Acronyms and Charts to Remember

Question 1

Home Owners Insurance Section 1 and 2

Answer 1

Acronym: A.B.C.D.E.F

Section 1 Coverages (A-D)
1. A: Dwelling and attached structure
2. B: Other structures (removed structures)
3. C: Personal Property (items in home)
4. D: Loss of Use (pays while you can’t use)

Section 2 Coverages (E-F)
1. E: Personal Liability (pays damage and cost of defense)
2. F: Medical Payments to Others (even when insured is not liable) DOES NOT COVER INSURED

Question 2

Asset Type Tax Treatment

Answer 2

1:Trade or Business #1 is a 1231 Asset
2: Trade or Business #2 is a 1245 Asset

Question 3

Insurance Risk Management Guidelines

Answer 3

Acronym: A.T.R.R
1. Avoidance: High Severity High Frequency
2. Transfer (Insurance): High Severity and Low Frequency
3. Reduction: Low Severity and High Frequency
4. Retention: Low Severity and Low Risk

Question 4

Charitable Donation AGI Ceilings

Answer 4

Cash Donation:
1. However much cash was given
2. Limit: 60% of AGI

Ordinary Income Property:
1. LESSER OF: FMV or Basis
2. Limit: 50% of AGI

Long Term Capital Gain Property (Stock):
1. FMV or Basis…you choose
2. FMV Limit: 30% of AGI
3. Basis Limit: 50% of AGI

Unrelated Use Property (Church sells donated property):
1. Basis of Property
2. Limit: 50% of AGI

Question 5

What are the Systematic Risks

Answer 5

Acronym: P.R.I.M.E
P: Purchasing Power Risk
R: Reinvestment Rate Risk
I: Interest Rate Risk
M: Market Risk
E: Exchange Rate Risk
1. BETA is used to measure systematic Risk: used to measure the risk arising from GENERAL MARKET MOVEMENTS (NOT S&P500)
2. Coefficient of determination determines what % of portfolio risk is due to systematic risk

Question 6

Steps to the Financial Planning Process

(ALWAYS remember what step you are in)

Answer 6

Acronym: U.I.A.D.P.I.M:

U: Understand Clients Personal and Financial Circumstances
* obtain qualitative and quantitative information about client
* use the information to assess the current sitution
* MUST furnish copy of ADV
I: Identify and Selecting Goals
* Ask or help define goals and slect assumptions/ estimates
* Select and Prioritize client goals; discuss unreasonable goals (MUST discuss unreasonable goals in this step)
A: Analyze clients current course of
action and alternatives
* Analyze current course of action (advantages/ disadvantages)
* Analyze alternative courses of action
D: Develop financial planning Recommendations
* select 1 or more recommendations designed to maximize clients goals and objectives
P: Present Financial Planning Recommendations
* Start by asking if there have been changes since last meeting
I: Implement Financial Planning Recommendations
* Address implementation responsibilities (who is responsible)
* Identify/ Recommend Products and services to meet goals
M: Monitor the plan
* Periodically meet to evaluate performance and update
* Establish who has monitoring responsibilities of the plan
* CLIENT RESPONSIBILITY: to notify cfp of changes
* CFP RESPONSIBILITY: Update the plan recommendations

Question 7

Bond Yield Summary (Premium/Par/Discount)

Answer 7

1. When Market Interest Rates DECLINE; Price of Bond goes UP
2. When Market Interest Rates INCREASE; Price of a Bond goes DOWN
3. A bond IS MOST LIKELY to be called by issuer when bond is selling AT A PREMIUM or if rates HAVE RECENTLY decreased

Question 8

6 Activities of Daily Living

Answer 8

Acronym: B.E.D.T.T.C
* B: Bathing
* E: Eating
* D: Dressing
* T: Transferring (Ability to walk or move from a bed to a chair or wheelchair)
* T: Toiletting (ability to us and get on/ off toilet)
* C: Continence (Ability to control bladder/ bowl movements)

Question 9

What Does an Investment Policy Statement Establish

Answer 9

Acronym: RR-TTLLU
OBJECTIVES
1. R: Return Requirement
2. R: Risk Tolerance
Constraints:
1. T: Time Horizon
2. T: Taxes
3. L: Liquidity
4. L: Laws
5. U: Unique Circumstances

Question 10

Life Insurance Dividend Payout Options

Answer 10

Acronym: C.R.A.P.O
* C: Cash/ Check
* R: Reduce future premiums
* A: Accumulate at Interest
* P: Paid Up Additions
* O: One year term/ extended term insurance (5th option)

If it is a mutual life insurance company:
1. It is owned by it’s policyholders
2. they benefit from increased earnings through dividends

Question 11

What are Non-Capital Assets

Answer 11

Acronym; A.C.I.D
A: Accounts Receivable (Taxed at Income)
C: Creations/ copyrights held by creator (Taxed at Income)
I: Inventory (Taxed at Income)
D: Depreciable Property (DEPENDS)

REMEMBER:
1. Collectibles or art NOT held by creator are taxed at 28%

Question 12

Options (in/at/out)

Answer 12

Question 13

Duties of a CFP Professional

Answer 13

Acronym: F-D.I.P

F: Fiduciary Duty
1. Duty of Loyalty:Place the interests of the Client above the interests of the CFP
2. Duty of Care: must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client’s goals, risk tolerance, objectives, and financial and personal circumstances
3. Duty to Follow Client Instructions
D: Diligence
1. Must provide professional services and in a TIMELY Manner
2. Be Thorough with the client
I: Integrity
1. Honesty; Candor;
2. NEVER: scheme; deceit; fraud….difference of opinion is ok
P: Professionalism
1. Treat Clients; prospects; and others with dignity and respect

Question 14

Options Strategies

Answer 14

1. BUYING CALL options offers the most potential for return (UNLIMITED)
2. Buying a Put: Portfolio Insurance
3. Maximum Loss on a LONG Option contract is the PREMIUM

