All Flashcards

Question 1

Q

Alien Spouse

Answer

A

Future interest gifts always subject to gift taxes
Terminable interests do not qualify for marital deductions
Max annual gift of $159k
Use a QDOT to transfer assets

Question 2

Q

Business Entity Liability & taxes

Answer

A

Sole prop - unlimited liability & both halves of SE tax
Gen. partnership - unlimited liability, SE taxes, flow-through (K1) - terrible business form! - can have speical allocations
Limited partnership - liability limited to capital invested; special allocations; LPs must be hands off; one general partner
Limited Liability Partnership (LLP) -
Limited Liability Company (LLC) - can be single member (much better vs. sole prop); check-box taxation (choose your path)
C-Corp - separate entity
S-Corp - separate entity, but flow through taxation! owners who are also EEs get W2 income. only pay SE on salary, not dividends

***liability insurance very expenses for sole prop/gen part***

Question 3

Q

Coefficient of Determination (r squared)

Answer

A

% of variability in dependent variable that can be correlated/attributed (but not caused by) to changes in a second/independent variable
Must be 70%+ for Beta to be reliable
can also be used to pick a benchmark for your portolio - pick the one with the biggest r-squared
defines amount of systemic risk in security, the rest is unsystemic

Question 4

Q

ESPP

(EE Stock Purchase Plans)

Answer

A

At the time of the grant, the option price may be as much as 15% lower than the fair market value of the stock.
ESPPs do not have any individual alternative minimum tax (AMT) consequences
An ESPP is a nonqualified plan. Employees may participate in ESPPs without being considered an active participant for purposes of IRA deductibility
ESPPs may exclude part-time workers.

Question 5

Q

flexible spending account (FSA)

Answer

A

2 types: Medical and Day Care

no FICA! or federal or state taxes

Medical

maximum amount for medical expenses = $2,750
not provided to self-employed persons
cannot be used for long-term care
do not cover OTC drugs
contribution cannot be changed mid-year
big deal is that if funds are unused they are lost, except maybe a $500 carryover to the next year
cannot transfer funds into HSA

Day Care

maximum salary reduction for dependent care = $5,000

Question 6

Q

Geometric Mean

3%
7%

−7.6%

9%
5%

Answer

A

Geometric mean (Assume an investment of $1)

PV = −1

FV = (1 + 0.183)(1 + 0.007)(1 − 0.076)(1 + 0.119)(1 + 0.025) = 1.2625

N = 5

Solve for I/YR = 4.7727, or 4.77%

Question 7

Q

Gifts given w/in 3 years of death

Answer

A

o Gift tax paid included in gross estate
o Asset included in taxable estate, as adjusted taxable gift (not in gross estate)
o Donee continues to receive the carryover basis (not stepped up)

Question 8

Q

Designated vs. Non-Designated

Eligible vs. Non-Eligible

Answer

A

non DB = non-human! e.g., charity, estate
- death b4 RBD = 5-year rule
- death on/after RBD = continue payments
- ***worst option, as it comes out so fast***
DB = human!
- Eligible Spouse - eligible for a stretch (recieve over thier lifetime)
  - death b4 RBD = 1) roll into their own retirement, 2) distribute based on decedants RBD (inherited acct); 3) 10 year trigger rule
  - death on/after RBD = 1) continue distributions; 2) roll into own IRA
- Eligible Non-Spouse - (disabled, chronically ill, not more than 10 years younger, minor child)
  - death b4 RBD = 1) 10 years or 2) begin year following death and use bene’s life expectancy (most tax efficient, as it spreads the payments over the longest timeframe!)
  - death on/after RBD = continue distributions on bene’s OR decedents life expectancy
- Non-Eligible - (usually adult child or grandchild) can’t get a stretch (very testable!)
  - death b4 RBD = 10 years
  - death on/after RBD = 10 years

Question 9

Q

Test of Qualified Plans to Ensure Enough NHCEs are Covered

Ratio Test

Beauty Co. employs 200 nonexcludable employees, 20 of whom are highly compensated. Sixteen of the 20 highly compensated and 125 of the 180 non-highly compensated emploSaveyees benefit from the Beauty Co. qualified pension plan

Answer

A

1) Calc % of HCE covered

The percentage of highly-compensated employees covered by the plan is 80% (16 ÷ 20).

2) Calc % of non-HCEs covered

The percentage of non-highly compensated employees covered by the plan is 69% (125 ÷ 180).

3) Divide non-HCE ratio by the HCE ratio

The plan exceeds the 70% required by the ratio percentage test (69% ÷ 80% = 86%).

Question 10

Q

Required Beginning Distribution Date

Answer

A

April 1st (NOT 15th) of the year following the attainment of 72

Question 11

Q

SS - Currently vs. Fully Insured - with respect to survivorship

Answer

A

Currently (quarters)- requires 6 of the last 13 credits – survivor benefits for spouse caring for child; dependent benefits up to age 18 or 19 if in high school
Fully - requires 1 credit per year since age 21 with a minimum of 6 and a maximum of 40 (eligible for life) – survivor benefits for spouse and parents (calculate by age minus 22)
- retirement benefits, spousal benefits, dependent benefits, dependent parent benefits (62+), surviving spouse if caring child under 16, widow benefits if 60+
Disability - anyone age 31 and older must have at least 20 of the most recent 40 credits ending with the disabling event. Before age 31 a lower number of credits is needed.

Question 12

Q

Straddle

Answer

A

Long Straddle - purchasing a put and a call on the same security, at the same exercise price, for the same period of time - benefits when price moves more than the premium paid - so investor expects price volitility

Short Straddle selling a put and call - benefit if price is stable

Question 13

Q

Test of Qualified Plans to Ensure non-HCE are Receiving Benefits

Benefits Test

The average benefits accrued for the highly compensated is 8%. For the non-highly compensated, the average accrued benefit is 3%.

Answer

A

Divide the Non-HCE benefit by the HCE benefit

The plan fails the average benefits test (3% ÷ 8% = 37.5%).

Question 14

Q

Disability Insurance: Personal vs. Business

Answer

A

Business - can deduct premium as a business expense, but proceeds are included in gross income and are taxable
Personal - cannot deduct premiums, but are recieved tax free

business = tax deductable, then taxable income

personal = non-tax deductable > tax free /not taxable

Question 15

Q

Trust Types

Answer

A

Simple - all income distributed annually
Complex - can retain income
revocable - grantor pays taxes, avoids probate, but still in gross estate
Irrevocable - out of estate and bene pays taxes
Testamentary - created by will, still goes through probate
Special needs - bene receiving gov. assistance, pays for additional needs
Pourover - collects assets from other sources
HEET - avoids GSTT taxes, payable only to medical and education institutions

Question 16

Q

1031 Exchange - calc’s

Answer

A

1) Realized gain = fmv (n) - basis (o) – boot given/+ boot received
2) Recognized gain = less of - realized gain or boot received (***if not boot received, always $0***)
Basis of New Property
- AB of Old Property
- - any gain recognized (pay taxes on, raises basis)
- - any boot paid (actual out of pocket cost, raises basis)
- - any boot received ($$$ into pocket, need to pay taxes on, reduces basis)

Question 17

Q

1202 Stock - QSBS “Qualified Small Business Stock”

Answer

A

Designed to help non-corporate investor sinvest in small companies, with capital gains breaks
Must be domestic corp and
Stock must be held for more than 5 years.
The capital gains rate is 28% - but only on the non-excluded amount - resulting in an actual rate of ~10%
If acquired 2/18/09 – 9/27/10 the taxpayer may exclude up to 75% of gain
If acquired earlier, the taxpayer may only exclude 50%.
If acquired after 9/27/10, 100%exclusion
If stock has not been held for five years, the gain would be taxable.

Question 18

Q

1244 Stock - Losses in small business stock (restricted stock)

Answer

A

Tax benefit apply to losses only!
$50K for single and $100K for MFJ
Can be deducted from active income

Question 19

Q

2032a

Answer

A

special use valuation for farm land - valued at current value vs. highest and best use
real property must be at lesat 25% of the AGE and
real and personal property must be at least 50% of AGE
must be owned for 5 of the last 8 years
must be passed to a family member (qualifying heir) that will be engaged for the next 10 years!

Question 20

Q

2503(b) vs. (c)

Answer

A

2503(b)

Bad boy trust
income must be distributed annually
but trustee can decide when to distribute corpus

2503(c)

c - college
income may accumulate
assets given to bene at age 21

***gift exclusion available for both***

Question 21

Q

401K - 5 types!

