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1
Q

What is financial planning?

A

A collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.

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2
Q

List the 7 steps of the financial planning process.

A
  • Understand the Client’s Personal and Financial Circumstances
  • Identify and Select Goals
  • Analyze the Current Course of Action and Potential Alternative Courses of Action
  • Develop Recommendations
  • Present the Planning Recommendations
  • Implement the Plan
  • Monitor Progress and Update
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3
Q

What is the time frame to notify the CFP Board of adverse conduct?

A

30 calendar days.

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4
Q

True or False: The more tailored the communication, the more likely it will be viewed as Financial Advice.

A

True.

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5
Q

Define ‘Engagement’ in the context of financial advice.

A

An oral or written agreement, arrangement, or understanding.

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6
Q

What is the Duty of Loyalty?

A

Place Client’s interests above self, disclose conflicts, and obtain consent.

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7
Q

What distinguishes Fee-Based from Fee-Only compensation?

A

Fee-Based includes any part of compensation deemed sales-related; Fee-Only has no sales-related compensation.

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8
Q

Name the three duties owed to clients.

A
  • Definitional: Integrity, Competence, Professionalism
  • Detailed: Provide information to client, compensation methods
  • General Rule + Exceptions: Borrowing/lending money, confidentiality, privacy
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9
Q

What are the three categories of adverse conduct?

A
  • Unacceptable: Felony theft/embezzlement, tax fraud, violent felony within 5 years
  • Presumed to be Unacceptable: 2+ bankruptcies, felony non-violent +5 years ago
  • Other Conduct that may reflect adversely: customer complaints, civil proceedings, misdemeanors
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10
Q

What are the four forms of discipline?

A
  • Private Censure
  • Public Letter of Admonition
  • Suspension
  • Revocation
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11
Q

What are the two general phases of the business cycle?

A
  • Expansion
  • Contraction
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12
Q

Define GDP.

A

Total market value of income and output produced by all the people and companies in the US.

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13
Q

What is price elasticity?

A

How quantity demanded changes in response to changes in price.

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14
Q

What is the Law of Demand?

A

An increase in price will decrease quantity demanded and vice versa.

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15
Q

Fill in the blank: Deficit spending occurs when government expenditures exceed _______.

A

revenues.

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16
Q

List the three primary tools of the Federal Reserve.

A
  • Discount rate
  • Reserve Requirement
  • Open market activities
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17
Q

What is the Front End/Housing Cost Ratio maximum percentage?

A

28%.

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18
Q

How many months of emergency funds are recommended for a two-income household?

A

3 months.

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19
Q

What is Chapter 7 bankruptcy?

A

Eliminates consumer debt by having a trustee sell the debtor’s personal property.

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20
Q

What are the five categories of credit score?

A
  • Payment History
  • Amounts Owed/Utilization
  • Length of Credit History
  • New Credit
  • Credit Mix
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21
Q

What is the maximum amount for a conventional mortgage?

A

Below $766,550.

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22
Q

What does the Emergency Fund Ratio measure?

A

Monetary assets divided by monthly living expenses.

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23
Q

What is the FAFSA?

A

Free Application for Federal Student Aid.

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24
Q

What does ‘Disability’ mean in insurance terms?

A

A condition that prevents a person from performing their job.

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25
Q

What is the Last-Month Rule regarding HSAs?

A

If eligible under HDHP on the first day of the last month of the tax year, you may fund HSA for the entire year.

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26
Q

What is the definition of ‘Peril’ in homeowners insurance?

A

The actual cause of loss.

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27
Q

What is a Personal Umbrella policy?

A

Extends coverage for libel and slander.

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28
Q

What is the purpose of the Coinsurance clause in property insurance?

A

To require that the dwelling is insured for at least 80% of Replacement Cost Value for a partial loss to be paid in full.

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29
Q

What does ‘ADLs’ stand for?

A

Activities of Daily Living.

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30
Q

What is the 1035 Exchange?

A

A tax-free exchange of one insurance product for another.