Question 15

Roth IRA Distribution Tax Steps

Answer 15

Steps to Solving Tax on Roth Distributions

Step 1: Contributions:
1. Contributions ALWAYS come out O.I tax free
2. Contributions ALWAYS come out Penalty free

Step 2: Conversions:
1. Conversions are ALWAYS O.I Tax free
2. Conversions are Penalty Free IF they meet BOTH 5 year rule and 10% exception

Step 3: Earnings:
1. Earnings are taxed at Ordinary Income or 10% unless they meet both the 5 year rule and 10% exception

Question 16

Above Line Deductions (FOR AGI)

Answer 16

1. Trade or business expense (ordinary; Necessary; and reasonable)
2. Loss of sale or exchange on property
3. One half of self employment tax paid
4. Contributions to IRA; HSAs; 401(k); Pension; Profit Sharing; etc
5. Interest on Student Loans
6. Educator Expenses
7. 100% of health insurance premiums paid by the self employed individual

REMEMBER:
1. These can be taken with below line deductions or standard deductions
2. Child support and Alimony (if after 2018) CANNOT be taken as a deduction to income!

Question 17

Below The Line Deductions (FROM AGI)

Answer 17

1. Charitable contributions
2. Limited Casualty Losses (Federally Declared Disaster)
3. Medical expenses IN EXCESS of 7.5% of AGI
4. Interest on mortgage (limited)
5. Interest on investments (limited)
6. HELOC Interest: ONLY if used for home improvement
7. Mortgage insurance premiums
8. Taxes (state, sales, local, and property):
9. Long-Term Care Premiums (DETERMINED BY INSURED’S AGE)

Question 18

Standard Deviation (when asking for probability of return)

Answer 18

For Standard Deviation Chart (from left to right)
.5%->2%->13.5%->34%->34%->13.5->2%->.5%

Steps to determine probability:
1. Plot the Mean (the mean is the center of the bell curve)
2. Plot out 1, 2, and 3 STDEVs (add an subtract STDEV from center)
3. 6 different STDEVs (3 stdevs on each side of mean)
4. Line up above chart with each
5. Determine probability based on which STDEV a particular return is in

Question 19

Passive Activity 2 Filter Method

Answer 19

General Information:
1. Loans INCREASE the basis of the partner based on his contribution/ ownership%
2. At Risk Business Interest CAN qualify for an UNLIMITED income tax deduction in the current year

What REDUCES amount AT RISK:
1. distributions made to the investor

What INCREASES amount AT RISK:
1. Cash Contributed by the investor
2. An investor’s portion of a loan in the business where they are liable

How to calculate suspended losses and amount you can deduct

Question 20

Gross Estate

Answer 20

What is included in the Gross Estate:
1. Any property owned at death
2. Interpolated Terminal Reserve+Unearned Premium
3. 3 Year Lookback: Gift tax paid (NOT GIFT); life insurance (when insured is decedent); Revocable Transfers
4. Transfer with Retained Interest OR with reversionary interest is LESS THAN 5% (gift with strings attached)
5. Revocable Transfers and Revocable Trusts (transfers with ability to alter or revoke a transfer)
6. Survivorship Annuities (NOT straight life)
7. Joint With Rights of Survivorship (JWrOS)
* If Spouse: 50%
* Non Spouse: % contribution Rule
8. Tenancy by Entirety: 50%
9. General Power of Appointment of Decedent (UNLESS limited by HEMS)
10. QTIP Property

EVERYTHING above is valued at FMV at Date of Death EXCEPT:
1. Closely held business (takes valuation discounts)
2. Financial Securities (AVG of High and Low trading price of the day of death)
3. Life Insurance (Interpolated Terminal Reserve + Unearned Premiums)
4. Life Insurance if decedent was insured: Death Benefit is in Gross Estate
5. Value of APPRECIATED securities IF DECEDENT DIES WITHIN 1 year will use CARRYOVER basis and holding period

Question 21

Entity Selection Chart
1. How Much Liability
2. Tax Concept
3. Owner Income
4. Tax File Document
5. Set Up Simplicity and Costs

Answer 21

Pass Through Entities:
1. Sole Proprietorships
2. Partnerships
3. LLCs
4. S-Corporations
What Entities Pay Quarterly Estimates:
1. Sole Proprietors
2. Corporations
3. Trusts
Who Files Schedule C (1040)
1. Everyone EXCEPT S-Corps and C Corps

Question 22

Property Titling Information:
1. Ownership %
2. Included in Gross Estate
3. Included In Probate Estate
4. New Basis

Answer 22

Question 23

Determining Marginal and Effective Tax Rate

Answer 23

Marginal Tax Rate:
1. Where does TAXABLE income fall within

Effective Tax Rate:
1. Find which Marginal Tax Bracket the client falls in
2. [(Taxable Income) - (amount over)] X Marginal Tax Rate + Pay

Question 24

Unsystematic Risk:

Answer 24

A:
B:
C:
D:
E:
F:
G:
1. Unsystemati risk CAN BE REDUCED through diversification
2. A fully diversified portfolio has NO unsystematic Risk

Question 25

Rental Home Stuff

Answer 25

General:
1. No income on the rental of a vacation home for less than 15 days is included in gross income
2. Rental Property CAN be depreciated over 27.5 years
3. Uncollected rent IS NOT deductible

NOT Rental Property if:
1. Rented LESS than 15 Days
2. Owner can rent less than 15 days and not have tax consequences on rent received

When home is considered a Rental Property:
1. deduct all expenses and costs (even if creating a loss)
2. Can depreciate over a 27.5 year

Mixed Use PROPERTY if Owner uses GREATER of:
1. Owner uses GREATER OF 14 Days in a year OR
2. 10% of Rental Days
* Expenses are allocated between rental and personal use
* Only deduct expenses UP TO income earned on property
* CANNOT take a loss on property