Answer

A

Always a profit sharing plan wiht a 401K provision,

DC plans - max of 19.5K deferral, with 6.5k catch-up if 50+; total contribution of 58K (with ER contribution)

Additional non-discrimination testing (ADP/ACP)

Traditional IRA 401k
Roth 401k
Safe Harbor - 70 of non-HCEs coverd
Simple
Solo

CODA -usually cash or deferred arrangement

Question 22

Q

403b - speical catch-up

Answer

A

19.5 standard deferral
6.5 over 50 catch-up
3k if have 15 years of service

Question 23

Q

403b/TSA

Answer

A

private tax exempt - 501c
annuities and mutual funds only
primarily EE contributions, but may be some ER contributions
think of as a 401K for tax exempt orgs
if matching contributions, then ACP testing - it’s the C in 501c

***special catch-up for HER (health, education, religion) with 15 years of service = $3K***

Question 24

Q

412e Plan

Answer

A

Uses only Whole Life and Annuities to fund plan
much of the admin work is off loaded to the insurance company
can dump a bunch of $$$ into - good for small business with conservative outlook

Question 25

Q

Section 457 Plans

Answer

A

***elegible vs. non-elegible (top hat plans***

Eligible

non-qualifed deferred comp plan, which means not subject to 10% EWP
state and local government plans (non-church!)
contribution $19.5k
special catch-up provisions in years before normal retirement age (2x’s base amount, so $39K!)
limited in-service withdrawals
distribution: death, retire, emergencies
can allow for ROTH contributions
***not considered active participant status***
often not available to “rank and file” EEs
no NUA, as it’s not a qualified plan

Question 26

Q

5 & 5 Power - Trust Income

Answer

A

Lapses of general powers of appointment above the 5-and-5 power in the three years prior to the holder’s death are included in the holder’s gross estate (in addition to the full amount of any unused general power of appointment for the year of death).

Question 27

Q

7-Pay Test - Violation

Answer

A

The 7-pay test requires that the total premiums paid never exceed the amount of level annual premiums paid if the policyholder had been charged a level amount that would pay the policy up after 7 years.
If the level amount for a 7-pay policy is a $3,000 annual premium, then the premiums paid cannot exceed $3,000 in the 1st year. In the 2nd year, the total premiums paid cannot exceed $6,000.
If at any time the total premiums paid exceed the net level premiums that would have been paid up to the time in question, the policy is considered a modified endowment contract and its tax treatment changes.

Question 28

Q

83b made for restricted stock

Answer

A

Recognize the income immediately, rather than waiting until there is no longer a substantial risk of forfeiture.
Election must be made within 30 days of the grant (by writing a letter to the IRS)
then gains are recognized as LTCG….vs. OI
Immediately include, as ordinary income, the fair market value of the stock at receipt, less any amount paid for the stock.
In the event of forfeiture, the employee may have a capital loss if he paid any amounts toward the purchase of the restricted stock.
“congressionally mandated gamble”

Question 29

Q

A-Trust - Power of Appointment

Answer

A

Marital Trust -

surviving spouse has GPOA (big difference)
terminable interest, but still qualifies for deduction (like C)
income payable to spouse at least annually (like C)
asset included in surviving spouses estate (like C)

Question 30

Q

ADP & ACP Test - only used for 401Ks and is an additonal test

Answer

A

Compares HCE to the R&F

ADP - testing pretax deferrals (from EE)

ACP - testing matching contributions (from ER)

Test Criteria:

0 to 2% = 2x’s non-HCE
2% to 8% = 2% + non-HCE
>8% = 1.25x’s non-HCE

Remedy: If fails or about to fail, 2 options:

corrective distributions (give back to highly comp’ed EEs, won’t be happy), or
nonelective contribution or matching contribution (cost the ER $$$) - 100% vested immediately

Question 31

Q

Alimony Recapture

Answer

A

P1 + P2 - 2P3 - (3 year agreement amount) = Recapture

Question 32

Q

Annuities

Answer

A

First in, first out (FIFO) basis recovery applies only to annuities purchased before August 14,1982 - otherwise LIFO
If the annuity is owned by a non-natural person (such as a corporation), earnings within the contract are taxable each year.
Exchanging an annuity for a life insurance contract does not qualify for tax-free treatment under Section 1035.
An immediate annuity will not be subject to the early withdrawal penalty because it will satisfy the substantially equal periodic payments exception to the IRS 10% early withdrawal penalty.

Question 33

Q

Asset Allocation Strategies

Answer

A

Tactical asset allocation refers to deviating from a portfolio’s target asset allocation weights in the short term to take advantage of perceived opportunities in specific asset classes.
Strategic asset allocation is determining the target asset allocation percentages for a portfolio.
Rebalancing is periodically adjusting a portfolio back to its target asset allocation.
Dynamic asset allocation takes a multiperiod view of the investment horizon. In other words, it recognizes that asset (and liability) performance in one period affects the required rate of return and acceptable level of risk for subsequent periods.

Question 34

Q

Asset Suitability

Answer

A

Aggressive Growth = tech, small cap, EM
High risk, seeking income = high yield bonds
Growth = stock
Income Producing Stock = large cap, preferred, utilities
Growth, leaning conservative = balanced funds (50/50) or Asset Allocation fund
high tax bracket (32%+) = munis!!!
Income = Bonds
Safety of Principal = treasuries
Liquidity = money markets, CDs,

Remember…we’re in CFP Land…keep it simple

Question 35

Q

Bad Debt - Personal

Answer

A

non-business bad debt = short term capital loss in the year it becomes worthless (e.g., Joey borrows some money and never pays u back)

Question 36

Q

behavioral finance

Answer

A

Loss Aversion - remembering losses more than wins; holding on to losers for too long, thereby not accepting the loss
Confirmation bias - data that confirms current beliefs
anchoring - attaching to a number (usually) - comparisions from there
mental accounting - putting money into different buckets based, IRAs, vs. checking. vs. winning from lottery, credit card vs. cash
Illusion of control - belief in ability to personally control outcomes
Recency - putting more weight on recent information (EM did great last year, let’s invest!)
Hindsight bias - believing that they would have made a different better decision than what someone else did - i knew the crash was coming!
Herd mentality - follwing CNBC!
Endowment bias - emotional attachement assets they own, especially if inherited
Affinity Bias - preference for “home country” stocks, or stocks that “do good in the world” vs. which may have the best performance
Snake bite effect - becoming timid after taking a loss
Availability bias - preference for companies based on how familiar they are with them - starbucks!
Self Attribution - belieft that I earned all my wins, and external variables are responsible for my losses
Cognitive Dissonance - ignore information that does not agree with world views, as would create a psychological conflict
Self-Control = lack of self control, spend it all now, don’t worry about the fture

Question 37

Q

Bill, Notes, and Bonds

Answer

A

Bills

Do not pay interest and are sold at a discount
Have maturities up to one year

Notes and Bonds

Treasury notes and bonds provide semiannual interest payments.
Income from both Treasury bonds and Treasury notes is exempt from state income taxes.

Bonus - The federal government does not sell zero-coupon bonds. Brokerage firms create zero-coupon bonds by selling the interest and principal of Treasury bonds as separate securities.

Question 38

Q

Bond A is selling for $1,103.19 and pays a $50 coupon every 6 months. What would happen to the price of this 30-year bond if interest rates rose 2%?

Answer

A

1) Calculate the current interest rate

If the current value of the 30-year bond is $1,103.19, then the prevailing market interest rate is 9%

(PV = 1,103.19; N = 60; PMT = 50; FV = 1,000; solve for I/YR = 4.5 × 2 = 9.0%).

2) Adjust the current interest rate (+2%), then calculate the new price

If the interest rate increased 2 percentage points to 11%, the value of the bond would decrease to $912.75

(FV = 1,000; N = 60; I/YR = 5.5(11% ÷ 2); PMT = 50; solve for PV = 912.75, or $912.75). The difference equals $190.44 ($1,103.19 − $912.75).

Question 39

Q

Bond Ordering

Answer

A

CR = coupon Rate

Premium bonds:CR > CY > YTM

Par bonds:CR = CY = YTM

Discount bonds:CR < CY < YTM

Premium bonds - cost more because you’re getting you’re money back more quickly in high interest payments (vs. at the end)
Discount bonds - getting more cash back at end via par (why YTM is higher than CY)

Question 40

Q

Bond Portfolio Strategies

Answer

A

Ladder = minimize impact of interest rate changes
Barbell = more aggressive than ladder

Question 41

Q

Bond Swaping Strategies

Answer

A

substituion swap - more in municpal and corporate market,
intermarket spread - take advantage spread between bond types (corprates vs. govs) and buy and sells based on spread between them
rate anticipation - based on what you think the Fed is going to do (essentially market timing)
pure yield pickup - aka taking more risk, lower quality, longer maturity
tax swap - interest rate go up, prices go down = take a capital loss on a bond, and then buy one with “similar but not same” characteristics (not a wash sale) -

Question 42

Q

Bond Volatility - What Drives?

Answer

A

Low = large coupons, short-term, and short durations, lower ratings
High = low coupons, longer-term, high duration, higher ratings

Question 43

Q

Bonds Taxability

Answer

A

Bill (up to one year)

Interest
- State = No
- Federal = Yes

Notes (2 to 10 years)

Interest
- State = No
- Federal = Yes

Bonds (10 to 30 years)

Interest
- State = No
- Federal = Yes

Municipals

Interest
- State = No, if issued from your state
- Federal = NO

Corporates

Interest
- State = Yes
- Federal = Yes

Savings Bonds

Interest
- State = No
- Federal = Yes (but waived if EE bond used for eduction)
Cap Gains
- State
- Federal

Question 44

Q

Business Entertainment

Answer

A

100% = Transportation expense
50% = Business meal and tip
0% = Entertainment expenses are not allowed

Question 45

Q

Business Travel for Own Company

Answer

A

meals and tips are only 50% deductible
Calculate on per day basis
airfare (to and from) was transportation for business that would not change whether it was personal or not, so it is not pro-rated but rather fully deductible.
Airfare Deductibility Rules:
- Domestic: If primarily business then deduct all airfare. Prorata meals and lodging.
- Foreign: Prorata meals and lodging. Prorata airfare unless (then you can deduct all): < 7 days <25% on personal

Question 46

Q

Buy and Hold

Answer

A

very popular in CFP land
uses index funds
transaction costs are minimized

but not buy and forget…must still monitor and update on a periodic bases

Question 47

Q

Buy Sell - Taxation of Stock Redemption - Entity

Answer

A

Life insurance proceeds on a business owner’s life are NOT tax deductable to the business
The business entity buys the interest of an owner who dies.
The business owner’s estate usually does NOT recognize a taxable gain when it sells the deceased’s interest.