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31
Q

What is a Modified Endowment Contract (MEC)?

A

A cash value life policy that fails the 7-Pay test and changes the tax treatment for cash distributions.

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32
Q

What is the ‘House Money Effect’?

A

Taking more risk with gains made from prior investments.

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33
Q

What does ‘Mental Accounting’ refer to?

A

The tendency to separate money into different categories based on subjective criteria.

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34
Q

What is the formula for calculating ACV of damage?

A

((Did Have/should have) * Loss Amount) - Deductible

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35
Q

Will a policy pay more than the stated limit?

A

No, the policy will never pay more than the stated limit.

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36
Q

What type of damage is covered when striking an animal under a Personal Auto Policy?

A

Comprehensive coverage

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37
Q

What does a Personal Umbrella policy extend coverage for?

A
  • Libel and slander
  • Boat coverage if minimum is maintained
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38
Q

What are money markets?

A

Short term debt instruments, cash and equivalents

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39
Q

What are capital markets?

A

Trade in long-term debt and equity instruments

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40
Q

What is the primary market?

A

Initial Public Offerings (IPOs)

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41
Q

Which act regulates the primary market?

A

Securities Act of 1933

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42
Q

What is the secondary market?

A

Trading among investors

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43
Q

What did the Securities Act of 1934 create?

A

The SEC (Securities and Exchange Commission)

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44
Q

What is the Investment Company Act of 1940 related to?

A

Mutual Funds

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45
Q

What does the Investment Advisor Act of 1940 regulate?

A

Investment advisors

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46
Q

What does SIPC stand for and when was it established?

A

Securities Investor Protection Corporation, established in 1970

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47
Q

What year was insider trading legislation introduced?

A

1988

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48
Q

What did the Gramm-Leach-Bliley Act of 1999 repeal?

A

Glass-Steagall Act

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49
Q

What is the formula for Holding Period Return?

A

Profit / Cost

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50
Q

What does Annual Yield not account for?

A

Capital appreciation

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51
Q

What is the Time Weighted Return?

A

A global standard for fund performance based solely on appreciation or depreciation period to period

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52
Q

What is the Dollar-Weighted return?

A

Return specific to a client with their own cash flows

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53
Q

How is total risk defined?

A

Total Risk = Systematic Risk + Unsystematic Risk

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54
Q

What quantifies systematic risk?

A

Beta

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55
Q

What is Purchasing Power Risk?

A

Risk associated with inflation

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56
Q

What is Reinvestment Risk?

A

Risk that future cash flows will need to be reinvested at lower rates

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57
Q

What is Market Risk?

A

Risk of losses in positions arising from movements in market prices

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58
Q

What is the r-squared (r²) threshold for using beta?

A

If r² > 0.7 use beta; if r² < 0.7 use standard deviation

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59
Q

What factors influence an investor’s capacity for risk?

A
  • Time horizon
  • Liquidity needs
  • Total investible assets
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60
Q

What are Junk Bonds rated?

A

Below BBB

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61
Q

What percentage of observations fall within one standard deviation?

A

68%

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62
Q

What does positively skewed distribution indicate?

A

A long right tail

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63
Q

What is Leptokurtic distribution characterized by?

A

More peaked than normal

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64
Q

What is the Efficient Market Theory?

A

Belief that all available information is reflected in stock prices

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65
Q

What does the Sharpe Ratio measure?

A

Risk-adjusted return

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66
Q

What does the Treynor Ratio use instead of standard deviation?

A

Beta

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67
Q

What does CAPM stand for?

A

Capital Asset Pricing Model

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68
Q

What does Jensen’s Alpha measure?

A

Performance relative to expected return based on risk

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69
Q

What does an upward sloping yield curve indicate?

A

Normal economic conditions

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70
Q

What is Nominal Yield?

A

Stated or coupon yield

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71
Q

What is Duration in bond valuation?

A

Estimates sensitivity of a bond to changes in interest rates

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72
Q

What happens to duration as maturity increases?

