $1,500 paid in the form of a life annuity. This is an example of what type of defined benefit formula?
A. Flat-percentage-of-earnings
B. Flat-amount-per-year of service
C. Unit-benefit
D. Flat-benefit-percentage
Question 14: C
Answer C is also known as percentage-of-earnings-per-year of service. Answer D is nonsense.
Question 11
In which of the following qualified retirement plans may forfeitures be allocated to increase account balances of the remaining plan participants?
I. Defined benefit plan
II. Profit-sharing plan
Ill. Money purchase plan
IV. Cash balance plan
A. I, II
B. I, IV
C. II, III
D. II, IV
Question 11: C
Forfeitures in defined benefit plans and cash balance plans must reduce plan costs or contributions. Money purchase plan forfeitures may (not must) be allocated to employee account balances. Forfeitures in a profit-sharing plan normally are allocated to the plan participants.
Question 9
On what is the maximum deductible contribution in a target benefit plan based?
A. An actuarial determination
B. The minimum-participation rule
C. A maximum of 25% of the aggregate eligible compensation of all covered participants
D. A maximum of 25% of the firm’s total payroll
Question 9: C
A target benefit plan is a defined contribution plan. Although an actuarial calculation is made when a target benefit plan is first installed, the maximum deductible contribution is always limited by Answer C. This is true even if the actuarial calculation calls for a larger contribution (likely if there are many older highly compensated employees and relatively few lower-paid rank-and-file employees). Answer D is wrong. The contribution is not based on total payroll but eligible compensation or payroll.
Question 5
What impact would increasing investment returns have on a money purchase plan?
A. Employer contributions would increase
B. Employer contributions would decrease
C. The amount of the employer’s contribution would not change
Question 5: C
Investment returns affect account balances, not contributions.
Question 4
What would be the impact on a money purchase plan if a key employee retires and is replaced by a clerical employee?
A. Company contributions would increase
B. Company contributions would decrease
C. The amount of the company contribution would not change
Question 4: B
The key employee had a higher salary level than the clerical employee. The employer would be contributing less on behalf of a lower paid worker.
Question 1
Quick Manufacturing, Inc. always maintains a top-heavy profit-sharing plan because of employee turnover due to layoffs. Which vesting schedule should they adopt if the company feels this will be an ongoing situation?
A. 3-year cliff
B. 5-year cliff
C. 2- to 6-year graded
D. 100% with 2-year eligibility
Question 1: A
The employees will be eligible after one year, but unless they stay three years, the employees will forfeit all employer contributions made to the plan. The forfeitures will be allocated to the long-term employees (probably the HCEs) allowing them to potentially receive 2023 annual additions of up to 100% of compensation or $66,000.
There is no indication the company wants to retain employees (2-6 year graded).
The 100% vested plan (2-year eligibility) is not an advantage over the 3-year cliff vesting schedule.
Question 7
Together, four doctors own 100% of Labs, Inc., a support organization. The respective ownership percentages are 80%, 10%, 5%, and 5%. The doctors own and operate individual practices as personal service corporations with no employees. Each practice provides a defined benefit plan. Which type of controlled group would Labs, Inc. fall under?
A. Parent-subsidiary controlled group (80% combined)
B. Brother-sister controlled group (80% combined)
C. Affiliated service group
D. Leased employees
Question 7: C
The IRS defines this as an affiliate service group. I realize the 80% factor may lead you to answer this as brother-sister.
Question 2
Which of the following is true about plan loans from a 401(k) plan?
A. They are prohibited because the plan accepts employee elective deferrals.
B. The loan interest is never deductible.
C. If married, the spouse would not need to consent to the loan.
D. The loan does not have to be secured.
E. If a plan allows loans, they must be made available to all participants without discrimination.
Question 2: E
Interest paid on a plan loan for a principal residence may be deductible. If the plan is subject to QPSA/QJSA and if the loan is secured with plan assets, both spouses must consent to the loan. In all cases, the loans must be adequately secured (with plan assets or other collateral acceptable to the plan administrator).