Question 48

Q

Buy-Sell for Partnership - Cross Purchase of Life Insurance

Answer

A

premiums for the life insurance are not tax deductible and the proceeds received from the life insurance are not taxable
number of policies = N*(N-1)

Question 49

Q

Bypass Trust - characteristics

Answer

A

NOT a marital trust

does not qualify for the marital deduction
fully utilizes the full applicable credit/exemption amount ($4,625,800/$11.7M)
best for appreciating assets - as assets will NEVER be taxed again
prevents overqualification of the estate i.e., too much to spouse
surviving spouse has HEMS power, but no annual distribution requirement
spouse can be the beneciary, but cannot be the sole bene
NOT included in surviving spouses estate
usually goes to the kids tax fee

also called, credit equivalency trust, credit shelter trust, or family trust

Question 50

Q

C Corp

Answer

A

C-Corp
- Pros
  - Limited liability for shareholders
  - raise capital
  - Continuity of business life
  - EE benefit plans
  - Separate taxable entity
  - corporate dividend exclusions (get a break)
  - 21% flat taxes - MAJOR advantage
  - 1244 stock (often tested!) – allows for up to $100K in losses against OI
- Cons
  - Double taxation (corporation taxed, then the share holders are taxed)
  - Lots of paperwork
  - capital losses NOT deductable
  - No preferentail LTCG rates
  - Accumulated earnings tax
  - Excess compensation rules
Special Taxes for C-corp
- Accumulated earnings – 20% penalty (same as highest LTCG tax)
- Personal Holding Company tax – individual starts a c-corp, 20% tax - call AAA for HELP

Question 51

Q

C Corp Earnings

Answer

A

Example

Max is the sole shareholder in the ABC Corporation.
ABC makes a distribution of $60,000 to Max.
This year, ABC has accumulated earnings and profits of $40,000. = then max dividends = $40K
Dividends can only be distributed to the extent of earnings and profits - so capped at $40K (rest is salary, cap gains, or return of basis)
Max’s basis for the stock he owns in the company is $7,000. = tax free return

How much of this distribution is taxable to Max as a capital gain? = $13K

dividends + salary = Gross income to owner
company wants to pay higher salary to avoid paying taxes on dividends, which are double taxed
Dividends are only taxable to the extent of the corp’s current and accumulated earnings and profits

Question 52

Q

C Corp Taxes

Answer

A

PHC - Personal Holding Company (20%) - if not really an active business, lots of pasive income
PSC - Personal Services Company (20%) - services company accumulated too much in earnings
- Call AAA for Help
- accounting, architecture, accuaries, health, engineering, legal, performing arts

Question 53

Q

C-Trust or QTIP Trust - Characteristics

Answer

A

Qualify for the marital deduction (that’s the “qualified” terminable interest trust)
Election made on From 706
Must pay income to the surviving spouse annually
Does NOT grant general power of appointment over the trust assets.
Grantor can determine where assets go with surviving spouse dies (likely to children of first marriage)
Asset are included in the surviving spouse’s gross estate
Protection is afforded against the surviving spouse’s creditors during lifetime and at death

Question 54

Q

Cafeteria Plan

Answer

A

Each employee has a certain number of dollars or credits which can be spent on a variety of benefits
A flexible spending account (FSA) is a cafeteria plan consisting of various tax-free benefits that are funded through salary reductions elected by employees each year.
Qualified benefits, which exclude the cash option, are an exception to the constructive receipt rules of income taxation.
The plan must include a cash option.
Appropriate when the employee mix includes young, unmarried people with minimal life insurance and medical benefits needs, as well as, older employees with families who need maximum medical and life insurance benefits.
Appropriate when the employer is large enough to afford the expense of such a plan.

Question 55

Q

Callable Bonds

Answer

A

Only likely to be called when trading a premium (not before!) - because interst rates have ALREADY decreased
Buy “deep discount bonds” if you don’t want your bonds called

Question 56

Q

Capital Asset vs. Ordinary Asset

Answer

A

***care because can only take losses on capital assets, not ordinary assets***

Anything except: (these are ordinary assets) - seet for the production of income
- A - Accounts or notes recieveable
- C - Copywrite or creative work
- I - Inventory
- D - Depreciable property used in a trade/business for the production of income (computer used in business is a favorite example ordinary asset)

***All ordinary assets that would result in ordinary income tax (not capital gain) if sold at a gain***

Question 57

Q

Capital Losses at Death

Answer

A

Only get $3K loss, but can use against ordinary income, however, canNOT carry it forward…like you, it’s gone… :(

Question 58

Q

Casualty Loss

Answer

A

Must be federally declared disaster or you get $0!

if declared disaster, then use the lower of

loss in FMV (old-new) or,
adjusted basis

Subtract $100 and then 10% of your AGI = allowable loss

***don’t forget the $100***

Question 59

Q

Charitable Contributions

Answer

A

Non-cash contributions to religious, public, and educational institutions and private operating foundations may not exceed 50% of AGI.
Long-term unrelated-use tangible property must use the lesser of basis or FMV (50% of AGI)
Ordinary income property is valued at the lesser of adjusted basis or FMV. (50% of AGI)
Charitable contributions by S corporations are a component of the net income reported on the shareholder’s K–1.
If the donations in cash, the AGI limit is normally 60%, however, there is a temporary CARES Act provision in place allowing for a 100% AGI limitation for cash donations.

Question 60

Q

Charitable Deductions for Public Charity

Answer

A

Either the basis or the FMV amount is available as a deduction, the % of AGI tells what is max amount for this year

Cash = up to 60% of AGI
STCG or unrelated use property = 50% of AGI against the lower of basis or FMV
Intangibles, related use property, real property = choice of:
- 30% of AGI against the FMV
- 50% of AGI against the basis

can carryover up to 5 years

Question 61

Q

Charitable Trust

Answer

A

CRAT
- 5 to 50% of initial FMV of asset
- for life or up to 20 term
- deduction = PV of retained income interest
- payouts taxed to the bene’s as OI or CG
CRUT
- 5 to 50% of assets - revalued annually
- for life or up to 20 term
- can put MORE contributions
- deduction = PV of retained income interest
- payouts taxed to the bene’s as OI or CG

Question 62

Q

Closely Held Businesses - Section 6166, 2032A, and 303

Answer

A

Section 6166 (installment payments of estate taxes) - requires the closely held business interest to be more than 35% of the AGE
Section 2032A (special use valuation) requires the value of the closely held business to be at least 50% of the AGE
Section 303 (closely held stock redemption) - must be a corporation.

Question 63

Q

COBRA Coverage - who/why and for how long?

Answer

A

Must have 20 full time EEs, part time counts for half
former EE pays up to 102% of cost

18 months

termination of employment - including retiring, voluntary resignation, being laid off, and being fired for anything except gross misconduct
a change in status (e.g., full-time to part-time)
Voluntary or involuntary termination qualifies the individual for 18 months (unless fired for gross misconduct, then you and your family get nada!)

29 months

Disability

36 months

death
divorce or legal separation causing the spouse and/or dependent children to lose coverage
child reaching an age where the child is no longer eligible to be covered
employee reaching Medicare age, and spouse and/or dependent child losing coverage as a result.

Question 64

Q

Concentrated Positions

Answer

A

Strategies

Sale via ESOP - bail out an owner of a closely held company
CRT - put the highly apprecaited in the trust, let the trust sell (tax free), then receive an income stream
Put Options - “protective puts” - like insurance - provides downside protection (often the right answer on CFP test), but allows client to remain invested and benefit from the upside
Zero Cost Collar - okay, but gives up on the upside - essentially a short straddle
Buy into an Exchange Fund - exchange your highly appreciated funds ($1M+) and buy into private partnerships

Answer 65

A

CR - triggered if an executive has the ability to access the funds or if the funds are securely set aside for the executive.
EB - triggered if there is an irrevocable transfer of funds made on the executive’s behalf that provides a benefit to the executive.

Answer 66

A

CR - triggered if an executive has the ability to access the funds or if the funds are securely set aside for the executive
EB - triggered if there is an irrevocable transfer of funds made on the executive’s behalf that provides a benefit to the executive

Answer 67

A

Convertible bonds can be converted into a specified number of common shares at the option of the investor.
Sold at a premium over the price of comparable non-convertible bonds - offer a yield that is less than the yield on straight bonds with similar risk and maturities.
When stocks sell for a price that is above the conversion price, convertible bonds sell for their stock values.
Have downside risk protection because they have the advantage of bonds.
Most convertible bonds are converted.
Most are callable, and companies often call their bonds to force conversion.