Question 26

1. Yield To Maturity (TVM Calculation)
2. Yield to Call (TVM Calculation)

Answer 26

YTM
1. Read Question. If it pays SEMI Annual; must enter everything as semi annual (N;PMT;2XIR)
2. N = (Years to Maturity) X (2)
3. PV = - purchase price of bond
4. PMT = (Annual Coupon) / (2)
5. FV = 1,000
ANSWER = (IR) X 2 if semi annual

YTC:
N= how long until bond can be called (call option in x years)
PV = - (Currently trading at)
PMT = Coupon
FV = Call Price of Bond (usually higher)
IR= Solve for this

Question 27

Dollar Weighted Return (Use CF Function on Calculator)

Answer 27

Dollar Weighted Return Steps (if multiple investments are made)
1. Enter each cash flow into CF in chronological order (REMEMBER if you make an additional investment, must place the negative sign in front of investment amount
2. Enter end of year balance or value of the account as final cash flow
3. [Shift]; [IRR]

Question 28

Buy/Sell Agreements AND Split Dollar

Answer 28

General
1. Used primarily to buy the dead partner’s ownership interest
2. Can be life insurance or used with disability insurance
3. provides sufficient assets to perform the continuation agreement and provides efficacy
Stock Redemption Plans (MUST have corporation)
1. Insurance is purchased by the company. At death, the company uses death benefit to purchase decedents ownership
2. Easiest to manage; especially when over 3 owners
3. Company CANT deduct premium payments; but benefit is tax free
4. NOT included in the estate of the owner
5. DOES NOT INCREASE BASIS for surviving partners!!!
Cross Purchase Plans:
1. Insurance is purchased by the different owners on eachothers lives
2. # of Policies = (# Owners) X (# owners - 1)
3. should be selected if the surviving partners expect to. sell their interest in business during their lifetimes
4. Premium payments ARE NOT tax deductible
5. DOES INCREASE BASIS for surviving partners!!!
6. benefit is paid to the beneficiary TAX FREE

Split Dollar Life Insurance:
1. An arrangement where an employee and employer share the premium cost and cash value for death benefit
2. Employer typically recovers cost of premiums and pays estate of decedent with remaining death benefit
3. Can be offered as a fringe benefit and MAY be used to fund a buy/sell stock redemption agreement
4. only premiums paid by the employer are subject to creditor

Question 29

Qualifying Child and Qualifying Dependent

Answer 29

Qualifying Child (for MFJ under $400,000)($3600-$3000)
1. Relationship Test: child OR brother/ 1/2 brother of tax filer
2. Abode Test: Must live with filer for OVER 1/2 of the year
3. Age Test: Under age 19 OR Student under age 24
4. Support Test: Child does not provide more than 1/2 of support during the year (scholarships NOT considered)

Qualifying Relative (MFJ $400,000):
1. Relationship Test: can be most any close family relative
2. Gross Income Test: MUST be LESS THAN $4,400 per year
3. Support Test: Must not provide more than 1/2 support
4. NOT a qualifying Child Test: Cannot be claimed as a qualifying child for anyone that year

Question 30

QTip Trust (C-Trust)

Answer 30

General:
1. Trust (election) that is created at death that grants surviving spouse lifetime right to income of trust and transfers remainder interest/ corpus to remainder beneficiaries
2. Allows decedent to direct/ control assets after death
3. Qualifies for marital deduction even though spouse cannot control corpus
4. must file form 706

Requirements and Rules
1. Income distributions must be made AT LEAST ANNUALLY to surviving spouse of decedent
2. Property transferred to this trust must qualify for UMD
3. MUST be included in gross estate of decedent spouse
4. Spouse MUST be able to compel trustee to sell non-income producing assets and reinvest in income producing assets
5. NO ONE can have rught to appoint property while the surviving spouse is alive

Benefits:
1. Spouse receives income but decedent controls asset bene
2. Reduces surviving spouse gross estate

Question 31

Highly Compensated vs Key Employee

Answer 31

Highly Compensated Employee:
1. Greater than a 5% owner
2. Compensation over $135,000

Key Employee:
1. Greater than a 5% owner
2. 1% Owner with greater than $150,000
3. Officer with compensation over $200,000

Question 32

Exceptions to the 10% Penalty for:
1. Qualified Plans AND IRAs (7)
2. Qualified Plans ONLY (2)
3. IRAs ONLY (3)

Answer 32

Qualified Distributions (Both QP and IRA)
1. 59.5
2. Death/ Disability
3. 72(t)
4. Medical Expenses in Excess of 7.5%
5. $5k for adopt
6. Federal Tax Levy

Qualified Plans ONLY:
* QDRO;
* Separate from Service after age 55

IRAs Only
* Health Insurance for unemployed;
* Higher Education
* 1st home purchase

Question 33

Pension VS DB and DC Plans

Answer 33

Pension Plans:
1. Defined Benefit Plans
2. Cash Balance Plan
3. Money Purchase Plan
4. Target Benefit Plan
* Pensions ALL have Minimum funding standards
* Pensions REQUIRE QJSA

Defined Benefit Plans (Employer bears risk/ 1 account ONLY plans required PBGC):
1. Defined Benefit Plans:
* Benefits older employees
2. Cash Balance Planse:
* DB plan, but looks and acts like a defined contribution plan
* Uses a STATED ACCOUNT BALANCE
* Benefits YOUNGER Employees

Defined Contribution Plans (Employee bears risk/ employee has individual account):
1. Money Purchase Plan
* Sponsor is REQUIRED to contribute annually
* Favors YOUNG employees
2. Target Benefit Plan
* Favors OLDER employees

Question 34

Section 303: Estate Stock Redemption

Answer 34

Section 303: Estate Stock Redemption
1. For shares of closely held business when decedent is a major shareholder (MUST be incorporated)
2. Decedent’s Estate can sell stock to generate liquidity
3. ONLY applicable if there is ACTUAL STOCK…not just ownership
4. Allows little to NO capital gain tax treatment due to step up in basis of the security in the estate at death

Section 303 Requirements:
1. Business must buy back securities
2. Value of securities must EXCEED 35% of the decedent’s estate
3. NOT available for public companies
4. CAN be Common or Preferred stock
5. Closely held business MUST have positive cash flow
6.