A

Duration increases

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73
Q

What is the purpose of matching the duration of a portfolio to a time horizon?

A

Immunizes those assets against interest rate risks

74
Q

What does Yield to Worst represent?

A

The lower of Yield to Maturity (YTM) and Yield to Call (YTC)

75
Q

What is the Multi-Stage Dividend Discount Model used for?

A

Valuing stocks based on expected future dividends

76
Q

What is a Margin Call?

A

A demand by a broker for additional funds to cover potential losses

77
Q

What does the Options Clearing Corporation do?

A

Guarantees performance of options contracts and eliminates counterparty risk

78
Q

What is the Time Premium of an option?

A

The additional amount over intrinsic value, greatest at contract creation

79
Q

What is a Covered Call?

A

Selling call options while owning the underlying stock

80
Q

What is the risk associated with Naked Call Writing?

A

Unlimited risk

81
Q

What is a Protective Put?

A

Buying a put option while owning the underlying stock

82
Q

What is a Collar strategy?

A

Buying a put and selling a call to protect against stock price decreases

83
Q

What is a Straddle in options trading?

A

Buying a put and call on the same stock with the same expiration date

84
Q

What does Hedging involve?

A

Taking a position to offset potential losses in another investment

85
Q

What distinguishes forwards from futures?

A

Forwards are not standardized and carry counterparty risk

86
Q

What does NPV stand for?

A

Net Present Value

87
Q

What is a wash sale?

A

Realizing a loss and acquiring a substantially identical security within 61 days

88
Q

What is the tax formula for calculating taxable income?

A
  • Income
  • Minus Exclusions
  • Gross Income
  • Minus Deductions FOR AGI
  • AGI
  • Minus deductions FROM AGI
  • Minus Greater of itemized deductions or the standard deduction
  • Minus Qualified business income deduction
  • Taxable Income
89
Q

What are some common exclusions from taxable income?

A
  • Muni Bond Interest
  • Fringe Benefits
  • Inheritances and Gifts
  • Scholarships
  • Personal Residence Sale (up to $250,000/$500,000)
90
Q

What is Schedule 1 used for?

A

Above the line deductions to arrive at AGI

91
Q

What is the limit for SALT deductions?

A

$10,000 limit

92
Q

What is the standard deduction based on?

A

Client’s age and blindness status

93
Q

What are refundable tax credits?

A

Credits that exceed liability are refunded directly to the taxpayer

94
Q

What is the penalty for negligence in tax matters?

A

20%

95
Q

What is the maximum penalty for failure to file taxes?

A

25% of unpaid taxes

96
Q

What is the maximum number of owners for an S-Corp?

A

100 owners

97
Q

What is a key feature of a C-Corp?

A

Double taxation

98
Q

What is a General Partner in a partnership?

A

Has full control and unlimited liability

99
Q

What is the FIFO method of inventory valuation?

A

First-In, First-Out; more realistic inventory valuation

100
Q

What is the Straight Line depreciation method?

A

Cost divided by useful life

101
Q

What does Section 179 allow?

A

Businesses to deduct the full cost of qualifying capital assets immediately

102
Q

What is a capital asset according to the tax code?

A

Not including accounts or notes receivable, copyrights, inventory, or depreciable property

103
Q

What are 1231 properties?

A

Used in trade or business and held for production of income

104
Q

What is a 1031 exchange?

A

Like-kind exchange of business realty

105
Q

What is the treatment of related party transactions?

A

Gains treated normally, losses not recognized until sold to an unrelated party

106
Q

What is recognized gain?

A

Lesser of realized gain or net boot received.

107
Q

Define deferred gain.

A

Realized gain minus recognized gain.

108
Q

What is substituted basis?

A

FMV of qualifying property received minus the deferred gain.

109
Q

Who are considered related parties in transactions?

A

Family and related entities if taxpayer owned 50% or more of the stock or interests.

110
Q

How are gains treated in related party transactions?

A

Treated normally, as if sold to an unrelated party.

111
Q

When are losses recognized in related party transactions?