Answer 68

A

Sold at a premium over the price of comparable non-convertible bonds
Offer a yield that is less than the yield on straight bonds with similar risk and maturities.
Have downside risk protection because they have the advantage of bonds.
Most convertible bonds are converted.
Most are callable, and companies often call their bonds to force conversion.

Answer 69

A

Conversion Value = Par/Conversion Price (or ratio) x’s Market Price of Stock

Answer 70

A

Bond Prices do NOT change in a liniar way
concave to the left
steeper at lower coupons
flatter at high coupons

***meaing the duration formula is not exactly right*** (+ or - a %)

Answer 71

A

normalized metric of how 2 variable move together
-1 to 1 — must be, if you don’t get a number between these, re-calc! —
(r) = rho

Answer 72

A

absolute metric of how 2 variable move together
Based on standard devation and correlation coefficient
intermediate step - by itself doesn’t tell you much

Answer 73

A

contribution is limited to $2,000. (non tax deductable!)
qualified education expenses can be incurred for elementary, secondary, undergraduate, or graduate level education.
Coverdell Education Savings Accounts (CESAs) can be established for any child under age 18 (also contributions must stop at 19)
No taxes on qualified withdrawals
Must be half-time+ for room and board to be covered
Impacts family’s abilitiy to qualify for financial aid (if parents will be over 59.5, better to invest into roth - if funds are limited e.g., $2K/year)

Answer 74

A

if die during the term of a CRUT, does the PV go to your estate?

Answer 75

A

Currently - survivor benefits ONLY (no retirement of disability!!!)

A $255 lump-sum death benefit, which is generally payable to the insured’s spouse.
A widow or widower’s income payable to a surviving or divorced spouse with a dependent child under the age of 16.

Fully

A widow or widower’s income payable to a deceased worker’s spouse at age 65 or at age 50 if the widowed spouse is disabled.
Monthly retirement income of 100% of the worker’s primary insurance amount at the insured’s full retirement age (should have life insurance for immediate needs)

Answer 76

A

prior to age of majority, custodian has all the power, even if they’re not the parent
at age of majority, transfer must be initiated by the custodian (does not happen automatically, and cannot be intiated by CFP or anyone else..don’t have the authority)

Answer 77

A

The maximum permitted disparity, or the difference between the base contribution percentage and the excess contribution percentage, cannot exceed the lesser of the 2x’s the base contribution or base contribution + 5.7% (the Social Security tax rate attributable to OASDI).
- Therefore, with a base of 7%
  - 2x’s 7% = 14% or
  - 7% + 5.7% = 12.7%

Answer 78

A

EE - based on taxpayer - meaning deferral amount is aggregated across companies

ER - based on ER (ABC Co.), may contribute up to the $58K limit, regardless or what other ER (XYZ Co.) is doing

Answer 79

A

P&C -
- Home/commerical property - multiply the ratio *’s the loss, THEN subtract the deductable
- usually 50% of Schedule A (dwelling) coverage for personal property
Health -
- Pay deductable FIRST, then multiply by the coinsurance amount
- Large claim, just look at the MOOP
- Smaller claim, do the calculation

Answer 80

A

max annual benefit determined by 3 highest CONSECUTIVE earnings years

Answer 81

A

Limited to the lesser of $230,000 (2021) or

the participant’s compensation averaged over the 3 highest consecutive earnings years (do not need to be the most recent)

Answer 82

A

Either to be reallocated to remaining participants’ accounts or applied to reduce the employer contribution

***in DB account, can only be used to reduce ER contribution (as there are no individual accounts to allocate to)***

Answer 83

A

The plan must satisfy one of the following two tests

The first is the 25% test.
- No more than 50% of the employer contributions can be used to purchase whole life insurance.
- No more than 25% of the employer contributions can be used to purchase life insurance term or universal
The second test is the 100:1 ratio test;
- For defined benefit plans, a death benefit cannot exceed 100 times the expected monthly benefit for the employee.

Answer 84

A

Short = up to 2 year
Long = 2+ years and until certain age, usually 65

Answer 85

A

Dividends are taxable to the recipient as dividend income, but can only be distributed to the extent of the corporation’s current and accumulated earnings and profits

Answer 86

A

participating = pay dividends (return of premium)
usually only from mutual companies, if stock company, additional earnings paid to stock holders
Types
- cash - no taxes if less than basis, if >basis, then OI
- reduced premium - no taxes, just reduces payment for that year
- accumulate at interest - set aside in account and earn interest (can be taxable)
- paid up additions - adds to death benefit, no current taxes, paid-up so no more premiums - good if client is unhealthy and likely couldn’t get other insurance
- one year term - boosts death benefit for that year

Answer 87

A

Establishes the amounts taxable to the beneficiaries.
- if mixed between DNI and corpus, use an allocation
Limit the amount of distribution deduction that may be available to the trust.
Includes most normal income and expense items.
Capital gains are NOT included in the calculation of DNI (become additions to the corpus)

Answer 88

A

S Corporations and sole-proprietorships cannot deduct any premiums for group health insurance for owners. Non-owner employee health premiums are fully deductible to both entities.
Partners are able to deduct 100% of the health insurance premium on their individual tax returns.

Answer 89

A

Open market operations - buy and selling of treasuries
reserve requirement - change amount required at banks as a % of deposits
discount rate - amount charged to banks borrowing from the fed

Answer 90

A

Raise revenue
Economics and Growth Development (social objectives)
Price stability

Answer 91

A

Cash Value life insurance
- withdrawal = FIFO!!!
- surrender = allocation between basis and earnings
Cash Value - MEC (fails the 7-pay test)
- withdrawal or loans = LIFO -gain taxed as OI (ouch!)
- 10% penalty if <59.5
- surrender = allocation between basis and earnings
- death benefit - standard, income tax fee
Annuity
- withdrawal, loan = LIFO - gain taxed as OI
- 10% penalty if <59.5
- annuitization =
- - allocation between basis and earnings
    - no EWP penatly, as taking funds over lifetime!
    - if live beyond premium paid, then 100% taxable (good for you, this is the idea!)
    - if die before recovered premium, can recover basis as misc. deduction above 2%

Answer 92

A

Not included: retirement assets, personal property (cars, homes)
Included: income of parents and students, non-retirement savings & investment accounts of parents and students

Answer 93

A

RIA

Series 65: Uniform Registered Investment Advisor Examination.
Series 66: Uniform Combined State Law Examination.

BD Rep

Series 7: General Securities Registered Representative
Series 63: Uniform Securities Agent State Law Exam
The Series 65 is the Uniform Investment Adviser Exam. The registered investment advisor may also want to sell securities in which case the Series 7 and Series 63 would also be required for regulatory compliance and registration with states which the RIA was residing and transacting business.
The Series 66 is the combination of the Series 63 and Series 65 combined into one exam.

Answer 94

A

***everything passed to the owners and reflected on their tax returns/Schedule C***

Sole Prop
General Partnership
Limited Partnership
LLC (if non-c-corp selected)
S-Corp
- flow through entity
- pays owner a small salary - SE tax due on this portion (just half?)
- pay the balance as dividends - no SE tax

Answer 95

A

Nontaxable

deminimis (copiers, sporting tickets)
onsite athletic facilities
meals and lodging furnished for ER convenience
can target a specific group of EEs (e.g., executives)

Taxable

stipend for off-site athletic facility

Answer 96

A

if unmarried and would like to leave to children and charity
- revocable trust (flexibility), and use applicable exclusion ($11.7M) for kids, and rest to charity = $0 in taxes!
if married and kids
- leave IRA to husband, then marital QTIP and by-pass trust for the kids

Answer 97

A

1) Stock price (2nd price) following the date of the gift multiplied by the number of trading days between the inital trade (1st) date and the gift date
2) Stock price (1st price) directly preceding the gift date multiplied by the number of days trading days between the date of the gift and the next trading day.
3) Divided by the sum of the days before and after the date of the gift.

A - Price

B- Days

B - Price

A - Days

Answer 98

A

Donor’s adjusted basis + [(unrealized appreciation ÷ FMV at date of gift) × gift tax paid]

Answer 99

A

annual exclusion is available when a life insurance policy is transferred
a gift occurs if someone purchases a life insurance policy and designates someone else as the owner at inception
a gift occurs when the owner of a life insurance policy transfers the policy to someone else without adequate consideration
if a policy is transferred while premiums are still being paid, the gift tax value of the policy is equal to the sum of the interpolated terminal reserve and the unearned premium

Answer 100

A

NO coupon, do not provide steady payments
mortgage backed securities backed by federal gov.
pass through of principle and interest
however, cash flows not steady - if interest rates go down, people refi and don’t get the same upside (price apprecation) as normal bonds
same downside, less upside, so yield are higher

Answer 101

A

person had a job that did NOT contribute to SS
Reduces their spousal benefits by .667% (both while alive and dead (survivorship))

Answer 102

A

To be nondiscriminatory = must cover 70%+ of all EEs AND at least 85% of non-key EEs

Answer 103

A

Up to $50K

Deductable to ER
nontaxable to EE

Over $50K

Deductable to ER
Taxable to EE (but deductable)

***ER can always deduct 100% of the group insurance premiums they pay***

Table I Rates - creates imputed income

Most policies can be converted into permanent cash value policy (guaranteeed)

Answer 104

A

If leaving job, can often convert into a cash value policy, and usually without showing proof of insurability

Answer 105

A

$$$ put into a trust for a single skip person is subject to GSTT, because it’s a direct skip
Transfer to an irrevocable trust is a completed gift subject to gift tax
The donor is liable for any GSTT due on a direct skip (not the trust)
If donee has right to annual income from the trust, it is a present interest which qualifies for the GSTT annual exclusion.