Question 35

HomeOwner’s Policy Forms

Answer 35

HO-1: Basic Form (covers basic perils)
HO-2: Basic and Broad (covers basic and broad perils)
HO-3: Special Form (Provides coverage on an “open perils” or “all risks” basis to dwelling)
HO-4: Contents Broad Form (Renters Insurance)
HO-5: Comprehensive Form (Dwelling and Personal covered under OPEN PERILS)
HO-6 Unit or Condo OWNER (covers all but building for the owner of a condo that is leasing to someone… DOES NOT cover roof or common elements)
HO-8: Modified Form (Covers Repair rather than replacement cost)

General:
1. Replacement Value: Cost to replace lost item
2. Actual Cash Value: Replacement Value - Depreciation

Question 36

Sale of Personal Residence (Section 121)

Answer 36

General:
1. You can EXCLUDE a large amount of the sale price of a primary residence if requirements are met
2. Single can EXCLUDE up to $250,000 in GAIN
3. MFJ can EXCLUDE up to $500,000 of GAIN

Requirements:
1. Must own and use the home as a primary residence in 2 of the last 5 years

Odd Situations to Know:
1. If a homeowner DEPRECIATES their home, they WILL have pay 25% depreciation recapture on the depreciation expense only

Question 37

Section 83b:
Special Restricted Stock Treatment

Answer 37

General:
1. Election that is made to receive special tax treatment on restricted stock or stock bonuses
2. Election tells the IRS that you would like to pay ordinary income taxes up front on all of your stock when given
3. 100% of stock is taxed at Income up receipt

Outcome:
1. Stock is taxed when granted by the employer at INCOME
2. Stock IS NOT TAXED once it vests even if there is a significant gain in the stock
3. Stock can be taxed if sold after the vesting

Question 38

Section 179:
Election for New Business Production Property

Answer 38

Section 179: Using business equipment to offset earnings:
1. Using newly purchased production property (like manufacturing equipment) to offset business earnings
2. Can elect to immediately offset UP TO $1,080,000 (for 2022) of business tangible property placed in service during the year AGAINST Net Business Income

Rules of Section 179:
1. Can ONLY offset UP TO Net business income (cant create a loss)
2. CANNOT exceed cost of the property put in service
3. Cannot use Section 179 for realty or production of income property. NOT FOR RENTAL PROPERTY
4. The amount expensed reduces depreciable basis.
5. You can carry forward losses
6. Paint/ vehicles ARE NOT a deductible expense
7. MUST be business equipment (computer systems, etc)

Question 39

Capital Gains

Answer 39

Short Term Capital Gains (Held 1 year or less):
1. Taxed at Ordinary Income Tax Rates
Long Term Capital Gains (Held OVER 1 year)
1. Income Tax bracket determines capital gains tax rates:
2. Can be: 0%; 15%; 20%
Collectible Taxable Gain (tax on collectibles)
1. 28%

Netting Long/ Short Capital Gains:
1. Net Short-Term Capital Gains and Short Term Cap. Losses
2. Net Long-term Capital Gains and Long-Term Capital Losses
3. Net Long and Short Term: if loss; offset UP TO $3,000 of ordinary income and carry forward any additional losses
4. REMEMBER: Short term losses are take AHEAD of Long term losses to offset Ordinary Income

Things to Remember:
1. Maximum Capital Losses = amount to offset capital gain + $3,000
2. If you have long term capital losses and short term capital losses; SHORT TERM get subtracted first for income offset
3. Land CANNOT generate a loss UNLESS it is business related
4. Personal Property converted to business property takes LOWEST basis between FMV and on transition or original basis
5. Final Income Tax Return (after death): can take a $3,000 capital loss BUT NO MORE CARRYFORWARDS after death

Specific Identification Method (when selling shares of STOCK ONLY!!! (NOT mutual Funds))
1. Client must use FIFO (first in first out) method for UNLESS they elect this method
2. Specific Identification Method allows taxpayer to CHOOSE which collection of shares to sell

Question 40

Insurance Vocab Words

Answer 40

1. Aleanation (Aleatory - Think alienation): states that benefit values of the contract can/ will be uneven
2. Adhesion: Take it or leave it and no negotiations (ambiguities help insured)
3. Contestability: Insurance has 2 years to prove that insured lied about something on the application
4. Suicide Clause: if suicide is committed within first 2 years, it IS NOT covered. Is covered after 2 years
5. Individual Policy Issue: This document is issued when a life insurance policy has been accepted and is in force

3 Principles of Legal Contracts:
1. Indemnity: Insures is ONLY entitled to compensation to the extent of financial loss (CANT make $)
2. Subrogation: Insured CAN’T receive compensation from Insurer AND 3rd Party
3. Insurable Interest: Life Insurance = Inception ONLY Property Insurance = BOTH Inception and Time of Loss

Insurance Authority Types:
1. Express Authority: Written in a contract and legitimate
2. Implied Authority: Actions that are part of an agents ability and takes place between Company and Agent
3. Apparent Authority: When a 3rd part BELIEVES that the agent has authority, but NONE actually exist

1. Structured Settlements for personal inury are income tax free
2. **Waiver of Premium: Allows Policy to stay in force WITHOUT paying premiums. Only allowed for terminally ill **

Question 41

Liability Amounts for Insured and Insurer

Answer 41

How Much is Insured Liable For:
Insured = (H.C Cost - Deduct) X Insured Co-insurance + Deduct
* amount below the oop maximum

How much is Insurer Liable For:
Insurer Liability = (H.C Cost) - (Insured Portion/ Liability)

Question 42

Social Security Survivorship Benefits

Answer 42

When Decedent is FULLY insured (40 quarters):
1. Children under 18 are always covered (19 or under if CURRENTLY in highschool)
2. Spouse if Caretaker of children under 16 (Called “Child in Care” benefits)
3. Spouse age 60 or older if worker is fully insured
4. Dependent parents age 62 or older if worker is fully insured. (paying for over 1/2 support)
5. Ex spouse if they were married for over 10 years AND SHE IS AGE 60 OR OLDER (taking care of kids does not matter)