A

Losses will NOT BE RECOGNIZED until the related party sells the asset to an unrelated party.

112
Q

What happens to suspended losses when sold in a taxable transaction?

A

Used to offset gain as well as other active and portfolio income.

113
Q

What qualifies for the personal use property exemption?

A

Can rent for 14 days or less, NOT required to report income.

114
Q

What is the exclusion amount for personal residence sale under Section 121?

A

250k for single filers, 500k for married couples.

115
Q

What are the requirements for the personal residence sale exclusion?

A

Must have owned and USED the property for 2 out of last 5 years.

116
Q

What is the AGI limit for deducting rental real estate losses?

A

25k loss allowed if MAGI is equal to or less than 100k.

117
Q

What is the phase-out range for rental real estate loss deduction?

A

From 100k to 150k AGI.

118
Q

What is the maximum allowable deduction for charitable contributions of LTCG property?

A

May elect to value at FMV or basis.

119
Q

What is the carrying over limit for contributions exceeding AGI limits?

A

Contributions can be carried over to each of the FIVE succeeding years.

120
Q

What are the requirements for written acknowledgment for charitable contributions?

A

Must obtain written acknowledgment for any single contribution of $250 or more.

121
Q

What is the imputed interest rule?

A

If taxpayer charges less than adequate rate of interest, imputed to lender.

122
Q

What is the formula for calculating Alternative Minimum Tax (AMT)?

A

Regular taxable income + preference items + standard deduction + AMT adjustments - exemption amount.

123
Q

What is the Kiddie Tax threshold for unearned income?

A

1300 standard deduction or earned income plus $450.

124
Q

What is the maximum contribution limit for defined contribution plans?

A

69k limit with 345k max compensation considered in formula.

125
Q

What is the maximum employer contribution rate for retirement plans?

A

Max deductible employer contribution is 25% of covered payroll.

126
Q

What are the characteristics of a Money Purchase Pension plan?

A

Mandatory annual employer contributions, 100% employer funded, easy for participants to understand.

127
Q

What is the special catch-up provision for Section 403b plans?

A

Employees with a minimum of 15 years of service can contribute an additional allowance up to 3k/year.

128
Q

What is the self-employment tax rate?

A

15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare.

129
Q

What is the penalty for early withdrawal from retirement accounts?

A

10% penalty unless exceptions apply.

130
Q

What is the 5-year rule for Roth distributions?

A

Applies to owners’ death, disability, first-time home purchase, or age 59.5.

131
Q

What is a Rabbi Trust?

A

Funds safeguarded in event of merger or acquisition and not trigger immediate recognition of compensation.

132
Q

What is the maximum retirement plan contribution for self-employed individuals?

A

First subtract ½ SE tax from net earnings and multiply by the adjusted employer plan contribution rate.

133
Q

What is the requirement for inherited IRA distribution for non-spouse beneficiaries?

A

Subject to RMDs.

134
Q

What is the goal regarding constructive receipt and current taxation?

A

To avoid constructive receipt and current taxation, there must be a substantial risk of forfeiture.

This is crucial for the non-recognition of income by executives until the risk is no longer present.

135
Q

What is a Rabbi Trust?

A

A Rabbi Trust safeguards funds for executives, ensuring they are not available for corporate use and protecting them in the event of a merger or acquisition.

It does not trigger immediate recognition of compensation.

136
Q

What are the tax implications of a large CVLI?

A

Executive owns the policy, employer pays premiums, executive pays taxes as bonus compensation, and death benefits are tax-free.

The executive also has access to cash value.

137
Q

What are the three types of plans recommended regarding employer contributions and employee taxation?

A
  1. Qualified Tax-Advantaged Plan
  2. Non-Qualified Section 162 Bonus Plan
  3. Non-Qualified Deferred Compensation Plan

You cannot have all three at once.

138
Q

What is the difference between NQSO and ISOs?

A

NQSO gives a corporate deduction when the employee pays tax at exercise, while ISOs may never grant a corporate deduction and can create AMT.