Answer 106

A

Moral - dishonesty - slamming on brakes to cause car behind to rear end

Answer 107

A

HCE - used for minimum parrticpation/nondiscrimination rules - also use for group health - $50K - exclusion
- $130K
- >5% owner
- Top 20% test
- Safe Harbor test, 70% coverage tests
Key EEs - used to determine if plan is Top Heavy
- >5 Owner (same as HCE)
- Officer and $185K
- 1% owner and $150K
- Top Heavy = >60% of benefits going to Key EEs

Answer 108

A

A Abode
detached buildings B = 10% of A
Contents/personal property - C - Usually 50% of A
Loss of Use - D - usually 20% of A or 40% of C (same thing, just depends on what they give you)
Liability - section E
- covers damages to other people at home and away
Medical to Others - section F
- not based on liability, just if person is injured

Get Personal Property Floaters - jewlery, furs, guns,.

Answer 109

A

like a combo of Traditional and Roth account!!!

Above the line deduction, no FICA or F&S taxes
Catch-up provision of $1K for 55+
max contribution - $3600 for individual; $7,200 for family
can be established by ER or EE
tax free on way out
***can make a one-time trustee to trustee transfer from an IRA, limited by max contribution amount***

MSA

like, HSA, but for 65+ and on Medicare

Answer 110

A

Immunization attempts to protect the yield of a bond portfolio from changes in interest rates.
Expected to provide a specific return over the investment time horizon.
If interest rates rise during the investment period, the capital losses are expected to be offset by the gains on reinvestment income.
Duration is equal to the investor’s investment time horizon
Zeros play a big role because they don’t have reinvestment risk

***attempts to manage Interest Rate Risk and Reinvestment Risk***(for bonds, these offset each other)

Answer 111

A

People are EQUALLY as happy at any point along their indifference curve
Find the point where the indifference curve and the efficient frontier touch

Answer 112

A

if don’t disclose cancer diagnosis, then fraud, insurer does NOT have to pay
if insured misstates age, then adjust coverage as-if age was correctly stated

Answer 113

A

Aleatory - based on chance
Adhesion - take it or leave it
Unilateral - only one party is making a promise (i.e., Insurer)
Collateral source rule - just because I have insurance, doesn’t mean that you don’t need to pay
Estoppel - prevents company from claiming a right that they’ve waived
Tort
- Negligence
- Vicarious liability (parent to child; ER to EE)
Contributory negligence - if I’m even 1% at fault, then I can’t collect anything
Comparative negligence - % at fault - split between parties (much more common)

Answer 114

A

amortization period for intangibles is generally 180 months (15 years)
Other examples of Section 197 intangible assets include: goodwill, going-concern value, operating systems, patents, copyrights, formulas, and non-compete agreements.

Answer 115

A

The number of relevant elements of the client’s personal and financial circumstances that the Financial Advice may affect
The portion and amount of the client’s Financial Assets that the Financial Advice may affect
The length of time the client’s personal and financial circumstances may be affected by the Financial Advice
The effect on the client’s overall exposure to risk if the client implements the Financial Advice
The barriers to modifying the actions taken to implement the Financial Advice

Answer 116

A

Investment Grade = High or Medium Grade = must have an “a” in it, either all A’s or B’s with at least 1 A
Main Graders:
- Standards and Poors
- Fitch
- Moody’s

Answer 117

A

Best Efforts - the investment bank incurs zero risk
Private Placement - no more than 35 non-accredited investors may participate
Standby Underwriting - the underwriters purchase securities remaining after the initial offering at a predetermined price
Firm Commitment - all risk is shifted to the underwriter

Answer 118

A

4D IRS Child’s Meal at Home

Death
Disability
Divorce
Disaster
Insurance premiums for unemployeed (IRA Only)
Reservist
Substantially equal paymetns

child - $5K for birth of child - each parent

Medical expenses >7.5%
Education (IRA Only)
Annuitized Payments
Levied by IRS

Home - first time (wtihin 2 years) home buyer, up to $10K (IRA Only)

59.5

Answer 119

A

non-deductable contribution creates basis
create an allocation, and each distribution a part return of basis (no tax) and part gain (taxed)

Answer 120

A

If death of the IRA owner occurs after the required beginning date, then longer of:
- The deceased owner’s remaining life expectancy reduced by one each year
- The eligible designated beneficiary’s remaining life expectancy reduced by one each year
Eligible designated beneficiary = not more than 10 years younger than the deceased owner.

Answer 121

A

Cannot leave the money in his father’s IRA to accumulate
May receiving the entire amount as a lump-sum distribution
Or over a 10-year payout of the balance
If he does not clean out the account earlier, the entire account balance must be distributed by December 31 of the year containing the 10th anniversary of parent’s death
This is because a son who is older that the state-set age of majority is not an eligible designated beneficiary according to the SECURE Act.

Answer 122

A

designed to tie the interests of the executive to the company
great if the company is short on cash, and stock is hot…Tesla!
Grant - no tax at grant (must be at the current FMV of the stock)
Exericse - no tax at exercise, must be 1 year+ from the grant date (difference btw Grant and Exercise is called the bargin element)
bargin element at exercise is a positive AMT adjustment (preference item)
Sale - must be 2+ years from the grant date AND 1 year from exercise = qualified sale

if meet qualified sale, then gain above grant prices is considered LTCG

if they don’t meet either or both timeframes, then OI for the bargin element and capital gain (long or short) for the FMV less the excise price

Answer 123

A

ISO

May be granted only to employees, usually executives
Employee cannot transfer ISOs during the employee’s lifetime. ISOs can be transferred only at death.
cannot exceed 10 years
favorable tax treatment

NQSO

More rank and file
May be granted to employees, independent contractors, family members of the employee or independent contractor, or any other beneficiary
May be gifted to an individual or charity during the owner’s life or at the death of the owner.

Answer 124

A

only for the top EEs - like the CEO
ER buys it (not deductable, and is the beneficiary
not about the EE….other than thier life

Answer 125

A

Company is the owner and beneficary, thus…
premiums are NOT deductible as a business expense, and any benefit paid will NOT be taxable to the company

Answer 126

A

The interest-adjusted method considers the time value of money.
The net payment cost index method measures the relative net payment of a policy for a given term, assuming no surrender of the policy.
The net cost method is the most basic method; however, this method does not consider the time value of money.

Answer 127

A

When a beneficiary receives the death benefit from a life insurance policy funded within a qualified plan = not ALL tax free
The taxable portion equals the cash surrender value ($60,000) minus any costs included in the participant’s income during the participant’s life ($25,000)
So taxable amount is $35K

Answer 128

A

Human Life Value - how much the person would have made over their lifetime, based on current income, age, etc.
computer program - usual way
LIFE
- Liabilities (mortgage, debts)
- Income replacement (see below)
- Final Expenses (emergency fund, funeral)
- Education
Capital Retention - Income / Interest Rate (inflation adjusted) - leaves amount at the end
Capital Utililization - TMV - define how much income needed and then solve for PV, nothing left over

Answer 129

A

Automatic premium loan provision provides that the premium will automatically be charged against the policy cash value if it is not paid by the due date.
Reinstatement provision allows a policyholder to reinstate a policy after it lapses, but only if the insured can prove insurability
Nonforfeiture provision specifies what will happen to the cash value if the policyowner discontinues premium payments
Incontestability provision prevents the insurer from challenging the validity of a policy after it has been in force for a specific period.

Answer 130

A

opposite side of the same coin (protection)
Life - needed in case you die to soon (“win” by dying young - small premium and large payout)
Annuity - needed in case you live too long (“win” by living a long time - get back more premium than you put in)

you can’t win both ;)

Answer 131

A

<10K = vested balance (which can be up to 100% of balance)
10k to 20k = 10K (which can be more than 50% of balance)
20k to 100k = 50% of vested balance
100K+ = 50K
repaid within 5 years, unless home, then usually 10 years
level quarterly payments at a reasonable interest rate

Answer 132

A

tax deductable to ER
NOT taxable income to the EE

Answer 133

A

must be guaranteed renewable (HIPAA qualification)
must not have a cash value.(HIPAA qualification)
must conform to NAIC LTCI model regulation
cannot pay for expenses reimbursable under Medicare
there is no elmination period
must offer inflation protection.
should be recommended starting at age 50+
insured age dictates how much of their premum may be deductable as an itemized amount
people generally don’t let lapse

Answer 134

A

mostly custodial, meaning not getting better, Medicare doesn’t do much
usually paid by Medicaid, but this is welfare, must have used most of your assets
Home
Respite - gives primary care giver a break
Custodial - non-medical supervisory care
Intermediate - some nursing care
Skilled Nursing Care - highest level 24 hours a day - nurse and doctor
Hospice - final days

Answer 135

A

If you’re long a commodity, then you wan a short hedge, which is a transaction involving the sale of futures (creates a short position)
If you’re short a commdity, then you want a long hedge, which is a transaction involving the purchasing of a futures contract long position)