When Decedent is Currently Insured
1. Spousal benefit ONLY if caring fro a child under age 16
2. Benefits to a child under 18 (19 if in highschool/ secondary)

Odd Rules:
1. When decedent is fully insured and survived by a disabled child, their benefits TERMINATE when they marry an able bodied person
2. If a widow remarries at or below age 50, they WILL NOT BE ENTITLED to collect on deceased spouse

Question 43

Federal Reserve (Monetary) AND Government (Fiscal)

Answer 43

Federal Reserve (Monetary):
1. Reserve Requirement (FED Funds Rate): Percentage of of deposits a bank must maintain in cash
2. Discount Rate:Overnight interest rate at which member banks can borrow from the Federal Reserve to meet reserve requirements
3. Open Market Operations: When the Federal Reserve Buys or Sells government securities
4. Excess Reserves: money that a bank holds at the Federal Reserve or Central Bank in excess of the reserve requirement

Congress (Fiscal Policy):
1. Anytime that government is spending money = Expansion
2. When congress CUTS TAXES = Expansion
3. Increase in debt (spending) = Expansion

Question 44

Important Education Funding Vehicles

Answer 44

529 Plans:
1. Two Types: Savings Plan; Prepaid Tuition Plan
2. After tax money for funding, but Tax free if used for education expenses
3. 10% penalty if NOT used for education expenses
Asset of the Student:
1. Businesses
2. Investments/ Brokerage Accounts
3. UTMA/UGMA Accounts
Asset of Parents:
1. 529 Plan = Asset of the parent if set up by the parent
2. 529 Plan = Asset of the grandparent if set up by grandparent
3. Distributions from the 529 are NOT counted as student income if owned by the parent or student
4. Distributions if owned by GRANDPARENT ARE considered income by student (save balance till senior year and take ALL out senior year is best strategy)
Excluded Assets:
1. Personal Residence/ Personal vehicle
2. Life Insurance
3. Retirement Plans; IRAs; ROTHs
Gifting:
1. Annual Contribution = $16,000 per parent or $32,000 MFJ
2. 5 year Frontload (MUST file form 709)= $80k single OR $160k MFJ
3. If a large gift is made in year 1 that are under the 5 year maximum must be pro-rated if parent want to contribute the following year Yr 2 Max = (Maximum 1 Yr gift) - [(Yr 1 Gift)/5]

Question 45

Life Insurance Nonforfeiture Options

Answer 45

General:
1. Non-forfeiture options are used if a policy lapses due to lack of premium payment
2. Can also be used if owner no longer wants to pay for the policy, BUT still wants benefits

Options Available for Personal Policy:
1. Cash Surrender Value (surrender policy in exchange for surrneder value)
2. Extended Term Option: Uses cash value from policy to purchases a term life insurance policy
3. Reduced Paid Up Insurance: Purchases a reduced permanent insurance policy and no premiums are due (fully paid up

Nonforfeiture Options Available for Group TERM Insurance
1. A GROUP TERM policy can ONLY be converted to an INDIVIDUAL Cash Value Policy AT CURRENT AGE RATES

Question 46

Types of Life Insurance

Answer 46

1. Term Life Insurance
* Pure insurance protection that pays a predetermined sum if insured dies in a period of time
* Use it or Lose it insurance
* no cash value; investing; or savings component
2. Whole Life/ Permanent Life Insurance
* Whole life policies provide lifetime protection if premiums are paid as agreed.
* Whole life policies have a savings or investment component with earnings accruing….. Invested in GENERAL Account
* Whole life policies provide tax deferred growth of cash value.
* Whole life provides permanent protection until age 100-120.
3. Variable Life:
* The cash value is invested in stock, bond, and money market mutual funds. An opportunity for higher returns on cash value exists with variable life.
* Cash Value invested in Separate or Sub Accounts
* The death benefit and cash value fluctuate based on investment performance.
4. Universal Life:
* The insured may adjust: Premiums paid, face value of the policy, and cash value (adjustable death benefit + Premiums)
* The insured does not direct the investment portion of the cash value.
* Cash value can be used to actually pay the policy premiums. Cash value grows tax deferred
5. Variable Universal Life:
* A product with investment options such as stock, bond, and money market mutual funds.
* There is no minimum guaranteed rate of return or interest.
* The cash value is invested in a separate account or sub account, not the insurer’s general account. Policy Owner chooses the investments
* The cash value is not guaranteed but in the event of an insurance company failure, the separate account will not be treated as an asset of the insurance company.

Question 47

Wash Sales

Answer 47

Define Wash Sale:
1. when an individual sells or trades a security at a loss and, within 30 days before or after this sale, buys the same or a substantially identical stock or security

Outcome:
1. prevents a taxpayer from taking a tax deduction for a loss on a security sold in a wash sale.
2. MUST go back to the original basis

Question 48

Roth vs Traditional IRA

Answer 48

Ask Yourself: WHEN DO YOU WANT TO PAY THE TAX???
1. If you want to pay the tax NOW = Roth IRA
2. If you wnt to pay the tax LATER = Traditional IRA

RMDs On IRAs and Roths:
1. Traditional IRA: MUST take RMD by April 1st after age 72 (every year after by DEC 31)
2. Roth IRAs: NO RMDs
3. Beneficiary Traditional IRA: Follow RMD Rules
4. Beneficiary Roth IRA: DOES have to take RMDs

Question 49

Medicare

Answer 49

Parts to Medicare:
1. Part A: Basic Hospital Insurance
2. Part B: Dr. Insurance (Supplementary Medical Insurance)
3. Part C (Medicare Advantage): Private Insurance that is an alternative to traditional Medicare
4. Part D: Prescription Drug Coverage