NQSO is subject to W-2 taxation, whereas ISOs have specific holding period requirements.

139
Q

What are the Social Security tax rates for employees and employers?

A

6.2% OASDI and 1.45% Medicare, totaling 7.65% from both employee and employer up to $168,600, with 1.45% unlimited above that.

Additional Medicare tax of 0.9% applies above certain income thresholds.

140
Q

What is AIME in the context of Social Security?

A

Average Indexed Monthly Earnings based on the 35 best years of earnings.

This figure is crucial for calculating the Primary Insurance Amount (PIA).

141
Q

What is the earliest age to claim Social Security benefits?

A

62, but benefits are permanently reduced if claimed early.

Benefits increase by 8% per year if delayed up to age 70.

142
Q

What is the maximum reduction for early retirement benefits?

A

30% maximum reduction.

The reduction is calculated based on the number of months prior to Full Retirement Age (FRA).

143
Q

What is the taxation rule for Social Security benefits?

A

Up to 85% of Social Security benefits may be subject to income tax based on provisional income calculations.

Provisional income includes 50% of SS benefits, tax-exempt income, and AGI without SS.

144
Q

What are the eligibility requirements for spousal Social Security benefits?

A

The worker must be receiving benefits, and the spouse must have been married for at least 1 year.

Former spouses can apply if divorced for more than 2 years, having been married for at least 10 years.

145
Q

What is the primary purpose of Medicare Part A?

A

To provide hospital insurance for individuals aged 65 or older who have paid into Medicare for at least 10 years.

It includes flat co-pays for days beyond the initial coverage period.

146
Q

What is the penalty for failing to take Required Minimum Distributions (RMDs) from IRAs?

A

A 25% penalty tax on the undistributed amount.

RMDs must start by April 1 of the year following age 73.

147
Q

What is a Qualified Charitable Distribution?

A

A nontaxable distribution from a traditional IRA directly to an eligible charity.

Must be at least 70.5 years old on the date of distribution.

148
Q

What is a Qualified Domestic Relations Order (QDRO)?

A

A legal order in divorce proceedings that recognizes a spouse’s right to receive a portion of the other spouse’s retirement plan benefits.

Distributions made under a QDRO are not subject to the 10% early withdrawal penalty.

149
Q

What are the types of wills recognized in estate planning?

A
  1. Mutual Will
  2. Reciprocal Will
  3. Holographic Will
  4. Nuncupative Will

Each type has different legal implications and requirements.

150
Q

What is the role of a Durable Power of Attorney (POA)?

A

Allows an individual to make decisions on behalf of another person, remaining effective even if the principal becomes incapacitated.

Essential for managing financial and healthcare decisions.

151
Q

What is the annual gift exclusion amount?

A

$18,000 for present interest gifts.

Applies to gifts made to individuals without incurring gift tax.

152
Q

What is the lifetime gift/estate exemption amount?

A

$13,610,000 for gifts and transfers at death.

Unified credit allows for a tax-free transfer up to this amount.

153
Q

What are the tax implications of a step-up in basis for community property?

A

100% step-up to the fair market value for the surviving spouse.

This is beneficial for minimizing capital gains taxes upon sale.

154
Q

What is the Generation-Skipping Transfer Tax?

A

Tax applied to transfers made to individuals two or more generations below the transferor.

It includes taxable distributions, taxable terminations, and direct skips.

155
Q

What is the process for calculating estate tax liability?

A

Gross estate minus deductions equals adjusted gross estate, then subtract charitable bequests and marital deductions to determine taxable estate.

Form 706 must be filed within 9 months of the decedent’s death.

156
Q

What is an irrevocable trust?

A

A trust that cannot be modified or revoked by the grantor after its creation.

Irrevocable trusts often provide tax benefits and asset protection.

157
Q

What is a Grantor Trust?

A

A revocable trust where all income is taxed to the grantor.

The grantor retains control over the trust and can modify it.

158
Q

What is the 65 Day Rule?