Answer 136

A

Personalty

Bonus depreciation - 100% in year 1
MACRS table -200% declining balance with half-year convention (only get half in first year, half in last year, so 5-year property actually takes 6 years)
straight line - still available, only makes sense if in a higher tax bracket in later years
Section 179 - $1.05M in year one (but not needed with bonus depreciation in play)

Realty - always use straight line

residential - 27.5 years
nonresidential - 39 years

Intangible

Section 197 - amortized over 15 years (180 months)

Depletion

Natural reources (e.g. oil and gas, gold)

Answer 137

A

Market Risk = Market Return - Risk Free Rate (part of CAPM calc)
Stock Risk Premium = Market Risk * Beta

Answer 138

A

Benefit pays the entire cost of the first 20 days
Partial coverage between Day 21 and 100
After 100 days - the patient must pay the entire cost

***skilled care only - nurse, doctor, 24/7 monitoring - big deal***

Answer 139

A

A - hospital statys
- 40 quarters for SS, then no premium!
- deductable and co-pays
B - physicians, outpatient
- does have a premium (comes out of SS check)
- co-insurance =20%
D - prescription drugs
- dougnut hole
C - Medicare Advantage (new plan)
- combines A, B, and D
- similar to pre-65 managed care
- not available in all areas

***once enrolled, can no longer contribute to an HSA***

Answer 140

A

alternative to Medicare Advantage plans
fills in the gaps to various degrees
A through N

Answer 141

A

Only for business depreciation of Personal Property

must be used if more than 40% of the property was placed in service during the last quarter of the year

Answer 142

A

Used if more than 40% of the property is placed in service in the last quarter of the year

Answer 143

A

Step 1: Compute the value of each future dividend until the growth rate stabilizes (Years 1-3).

D1 = $0.7600 × 1.035 = $0.7866

D2 = $0.7866 × 1.035 = $0.8141

D3 = $0.8141 × 1.035 = $0.8426

Step 2: Use the constant growth dividend discount model to calculate the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 4).

D4 = $0.8426 × 1.02 = $0.8595

V = $0.8595 ÷ (0.07 − 0.02) = $17.1896

Step 3: Use the uneven cash flow method to solve for the net present (intrinsi value of the stock.

CF0 = 0

CF1 = 0.7866

CF2 = 0.8141

CF3 = 0.8426 + 17.1896 = 18.0322

I/YR = 7%

Solve for NPV = 16.1659, or $16.17 (rounded)

Answer 144

A

bid is usually equal to its NAV
shareholder vote by proxy
12b-1 fees max of 1%

Answer 145

A

Nominal Return - Consumer Price Index = Real Return

Answer 146

A

agreement to defer must be in place BEFORE money is earned
represents an UNFUNDED promise
there must be a SUBSTANTIAL RISK OF FORFEITURE
if EE dies, funds are paid to the estate and taxed
EE’s pay FICA and Income tax when distribution occurs
409a requirements - if fail this test, lots of penalties

Unfunded:

promised to pay, very little security for EE
Top Hat plan - 457b

Informally Funded

funds actually set aside - Rabbit trust, corporate owned life insurance (no deduction for premiums)
available to creditors

Funded Plans

assets are set aside - secular trust
results in current taxation
beyond the reach of creditors
good if EE thinks tax rates will be higher in retirement (kind of like a Roth)

Answer 147

A

when NPV is $0 or greater!
as even at $0 it provides the return that the investor is seeking

Answer 148

A

Needed because executives are making above the 415 limits (make defined benefit of $230K, DC limit is $58K)

Elective Deferral - EE defers current income (what I do)

Supplemental

ER funded - Excess Benefit - makes up the difference between 415 limit and 25% of salary
Supplemental (SERP) - golden handcuffs/top hats - benefits paid over a long time period, but very lucrative

Answer 149

A

Straddle = buy a call and a put - benefits if price moves dramatically from current price
Short Straddle = write a call and a put - benefits if price is stable, allowing investor to keep the premiums
Protective Put - If own stock and want to protect profits = buy protective puts ~current market price
- Allows upside participation via the stock if prices rise
- Protects downside by allowing investor to put stock if price falls

Answer 150

A

Capital losses are the result of a transaction, and are subject to limitations
Ordinary losses result from something other than a transation (like what? theft? fire)

Answer 151

A

Over = too much to spouse
- created by “i luv u” will or everything JTWROS - everything to spouse
Under = too little to spouse
- too much in a b-trust that the spouse doesn’t have anything to live off of

Answer 152

A

Cannot claim losses in excess of your basis, even if active particiant

Answer 153

A

Suspended due to at risk = how much is at-risk/invested
supended due to passive activity = must have income to offset against…otherwise, loss must be suspended
can always get it out at the end, with the sale of the asset

***every PIG needs a PAL***

Passive Income Generator (PIG)

Passive Activity Loss (PAL)

Answer 154

A

Not needs based
Must be FULL time student
unlimited amount, but no more than the cost of schooling

it’s a PLUS to have wealthy parents

Answer 155

A

mode < median < mean

Answer 156

A

1) calculate the multiplier = Price/Earnings
2) calculate dividend increase = current x’s increase rate
3) multiply new dividend by multiplier

Answer 157

A

Issued by municipalities to provide local industries with funds.
Derive their debt service only from their revenues and do not depend upon the issuing municipality
More than 10% of the proceeds are used for private business use
Interest is an AMT preference item

Answer 158

A

plan cannot make loans to parties of interest (owners, fiduciaries)
limited amount of company securities
penalty of 15% when discovered
plan needs to put back into the shape it was before the prohibited transaction occured

Answer 159

A

each unto it’s own! (must be looked at individually) - they are stand alone entities
trade on exchanges and OTC

***NPTP (Non-Publicly Trader Partnership) or Private Placements = can be used to offset against other passive income***

Answer 160

A

QDOT would only be appropriate when the surviving spouse is not a U.S. citizen.
At least one trustee of the QDOT must be a U.S. citizen or U.S. corporation
Type of marital trust where all income must be distributed to the surviving non-U.S.-citizen spouse each year
QDOT treatment can be elected by the executor of the decedent’s estate.
can be an election on 706

***like a QTIP, but for a non-citizen spouse***

Answer 161

A

Applys to all pension plans
rights can’t be waived without the spouses notorized permission
QPSA - no benefit until the age at which the worker would have begun recieving benefits (should have life insurance)
*

Answer 162

A

can be used to avoid 2 probates is couple dies in close proximity (like within 6 months of each other)

Answer 163

A

They must be in writing.
The disclaiming party cannot have previously benefited from the interest being disclaimed.
They generally must be made within 9 months of the creation of the interest.
The disclaiming party cannot direct the disclaiming interest to other parties.

Answer 164

A

5-year holding period +

Death
Age (59.5)
First Time Home – up to $10k
Disability

Remember: Denver Area Fire Department

Answer 165

A

Holding period is more than 60 days in the 121 days surrounding the ex-dividend date.
If not met, ordinary income tax rates apply

Answer 166

A

With a QPRT, the grantor must survive the trust term to realize any estate tax savings.
After the trust term, the house goes to the beneficaries
The grantor makes a taxable gift upon the creation of the QPRT, although the gift is usually small.
If the grantor dies during the trust term, the entire value of trust property is included in the grantor’s gross estate. This is true of most grantor retained trusts.
***GRATs and GRUTs are remarkable because the value in the gross estate is only the value of the remaining payments. All other donor-retained trusts include the entire value of the trust property if the donor dies while the trust is in effect.***
The taxable gift will be based on the fair market value of the house (on the date of transfer) less the present value of the right to live in the house.
Vacation homes are often transferred to QPRTs.

Answer 167

A

Must meet

coverage ratios tests (70% of non-HCE (safe harbor), ratio test, or benefits test) - HCE vs. non-HCE
contribution and benefits limitations (section 415)
vesting requirments (graded and cliff)

Coverage tests

need to understand HCE ($130K, >5%, top 20%)
70% covered by: Percentage Test, Ratio Test, and Avg. benfits test
DB: 50/40 test - people before percentage

Plan becomes top heavy based on too much benefit going to Key EEs:

Key EEs = ($185K+, >5%, 1% and officer)
More than 60% of benefits/contributions (assets) go to Key EEs
DB - accelerated vesting and 2% per year requirement
DC - no change to vesting; but at least 3% non-elective contribution to little guys per year

Answer 168

A

Real estate returns are not highly correlated with stock and bond returns
Real estate can act as an inflation hedge, unlike traditional assets
Properties are heterogeneous, not homogeneous, increasing the complexity of real estate risk analysis.
Real estate is not easily divisible.