General:
1. DOES NOT provide health care coverages for services received outside of the U.S.
2. Medicare is an 80/20 split with NO STOP LOSS LIMITS
3. Disability is defined as ANY OCCUPATION
4. Lump Sum Death Benefit: $255 (Paid as long as Fully OR Currently insured)
5. Skilled Nursing is the HIGHEST level of care
6. When you are employed, Medicare provides SECONDARY health coverage, employer provides primary

Benefit Calculation:
1. First 20 Days: MEDICARE PAYS EVERYTHING
2. Next 80 Days (21-100): UP TO $200 per day
3. After Day 100: Medicare Pays $0

What’s NOT Included in Medicare Coverage:
a. Dental care/ dentures
b. Cosmetic surgery
c. Hearing aids
d. Eye exams
e. Initial preventive visit and annual wellness visits
f. Custodial Care

Question 50

Types of Bonds and Bond Info:

Answer 50

EE Bonds:
1. Primarily for Education
2. Pay fixed interest rate with NO INCOME
Series I Bonds
1. Bonds that are primarily purchased as inflatino hedges
2. Fixed interestrates and PRINCIPAL is adjusted for inflation or CPI
Corporate Bonds:
1. Pay Fixed Interest Rate
2. Principal IS NOT protected
Zero Coupon Bonds:
1. Pay NO INTEREST… sold at discount and mature at par
2. ALWAYS has the highest duration of any other bond
3. Taxed on “phantom income”
Treasury Inflation Protected Securities (T.I.P.S)
1. Interest is FIXED…Income is fixed %
2. Principal at Maturity is VARIABLE and adjusted for inflation
Treasury Securities (NO STATE taxation):
1. T-Bills: Maturity of 0-1 Year (LOWEST DURATION)
2. T-Notes: 2-10 Years
3. T-Bonds: OVER 10 years (HIGHEST DURATION)

General Bond Information:
1. Bonds are less likely to be called at deep discount
2. Bonds WILL be called if they are selling at a PREMIUM (this is because bonds sell at premium when IR are HIGH)
3. Duration = Sensitiviy to IR changes (high duration = high risk/ high sensitivity)

Question 51

Strange Tax Concepts:
1. Minimum Tax Due to avoid penalty
2. Quarterly Taxes
3. Qualified Cafeteria Plan (Offered by Employer)
4. Donations to Political Campaign
5. Earned Income and FICA

Answer 51

Minimum Tax Due to Avoid Penalty
1. If AGI is UNDER $150,000: Client must pay LESSER OF: 90% of CURRENT year’s tax OR 100% of PRIOR year’s tax
2. If AGI is OVER $150,000: Client must pay LESSER OF: 90% of CURRENT year’s tax liability OR 110% of PRIOR year’s liability
* REMEMBER: ALWAYS penalized if you underpay taxes by MORE THAN 10% of amount due
* REMEMBER: If client pays QUARTERLY, divide tax liability by 4

Quarterly Taxes General
1. Individual pays estimated quarterly installments to the IRS
2. Who Pays: Lottery Winners; Self-Employed; Small Business Owners

Qualified Cafeteria Plan (Offered by Employer):
1. Contributions to the Cafeteria Plan DO NOT have to pay any FICA taxes

Donations to Political Campaign:
1. CANNOT take a deduction for political contributions

Earned Income and FICA
1. Earned Income is the only income subject to FICA
2. Even Retirement Plans are subject to FICA (NOT cafeteria Plans)

Question 52

Efficient Market Hypothesis:
1. CAPM Model
2. Arbitrage Pricing Theory

Answer 52

Efficient Market Hypothesis Forms
1. Weak Form:Historical information does not help investors get above average returns (rejects Technical Analysis)
2. Semi-Strong Form: Historical and Public information will not help achieve above avg returns (rejects tech and fundamental)
3. Strong Form: Historical; Public; and Private information will not give above avg returns (rejects tech; fund; and insider info)

CAPM General:
1. States that markets are efficient and return is predictive based on risk taken

APT General:
1. Developed as an alternative to CAPM Theory
2. APT Assumes markets MISPRICE securities (not perfectly efficient)
3. Goal is to take advantage of a TEMPORARY mispricing of securities by the market (mispricing is short term)
3. APT is a MULTI-FACTOR model and MORE FLEXIBLE due to multiple sensitivity measures

Question 53

Charitable Trusts to Know:
1. CRAT
2. CRUT
3. CLT

Answer 53

Charitable Remainder Annuity Trust (CRAT):
1. Provide a fixed annuity to the donor (MUST pay annually)
2. Term of the annuity may be life of donor OR no more than 20 years.
3. At death a CHARITY (501c3) is Remainder Beneficiary
4. The CRAT has a significant cost advantage (only requires ONE Valuation at funding) BUT MUCH more strict
5. REMOVES ASSET FROM ESTATE

Charitable Remainder Trust (CRUT):
1. Has much more flexibility than a CRAT
2. Can make contributions AFTER initial establishment (MUST be valued annually)
3. If the client’s primary objective is to maximize the income payments to the noncharitable beneficiaries (self)
4. Much more expensive and complicated
5. REMOVES ASSET FROM ESTATE

Charitable Lead Trust (CLT or Lead Trusts):
1. Remember “Income LEADs”… reverse CRAT
2. Gove CHARITY an income stream for a period of time THEN gives remainder beneficiary remaining assets
3. the grantor will receive an income tax deduction at the inception of the trust.
4. REMOVES ASSET FROM ESTATE if paid to different beneficiary

Question 54

Annuity Trusts (NON-Charity):
1. GRAT
2. GRUT
3. GLT

Answer 54

Grantor Retained Annuity Trust (GRAT):
1. an irrevocable trust that pays a fixed annuity to the grantor for a defined term and pays the remainder interest of the trust to a noncharitable beneficiary
2. The GRAT is funded by the grantor with a transfer of property, and the annuity can be a stated dollar amount, fixed fraction, or a percent of the initial fair market value of the property transferred to the GRAT.
3. MUCH MORE STRICT THAN: GRUT
4. If donor dies during GRAT Term: Entire amount is included in estate and assets have carryover basis