A

Allows fiduciaries to make distributions within 65 days of the new tax year.

This rule is important for tax planning purposes.

159
Q

What is a Testamentary Trust?

A

A trust created through a will that is funded with assets after the grantor’s death.

It helps in managing estate taxes and ensuring proper asset distribution.

160
Q

What is the Section 645 Election?

A

Allows the executor of an estate and the trustee of a revocable trust to treat the estate and trust as one for tax purposes.

This can simplify tax reporting.

161
Q

What is Distributable Net Income (DNI)?

A

Represents the maximum amount that can be taxed to the beneficiaries of a trust.

It allocates taxable income between beneficiaries and the trust.

162
Q

True or False: A Grantor Trust must file Form 1041.

A

False.

Grantor Trusts do not require Form 1041 if the grantor is taxed.

163
Q

What is a GRAT?

A

A Grantor Retained Annuity Trust that provides fixed payments to the grantor for a specified term.

Future appreciation passes to non-charitable beneficiaries.

164
Q

What is a CLAT?

A

A Charitable Lead Annuity Trust that pays fixed income to charity for a period, with the remainder going to non-charitable beneficiaries.

Can be inter-vivos or testamentary.

165
Q

Fill in the blank: A QPRT is a ________ that holds a person’s residence and allows them to live rent-free.

A

Qualified Personal Residence Trust

The grantor must rent the home at fair market value or move out at the end of the term.

166
Q

What does a Spousal B-Trust do?

A

Utilizes the decedent’s maximum unified credit and allows the surviving spouse to obtain income as needed.

Assets are not included in the surviving spouse’s estate at death.

167
Q

What is a Qualified Domestic Trust (QDOT)?

A

A trust for non-citizen spouses that allows the estate to qualify for the marital deduction.

This is crucial for estate tax planning in mixed-nationality marriages.

168
Q

True or False: Special Needs Trusts preserve eligibility for government benefits.

A

True.

They provide for extra services not covered by public assistance programs.

169
Q

What is an ILIT?

A

An Irrevocable Life Insurance Trust that removes life insurance from the owner’s estate.

Must survive three years to avoid inclusion in the estate.

170
Q

What is a Family Limited Partnership?

A

A pass-through entity consisting of family members that allows property transfer at reduced costs.

It provides income tax reduction and protection from creditors.

171
Q

What is a Private Annuity?

A

An agreement where the buyer pays the seller for life, with no collateral required.

Payments continue even if the buyer dies before the seller.

172
Q

What is the penalty for a frivolous tax return?

A

$5,000.

This penalty applies if the tax return is deemed to have no merit.

173
Q

What is the maximum compensation considered for contribution formula?

A

$345,000.

This is relevant for retirement plan contributions.

174
Q

What is the measure of total risk in investments?

A

Standard deviation.

It quantifies the volatility of investment returns.

175
Q

What is the 300 deduction for educators?

A

A deduction for educator expenses up to $300.

This applies to eligible educators for unreimbursed expenses.

176
Q

What is the waiting period for Social Security disability benefits?

A

5 months.

Benefits begin after this waiting period.

177
Q

What is the penalty for early withdrawal from an annuity purchased before 8/14/82?

A

FIFO method applies for tax purposes.

This affects the tax treatment of withdrawals.

178
Q

What does the Endowment Effect refer to?

A

The tendency to overvalue items owned, affecting negotiation decisions.

This can lead to suboptimal choices in trades or sales.

179
Q

What is the tax treatment of damages received for personal physical injuries?

A

Excluded from income.

Only damages for physical injuries or sickness are excludable.

180
Q

What happens if a client doesn’t have children regarding the GSTT?

A

There is a special exemption for the 37.5 rule.

This affects generation-skipping transfer taxes.

181
Q

What is the penalty for a deficiency in tax payments?

A

20% tax penalty.

This applies to underpayment of taxes owed.

182
Q

What is the maximum exclusion for educational assistance programs from an employer?

A

$5,250.

Amounts above this threshold are considered taxable income.

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