Answer 169

A

Individuals or MFJ can deduct up to $25,000 of rental real estate losses against active and portfolio income
However, 2 tests must be met to qualify for this exception.
- One test is active/material participation in the activity
- Ownership of 10% or more (in value) of all interests in the activity during the taxable year
In addition, the $25,000 offset allowance is reduced by 50% of AGI in excess of $100,000 with a complete phaseout at $150,000 AGI.
If MFS - then max of $12.5K, and phased out between $50K and $75K

Answer 170

A

Realized Amount = stock sale amount, less commissions (seems wierd not to back out basis…)

Recognized = realized amount, less amount paid (including commissions)

***commissions are included for realized and recognized calculations***

Answer 171

A

Use annual exclusion
Pay gift taxes 3 years before death
use basic trusts with crummey powers
use ILIT for insurance
use applicable exclusion amounts (e.g., use the whole exemption and fund a GSTT trust - this gets $$$ to second generation, which is the challenge for many HNW clients)
use charitable deductions - there’s a benefit to you

***estate tax due 9 months after death…really not long for a big estate***

Answer 172

A

Increases basis in mututal funds (even though not cash dividends like life insurance)

Answer 173

A

Personal Use - no more that the lessor of 14 days or 10% of rented days
Allocate expenses between personal and rental use %
$25K deduction against other income (MFJ and SF), up to $100K AGI, above reduced $1 for $2, until phased out at $150K AGI
Can take a loss and carry over (if high income, likely won’t capture until sold)

Answer 174

A

Rented less than 15 days
All revenue is excluded from tax payer’s taxable income

Answer 175

A

Mixed

Expenses allocated between rental use and personal use
Only deductible to the extent of rental income received (that is, the taxpayer cannot claim a loss)
can deduct mortgage interest and state taxes as itemized ductions
Losses may NOT be carried forward they are lost

Answer 176

A

used when grandchildren (subject to GSTT) are beneficaries
takes advantage of GSTT exemption for first spouse to die
Marital deduction is NOT lost

Answer 177

A

A majority vote of the shareholders
fails to meet the requirements of a small business corporation.
When more than 25% of gross receipts for 3 successive years come from certain types of passive income and the corporation has accumulated earnings and profits from its operations prior to the S election

Answer 178

A

Static risk includes losses caused by earthquakes and floods.
dynamic risk - related to the economy (inflation, market)
Speculative risk involves the chance of loss or gain (insurance tries to prevent)
Pure risk - only the opportuinty for loss = insurance
Fundamental risk affects a large group of people
Particular risk is personal and individual risk

Answer 179

A

Trigger Dates

Trigger in the year you turn 72 (can be delayed if still working and you own <5% of the company)
But initial distribution doesn’t need to be until 4/1 of the next year (age 73)
However, still need to take the year 73 RMD by 12/31 of 73rd year

Table 3, 2, 1

3 - standard table (uniform lifetime table)
2 - if spouse >10 years younger (Joint Life and last Survivor Expectancy)
1 - after account owner dies (???)

Answer 180

A

Qualified

59.5, Death, Disability ***no first time home buyer***
Distribution allocated between basis and earnings

Can this happen while still employed?

Answer 181

A

How to take out-

Avoid taxes and 10% penalty = 5 years + Death, Age, First Time Home Buyer, or Disability

if neither of the above, then-

Contribution (no tax, no penalty)
Conversions (no tax, EWP)
Earnings (income tax and penalty)

Roth and education, use in the junior and senior year, otherwise looks like income for the student

***can always use the higher education exclusion to avoid the 10% EWP on conversion and earnings, but income tax on earnings would still be due***

Answer 182

A

Taxed at vesting - Federal, State and FICA
can make the 83b

Answer 183

A

The S corporation business form avoids double taxation!

In a traditional corporation, the shareholders are paid dividends, which are taxed twice (once to the corporation and once to the shareholder). In the S corporation, the earnings are not taxable to the corporation and the shareholder’s receipt of the earnings is only taxed once.

Answer 184

A

The S corporation business form avoids double taxation
Commonly used for retirement purposes, allowing the retiree to draw a salary and avoid double taxation.
Also a useful tool when transferring income to a lower income family member because making the family member a stockholder allows items of income and expense to be transferred to the family member stockholder on the K-1.
Pass-through entity - no expenses are deductible by the corporation as it furnishes K-1s to the shareholders who then report items of revenue and expense on their personal income tax returns.
Partners, proprietors, and greater than 2% S corporation owners are not considered employees and are ineligible for fringe benefits (e.g., the employer paid group term life insurance of $50,000)
LIFO recapture tax applies only to S corporations
flow-through is not considered self employment income
extentions must be filed by 3/15, and SEP contributions can be made up until the extention deadline

Answer 185

A

Rules Avoided:

ADP test. (actual defferal)
ACP test. (actual contribution)
Top-heavy rules.

However are subject to coverage tests/general nondiscrimination rules

Contribiutions - 2 ways: (100% immediate vesting)

Dollar-for-dollar matching on elective contributions, up to 3% of compensation, and a 50% match on the next 2% of compensation; max ER contribution of 4%
A nonelective contribution of 3% of compensation for everyone

Answer 186

A

Eliminated when SIMPLEs were introduced
Grandfathered plans allowed, can add new participants
Deferals - federal income tax deferred, but subject to FICA and FUTA

Answer 187

A

Applies only to stock issued after August 10, 1993.
Must be held 5 years to be excluded from taxable income
The capital gains rate on Section 1202 stock is 28%
Depending on the date of acquisition, 50%, 75%, or 100% of the gain may be excluded.
8/10/93 to 2/18/09 - 50% exclusion
2/18/09 – 9/27/10 exclude up to 75%
After 9/27/10 - 100% excluded
also excluded from AMT

Answer 188

A

Section 1231 assets are certain assets used in a taxpayer’s trade or business that are held for the long-term.
Assets include depreciable tangible and intangible personal property, real property, timber, certain livestock, and unharvested crops.
Not included: inventory, copyrights and property held for sale to customers.

Answer 189

A

always at 25%, even if the client’s marginal tax rate is higher or lower (??? - not sure this is right)

Answer 190

A

$1.05M in immediate taxable dedutcion
can only be used against current income, then rest of expense can be carried over
can be used for depreciatable tangible capital assets (e.g, machinery, computers)
phase out starts at $2.62M - dollar for dollar

Answer 191

A

Not a qualified plan - it’s a deferred comp plan
May be established by governmental units or agencies and nonchurch-controlled, tax-exempt organizations
have special catch-up rules - contribution limit is doubled in the 3 years prior to the plan’s normal retirement age ($19.5K x’s 2 = $39K)
Not subject to an early withdrawal penalty

Answer 192

A

7.65% (6.2% OASDI and 1.45% HI)
15.3% = 2x’s for Self Employed

Short cut to calculate (if below wage base $142.8K)

Net Earnings * .9235 (reduces earning by 7.65%) = Wage Base

Wage Base * 15.3% (SS amount for Self Employed) = SE Tax

Super short cut = net earning * 18.6%

Answer 193

A

Tax advantage, but not qualified/ERISA plan (like IRA)
ER contributions only - but discretionary (big advantage to ER) - i.e., no fixed formula, unlike SIMPLEs
Contribution limit = 25% of salary (limited by includable comp of $290K) or $58K
Participants are 100% vested and nonforfeitable - self-directed
Participants cannot take loans from the plan (like IRA)
Can be integrated with Social Security.
Eligibility: 21+, $650 this year, and worked for 3 of last 5 years, no hours minimum (If high turnover, works well for ER)
ER - fully deductable at time of contribution - no payroll taxes charged
EE - like IRA distribution - ordinary income

Answer 194

A

Sharpe = Total Risk - based on SD
Treynor = systemic/market risk adjust measure based on Beta

Answer 195

A

Qualified plan under ERISA, because it uses the 401K vehicle (unlike SIMPLE IRA)
<100 EEs earning at least $5K (low overhead to run)
EEs must have earned >$5k in any 2 preceding year, and expected to earn $5K this year
No other plans, except the 457 plan
Can NOT make after tax contributions - i.e., this isn’t a Roth!
EE deferral of $13.5k
10% EWP - NOT the 25% penalty applies only to SIMPLE IRAs
Avoids ADP/ACP and top heavy rules
ER contributions - no vest schedule, always 100% vested
- matching of 3% of comp - cannot reduce the matching percentage to below 3%. (unlike SIMPLE IRAs) or…
- non-elective of 2% for all EEs

Answer 196

A

No more than 100 EEs, must earn >$5K
No non discrimiation or top-heavy rules
Contributions from EE ($13.5k, with $3K catch-up), and mandatory from ER
Mandatory = match (up to 3%, with no comp limit/effectively $450k) or non-elective (2% of comp up to $290K)
Match can be reduced to 1% in 2 out of 5 years ***flexibility not available in SIMPLE 401k, which is why most $$$ is in Simple IRAs***
Can take a distribution from a SIMPLE IRA at any time without separating from service - but EWP and OI apply
100% immediate vesting of employer contributions
Cannot be rolled into a traditional IRA until the participant has been in the SIMPLE IRA for 2 years.
25% EWP (not 10%) for withdrawals occurring within the first 2 years of participation
Cannot be integrated with Social Security
EE - no income tax but does pay FICA and FUTA
ER - gets out of income taxes and FICA and FUTA!!!
like all IRAs - no insurance!

Answer 197

A

To be effective, a self-canceling installment note must reflect a risk premium to compensate the seller for the possibility of cancellation.
A seller who accepts a self-canceling installment note MAY require security for the note without jeopardizing the estate planning advantages of the SCIN.
At the seller’s death, the present value of any remaining self-canceling installment note balance is EXCLUDED from the seller’s gross estate.
A self-canceling installment note is a debt that ordinarily is extinguished at the seller’s death.