Grantor Retained UniTrust (GRUT):
1. Similar to a GRAT EXCEPT it is much less strict as assets can be added for entire term of the trust
2. More expensive because assets must be valued annually
2. If donor dies during trust term: Entire amount is included in estate and assets have carryover basis

Question 55

Irrevocable Life Insurance Trus (ILIT)

Answer 55

General:
1. A properly executed ILIT will remove life insurance proceeds from the GROSS ESTATE AND Probate
2. The purpose of an ILIT is to prevent an insured party from having incidents of ownership in the life insurance policy on his life.
3. When an ILIT is created, the grantor often wants to qualify the gifts to the ILIT for the gift tax annual exclusion so that his applicable gift tax credit amount will be available for other planning either during lifetime or at death
4. Since an ILIT is irrevocable, transfers to the ILIT are usually made subject to a Crummey withdrawal right on behalf of the beneficiaries
5. Often used to provide liquidity to an estate…ILIT purchases assets from the estate

An ILIT Accomplishes:
1. Vehicle that avoids generation skipping transfer tax
2. Makes proceeds available to surviving spouse
3. Excludes assets from Gross Estate
4. Excludes proceeds from Probate
5. Shelters premiums up to gift tax exclusion

Special 3 Year Lookback Rule:
If you fund an ILIT with an existing policy, the IRS will look back three years, meaning that if you die within three years of funding the ILIT, the policy will be considered part of your estate rather than the ILIT.

Question 56

Common Estate Plan Trust:
1. Revocable Trust
2. Irrevocable Trust
3. Testamentary Trust

Answer 56

Revocable Trust:
1. Trust that is created during the life of a client and can be changed or updated
2. Trust Assets MUST be included in Gross Estate
3. Trust AVOIDS probate

Irrevocable Trusts:
1. Trust that is created during the life of the owner
2. Trust creator generally relinquishes control over anything that has been placed in the trust
3. As a result, avoids BOTH Gross Estate and Probate!
4. Exception: if residual benefit to the creator

Testamentary Trust:
1. Trust that is created AT DEATH by last will and testament
2. DOES NOT AVOID Gross Estate OR Probate

Question 57

Insurance Transfer for Value

Answer 57

Death benefit of life insurance is Tax Free UNLESS Transferred for Value
1. Occurs if life insurance policy is exchanged for value
2. Basis received is tax free, but benefit over basis is taxed at income
3. Remeber: BUYER pays the taxes

Transfer for Value EXCEPTIONS
1. Transferred to insured
2. Transferred to a partner of insured where insured works
3. Transferred to a corporation where insured is a shareholder
4. Transferee takes the transferors basis in the contract
5. Stock Redemption (entity owned buy/sell) ARE NOT taxed on death benefit

Transforee Tax Calculation: Transforee (BUYER) Pays Tax On:
* Death Benefit - Basis - Additional Premiums Paid

Question 58

1031: Like Kind Property Exchanges

Answer 58

General
1. Properties in trade MUST be considered like kind in their purpose and function
2. If properly executed, DEFERRAL of tax consequences (Realized but NOT Recognized)
2. Property that DOES NOT qualify: Primary Residence; Property outside the United States
3. 45 Days to identify a new property
4. 180 Days to complete transaction

Define Boot:
1. Cash received in addition to property received
2. Debt relief from exchange (financing on property)
3. Any additional items (equipment)

If Boot is RECEIVED in Exchange:
1. Must immediately PAY TAX on the amount of Boot Received
2. Basis Remains the same

If Boot is PAID in Exchange:
1. NO tax is to be paid on amount give
2. INCREASE basis in property by amount of basis

Question 59

Non-Qualified Retirement Plan
1. 403(b) Plan (TSA)
2. 457(b) Private Plan
3. 457(b) Public Plan

Answer 59

403(b) Plan (Tax Sheltered Anuities):
1. Retirement Plan for: Public/ Private Schools OR 501c3 OR churches OR other education institutions
2. Deferral Limit: $20,500
3. Normal Catch Up: $6,500
4. 15 Year H.E.R Organization: $3,000 for employees working for 15 years (can take 5 times) (NO age requirement)
5. Maximum Deferral: $30,000 (can take BOTH catch ups)

457(b) PRIVATE Plans (501c3 Organization NO CHURCHES):
1. Retirement Plan for KEY employees/ HCEs ONLY
2. NOT protected by a trust
3. Deferral Limit: $20,500 Plus any Catch Up
4. Final 3 Year Catch Up ONLY: 3 years before normal retirement age (in plan), you can DOUBLE your annual deferral IF you have unused deferral from previous years

457(b) PUBLIC Plans (Government Organization):
1. All employees that are eligible may contribute to plan
2. PROTECTED by a trust
3. Normal Catch Up (only Public): $6,500
4. Final 3 Year Catch Up ONLY: 3 years before normal retirement age (in plan), you can DOUBLE your annual deferral IF you have unused deferral from previous years
5. CANNOT take both catch ups together

REMEMBER:
1. Can max out 457(b) Plan AND 401(k) Plan

Question 60

Generation Skipping Transfer Tax

Answer 60

General:
1. prevents you from deliberately skipping your children in your estate plan in favor of younger generations to bypass potential estate taxes due upon your children’s deaths.
2. the maximum tax rate is 40%
3. Gift tax can be avoided by annual gifting of 16k per year or 32k per year for MFJ (gift tax exclusion)
4. Payment DIRECTLY to a hospital/ school/ etc IS NOT gift

Skip Person Definition:
1. Anyone 2 generations or more that is in the same family
2. Anyone UNRELATED that is more than 37.5 years younger than the donor

Exceptions:
1. If the client has no living children (their children died), then they CAN gift to grand children and not worry about GSTT. the 37.5 rule DOES NOT APPLY either