Question 4
Walter Workaholic works for two related employers. Each employer provides a 401(k) plan. With one employer he earns $50,000, and with the second employer he earns $60,000.
If both plans allow for a 6% deferral and a 3% match, how much can he defer in 2023?
A. $3,000
B. $3,300
C. $6,600
D. $22,500
E. $30,000
Question 4: C
6% of the total of $110,000 = $6,600. The plan only allows for a 6% deferral. He cannot defer $22,500.
Question 5
A plan participant borrows from her 401(k) account to purchase a house. Under which of the circumstances described below would the loan interest be deductible?
A. The participant, a key employee, secures the loan with the primary residence purchased with the loan.
В. Under the tax code, home mortgage interest is deductible.
C. The participant, a rank-and-file employee, secures the loan with both the primary residence purchased with the loan and elective deferrals.
D. The participant, a rank-and-file employee, secures the loan only with the primary residence purchased with the loan.
Question 5: D
401(k)s [and 403(b)s] plans do allow principal residence loans to key employees and non-key employees alike.
However, interest paid on a plan loan for a principal residence is only deductible under two conditions.
1) The loan is secured by the residence for which the loan is made, and
2) The participant is not a key employee.
Interest on plan loans (even if for a primary residence) will be considered consumer interest if secured by the employee’s own elective deferrals. Home mortgage interest isn’t always deductible. Consumer interest is not deductible.
Question 6
Under which of the following circumstances can a Roth account be closed with no adverse tax consequences?
A. Immediately after it is funded
B. When the distribution is made for a qualifying special purpose
C. After the individual has maintained the Roth IRA for five years D. After the owner turns age 59½
E. Both C and D
Question 6: E
Earnings must meet the five-year rule, and the Roth IRA owner must be 59½ for the distribution to be tax-free.
Question 3
Tom Sellers own and operates TS, Inc. TS, Inc. has no other employees. Income from the business net of expenses is $80,000 this year.
Which of the following plans provides the maximum allowable contribution for Tom?
A. SEP
B. SIMPLE 401(k)
C. SIMPLE IRA
D. Keogh
Question 3: A
A SEP is easy to install. The SEP contribution would be $80,000 x .25 = $20,000. SIMPLE IRA and SIMPLE 401(k)
contributions are $15,500 + $2,400 (3%) = $17,900. Keogh isn’t a complete answer. Is the Keogh a defined
benefit or money purchase plan?
Question 13
Mr. Pope, age 55, operates his management consulting business as a sole proprietor. He wants to establish an uncomplicated retirement plan and contribute the maximum allowable amount per year. He has no employees, and his annual net profit always exceeds $250,000. Which type of plan should he adopt?
A. SIMPLE 401(k)
B. Profit-sharing
C. SIMPLE
D. SEP
E. uni-401(k)
Question 13: E
With the uni-401(k) Mr. Pope can defer $22,500 plus add employer profit-sharing contributions to a cap of $66,000 plus a catch-up contribution of $7,500.
The SIMPLE and SIMPLE 401(k) would only allow for $15,500 to be deferred plus 3% of compensation as a matching contribution.
The profit-sharing and SEP would allow Mr. Pope to contribute $66,000 but no catch-up contribution is available.
Question 1
A defined benefit plan includes incidental life insurance using the 100 to 1 test. Tom, who had been a participant, died prior to retiring. His wife received two checks during the year of his death: $200,000 pure death benefit and $20,000 cash value. What amount will not be taxable this year?
A. 0
B. $20,000
C. $200,000
D. $220,000
Question 1: C
The pure life insurance death benefit will be tax-free. The employee was charged with the cost of the pure death benefit of the life insurance. The cash value will be taxable. See Chapter 8 materials for more detailed explanation.
Question 3
XYZ’s pension plan portfolio consists of the following investments. Which investments) may produce UBTI income?
A. Real property rents
B. Gain from sale of capital assets
C. Equipment leasing program (containers)
D. Annuities (fixed or variable)
E. Whole life insurance
Question 3: C
Equipment leasing programs are normally limited partnerships. Annual limited partnership income in excess of $1,000 is exposed to UBTI current taxation.