Question 61

Disability Insurance Information

Answer 61

Any Occupation (MOST RESTRICTIVE definition):
* Must be unable to perform ANY occupation to receive benefits
* WAY LESS EXPENSIVE
Own Occupation (LEAST RESTRICTIVE definition):
* Can’t perform your own occupation (even if you can perform other jobs
* Way MORE EXPENSIVE
* REMEMBER: My Job is EXPENSIVE!
Split Definition:
* Begins with own occupation; then moves to modiefied any occupation (suited for through education and training)
Social Security Integration:
* Once social security begins paying out, disability payments to you go down
* Socia Security Integration is LESS EXPENSIVE
General:
* Probation Period = period of time insured must wait before specified illnesses or injuries are covered
* Noncancelable and guaranteed renewable CAN be renewed
* Insurer can change benefit if employer changes job
* Premiums are NOT deductible by employer

Question 62

Long Term Care

Answer 62

Qualified Long Term Care Policy
1. Premiums ARE Tax Deductible
2. Income received IS taxable to the individual once received
3. More standardized and have MORE STRICT triggers

Non-Qualified Long Term Care Policies:
1. Premiums Are NOT Tax Deductible
2. Income received is GENERALLY not taxable
3. Much LESS standardized; therefore more LIBERAL triggers

Triggers:
1. 2 of 6 ADLs
2. Mental Heaalth/ Alzheimers diagnosis

Employer Benefits:
1. If EMPLOYER pays all long term care cost, the amounts received by the employee ARE TAXABLE WITHOUT REGARD to other sources of income

Question 63

Crummey Powers

Answer 63

Crummey Provision:
1. Explicit right of a trust beneficiary to withdraw some, or all, of any contribution to a trust for a limited period of time, generally 30 days, after the contribution.
2. Beneficiary is given power of apointment
3. Makes a gift of PRESENT INTEREST (so exclusion can be taken)
4. Crummey Power allows contributions UP TO annual exclusion amount per person (anything OVER the annual exclusion IS considered a taxable gift)

5/5 Lapse Rule
1. If a trust has more than one beneficiary, the 5/5 Lapse Rule must be applied
2. a taxable gift is deemed to have been made when a power to withdraw an amount in excess of the greater of $5,000 or 5% of the trust assets has lapsed, or not been used by a beneficiary.

Question 64

Special Use Valuation (Section 2032A)

Answer 64

1. Reduces the value of REAL PROPERTY (usually a farm) used in a business when it is in an estate
2. This REDUCES overall estate tax due because property is valued at less
3. MAXIMUM Reduction is 1,230,000 and indexed

Question 65

Taxability of Life Insurance

Answer 65

Death Benefit:
1. Death benefits are generally excludable from income taxation
Life Insurance Policy Dividends:
1. Not taxable up to return of premiums
2. Amount above premiums are taxable
Withdrawals and Loans:
1. IF MEC: Taxable at LIFO Basis: taxed on O.I basis until cash value or ln equals accumulated premiums (basis). Subject to 10% penalty before age 59.5
2. NOT MEC Withdrawal: Withdrawals are tax free up to premium (basis). Then taxed on a FIFO basis
3. If Not Mec Loans: Loans ARE NOT taxable
If Policy is Surrendered DURING LIFE:
1. All benefits taken (lump, interest,etc) are ONLY taxed above basis at O.I

Question 66

Product Life Cycle (4 Stages)

Answer 66

Cycle in Chronological Order:

Startup:
* Market is not yet established
* Sales are minimal
Growth:
* Market is established and sales are STRONG
* Competitors begin to enter the market
Maturity:
* Sales slow down
* Industry consolidates
Decline:
* Sales decrease substantially
* Competitors fail

Question 67

Special Needs Trust

Answer 67

General:
1. A trust that is funded with parent assets or other sources that is designed to provide for someone with special needs WITHOUT penalizing their ability to qualify for government assistance programs
2. Irrevocable trust that is protected from creditors and creditors of the special needs individual
3. Provides supplemental income to programs like medicaid and social security

Question 68

Social Security Integration in Retirement Plans

Answer 68

General:
1. Social Security Integration allows employees that make OVER the social security wage base to add more to their retirement benefits
2. Reverse Discrimmination (benefits higher paid employees)

Plans that CAN:
1. Defined Benefit Plans
2. Defined Contribution PENSION PLANS (Money Purchase and Target Benefit)
3. Profit Sharing Plans
4. SEP IRAs

How does it work (STEPS):
1. Base % = 0 -$147,000: Benefit = Stated Plan
2. Excess % = $147,000 - $305,000 = LESSER OF BASE OR 5.7%

Question 69

FSA VS HSA

Answer 69

HSA General:
1. An HSA account is an account that allows individuals to make tax deferred contributions into an invested account that rolls over annually and is tax free (if used for Qualified Medical)
2. Must have a high deductible plan
3. Maximum Contribution: $3,650 (Single); $7,300 (Family)
4. Catch Up Contribution (over 50): $1,000
5. Can pay for LTC UP TO CERTAIN LIMITS
6. Penalty on Distributions (for non-qualified):
* Ordinary Income ONLY if over 65
* Ordinary Income AND 20% if UNDER 65

FSA General:
1. Similar in concept to HSA EXCEPT amounts that can be carried forward are limited ($570 can be carried over)
2. Does have a wider list of applications including child care expenses
3. contributions cannot be invested

Question 70

Special Tax Sections
1. Section 83b
2. Section 121
3. Section 179
4. Section 303
5. Section 2032A

Answer 70

Section 83b: For Restricted Stock:
* Election to pay O.I Tax on restricted stock NOW and NOT pay tax when it vests (even if appreciated)

Section 121: Sale of Personal Residence:
* 250k or 500k capital gain exemption for sale of primary residence

Section 179: New Business Equipment Offset Earnings:
* You can offset earnings UP TO 1.08 million if new business equipment was purchased during the year

Section 303: Large Shareholder Estate Stock Redemption:
* Allows the closely held company to purchase decedent’s stock with no capital gain treatment to decedent estate

Section 2032A: Special Use Valuation (Farm)
* Reduces Gross Estate that has a sizeable farm because value of property is reduced