Question 4
What entity or regulation imposes extensive reporting and disclosure requirements on a defined benefit plan?
A. PBGC
B. ERISA
C. Department of Labor
D. IRS
Question 4: B
A defined benefit plan is subject to all the ERISA requirements for qualified plans (participation, funding, vesting, etc.) and the ERISA reporting and disclosure requirements. This information is disclosed to the plan participants and/or filed with the IRS or the Department of Labor. PBGC is not per se a reporting agency.
Question 5
Apex, Inc. wants to reward its employees but does not have cash to contribute for year-end. The company feels it will be in a very profitable position during the year 2023. What would you suggest Apex do?
A. Adopt a profit-sharing plan and, in lieu of a cash contribution, provide the plan with a promissory note.
B. Adopt a profit-sharing plan and borrow the necessary cash for the contributions from a bank.
C. Adopt an ESOP and fund the contribution with company stock.
D. Do not start the plan until 2024.
Question 5: B
This option allows Apex to put money in the plan now and get a tax deduction now. Answer C is a good answer, but there is no indication in the question that Apex is interested in using company stock. This is the best answer though answer D could work as well (subjective).
Question 11
Joe Mills dies a few months after his 69th birthday. His wife, Wendy, is the sole beneficiary of Joe’s IRA. Match his IRA to the correct distributions.
I. Take distributions at Joe’s RBD based on Wendy’s single life expectancy recalculated each year
II. Roll the account balance into Wendy’s IRA; take distributions based on her RBD (new uniform lifetime
table)
III. Take distributions over Wendy’s life expectancy by December 31st of the year after Joe died
IV. Take distributions at least as rapidly as under the distribution schedule in effect when Joe died
A. I
B. I, II
C. III
D. II, IV
Question 11: B
Answer III would be more appropriate for a non-spouse beneficiary. Joe had not started his distributions so the
“at least as rapidly” distribution would not apply in this situation.
Which of the following statements accurately describe(s) the provisions of constructive receipt as it is applied to nonqualified deferred compensation plans?
I. Constructive receipt occurs when the funds are available to the employee.
II. Constructive receipt by employee results in taxation to the employee of the applicable benefits.
III. If a company goes through a merger or acquisition, the rabbi trust provisions will automatically trigger constructive receipt to the employee.
IV. If a company owns the deferred compensation assets, its employee will not have constructive receipt.
A. I, II, III, IV
B. I, II, IV
C. I, II
D. III
E. IV
Question 1: B
A rabbi trust might trigger constructive receipt due to a merger or acquisition.
Question 3
John, a high-performing sales manager for ABC Auto Parts, is unhappy with the company’s 401(k) program. The $330,000 compensation cap and the ADP test are limiting contributions.
In an effort to retain John, which of the following opportunities should ABC make available to him?
A. A salary continuation plan invested in a variable annuity policy
B. An increase in company contributions to the 401(k)
C. A secular trust
D. A split-dollar policy
E. A pure deferred compensation arrangement using a VUL policy
Question 3: A
A salary continuation plan is funded entirely by employer contributions. Pure deferred compensation uses a portion of the employee’s current compensation. Nothing indicates a need for life insurance (Answers D and E).
A secular trust contribution would be currently taxable to John and limits his ability to use the funds until the end of the term of the agreement.
Question 4
Harry is granted $250,000 of ISO options that vest in one year. The following year he exercises $150,000 of the options. What will be the result of this exercise?
A. $100,000 will be treated as ISOs; $50,000 will be treated as NSOs.
B. $50,000 will be treated as ISOs; $100,000 will be treated as NSOs.
C. $75,000 will be treated as ISOs; $75,000 will be treated as NSOs.
D. $150,000 will be treated as NSOs.
Question 4: A
If more than $100,000 of ISOs that vest in the same year are granted, only the first $100,000 (worth) are treated as ISOs with the excess treated as NSOs