Answer 198

A

related person 2 or more generations below the donor (e.g., Grandchild)
Trust - when all bene’s are 2 or more generations below donor (i.e., a skip trust)
unrelated person younger by donor by 37.5 years or more

Answer 199

A

The security market line (SML) shows the relationship between the rate of return and systematic risk (beta). Thus, the SML depicts a security’s expected return as a function of its systematic risk.

Answer 200

A

5/9th times number of months up to 36 early
5/12th time numbers of month earlier than 36

so if taking 20 months early, just multiply 5/9 x’s 20 = 11.11 (reduction) vs. his PIA

if late, 8/12 per month up to age 70

Answer 201

A

8/12 for each month, up to 70
so get get up to 24% extra

Answer 202

A

Need 6 of the last 13 credits
If, >31 = 20 of the last 40 quarters
***also meet the definition of disability =
Me = 100%
Spouse 50% for FRA, 35% at 62, 0% at 60
umarried child <18, 19 if in High School, or disabled before 22 = 50%
spouse with disabled child = 50%
parents - nada

Answer 203

A

be FULLY insured, not just Currently
Meet a 5-month waiting period
Unable to work in “ANY OCC” - occupation
not due to alcohol or drug addiction
Disability expected to last at least 12 months or result in death
***if between 31 and 42, then need 20 of the last 40 credits***

Answer 204

A

Provisional Income- MAGI = AGI + Tax-Exempt Income + 1/2 of SS benefits

Below 50% threshold, not taxable

50% Taxable (between 50% and 85% thresholds)

Single - $25K
MFJ - 32K

85% Taxable (if greater than the thresholds, then 85% taxable) - Know this number 85%

Single - $34K
MFJ - 44K

Answer 205

A

Most qualified plans and SEP plans — ESOP:, SIMPLEs and SARSEPs cannot use integration!!! - 401K profit sharing portion only
Stops at wage threshold - $142.8K - integration level
Methods:
- Excess - DC & DB plans (most likley to test DC)
- offset - DB only
Excess: lessor of
- 2x’s the base
- base +5.7% (permitted disparity)
Offset
- 75 bps (max amount) for up to 35 number of years of service
- 26.25% (max disparity)
if use lower integration level, maximum allowed disparity becomes less

Answer 206

A

In order of authority

IRC - the code
regulations
revenue rulings
private letters - individual
Notices
announcements

Answer 207

A

the employer owns the policy and is primarily responsible to the insurance company for paying the entire premium.
If EE dies while employeed, the ER get back the premium paid and the remainder of the death benfits goes the EE’s beneficiary.

Answer 208

A

Spousal benefits = need to be married for >12months (with a spouse who is recieving benefits)
Widow benefits = being a widow or widow, but remarried after 60
Parent benefits = if receiving >50% support from child and child dies
Divorced benefits = terminate when remarried
If disabled child = continue forever, unless marries and able-bodied person

Answer 209

A

62 - earn >$18K before reduction, then $1 reduction for every $2 above limit
Year you get to FRA (67), earn >$50K, then $1 reduction for every $3 above limit
No reduction after getting to FRA

Answer 210

A

Fully

Me = nope - dead
Spouse 100% for FRA, 83% at 62, 72% at 60
umarried child <18, 19 if in High School, or disabled before 22 = 75%
spouse with disabled child = 75%
parents - 75%
divorced spouse = same as spouse

Currently

child <18 = 75%
spouse caring for a child = 75%

Answer 211

A

Currently

lump sum death benefit of $255
A surviving spouse caring for a child under the age of 16.
Unmarried children under the age of 18 who are dependents.
Unmarried disabled children who became disabled before age 22. (???)

Fully

An unmarried surviving divorced spouse age 50 or over, with no children who was married to the decedent/worker for over 10 years and who is disabled.
parent benefit for parent who are over 62

Answer 212

A

Seed financing - early-stage business funding for the purpose of research and development of an idea?
Start-up financing is for product development and marketing for firms who have not sold products or services commercially.
First-stage financing is for initial manufacturing and sales.
Bridge financing is for firms that expect to go public within approximately 1 year.

Answer 213

A

if based on injury or sickness, then all proceeds are income tax free
however, creditors can make claims against these assets
once established, cannot be changed - i.e., no flexibility

Answer 214

A

P - purchasing power - impact of inflation - no matter how many bonds you have still impact - equities offset
R - reinvestment risk - next coupon, can’t be invested at the same rate (elimiated by owning zeros)
I - interest rate - moves all bond prices up or down, impacts overall economy
M - Market risk - any given day can go up or down - one stock or 5000 - still impacted
E - exchange rate - foregin currency

Answer 215

A

If AGI

100% of prior year’s liability
90% of current year liability

If AGI >$150K, lessor of:

110% of prior year’s liability
90% of current year’s liability

25% of estimated payment due each quarter

Answer 216

A

correspondence - get a letter in the mail generated by a computer, based on being flagged - usually forgotten income - minor
office - request to appear at the local IRS office, you don’t go, send a knowledgeable representative (EA, CPA, attorneys) ***not CFPs***
field - agents actually show up at your office - big deal

Answer 217

A

Avoidance

mini bonds - avoid state and federal tax
treasuries - avoid state tax
deferral of taxable income (retirement)
use of deductions and credits

Evasion - illegal!

Answer 218

A

Fraud - no statue of limitations
Not required to file if under standard deduction, but you should anyway (in case you get audited at some later date)
Small Businesses - file by 3/15 (flow through)
FTF - Failure to File = 5% per month up to 25% (IRS does not like at all!)
FTP - Failure to Pay = .5% (IRS understands if it’s going to take you a while to come up with the $$$)
If both, max is 5%/month, up to 25%
Frivolous return = $5K
Negligence = 20% of underpayment
Civil fraud = 75% of underpayment

Answer 219

A

Value to the Client:

Itemized Decuctions = amount * marginal tax rate
Short Term Capital Loss = amount * marginal tax rate
Credit = amount * 100% ***often most valuable***

***Credit to equvilant Itemized = Credit Amount / Marginal Rate***

Answer 220

A

Direct Skip during donor lifetime = donor pays taxes
Termination - trust terminates and only bene’s are skip people
- trust with non-skip and skip people
- termination occurs with non-skip person dies
- triggers GSTT paid by the trust
Distributions - trust distribution to a skip person
- trust with non-skip and skip people
- trustee makes a distribution to both people
- trigger GSTT paid by skip person (grandson)

Answer 221

A

CD - interest taxable each year (no change in basis = no cap gains)
Blue-chip taxed at favorable capital gains rates (15%)
U.S. savings bonds - appreciation taxed at ordinary income tax rates for federal income tax purposes. However, savings bonds are not subject to state income taxes.
Traditional IRA (with nondeductable contributions)/ROTH = only the appreciation
401(k) plan = the entire amount would be taxed at both federal and state ordinary income tax rates

Answer 222

A

2% misc. deductions, including attorney fees, unrembursed casualty losses,

Answer 223

A

Generally aren’t “gotcha” questions, usually testing is straight-forward and they’re looking to test “main points” about an topic (e.g., pension plans aren’t flexible from ER perspective)
meaning often go for the more obvious answer - but not necessarily the most simply worded (somethings that is a catch)
RTFQ - especially the last sentence, are they asking for taxable amount, or exclusion amount; absolute gain or taxable gain
Concepts
- ask the client questions/slow down - don’t jump to action
- only engage outside professionals (CPA) with permission
- remember who the client is, don’t work with children
- Options - choose simple strategies, don’t leave client exposed for a few points
- choose the more general answers
Select more traditional answers, like selling stock vs. art work (too many variable)

Answer 224

A

Pay a fixed rate of interest
But principal is adjusted based on CPI
so inflation adjusted at maturity value, but NOT during the bonds lifetime
if there’s an inflation assumption in the problem, add this to the yield

Answer 225

A

Providing more than 60% of the plan benefits to Key Employees
Both DC and DB can be top heavy
DC required to contribute at least 3% of each nonkey employee’s compensation, unless the contribution for key employees is less than 3%, in which an equal percentage for all participants may be used.
DB require employers to contribute at least 2% of average compensation times each employee’s years of service, up to 20%. Average compensation used for this test, generally, is based upon an employee’s highest three years of compensation.
Top-heavy defined benefit pension plans must use accelerated vesting schedules (which is the standard for DC plans)

Answer 226

A

Definition = >60% of benefits go to key EEs

DB plan - based on accrued benefits
DC plan - based on assets in plan

Accelerated Vesting Schedule

DB plan - use DC vesting schedule
DCplan = same schedule as always 3 - 2-6

Minimum funding

DB - minimum formula = at least 2% per year of service in benefit
DC - 3% qualified non-elective contribution to Non-Key EEs (if ER willing to do this, adds a lot of flexibility to plan structure)

If in doubt, go 2% (DB) and 3% (DC)

also, in DC SIMPLEs 2% nonelective and 3% matching

Answer 227

A

Creates a basis in the account, basis is tax fee, but non-deductable contributions and earnings are taxed as OI
withdrawals are based on an allocation between basis and earnings, meaning each withdrawal is a blend

Answer 228

A

30 days - get baby needs to get covered by group health plan (super important if NICU)
16 - last year that can get survior disability for mom
18 - last year for contribution to a CESA
18 or 21 - age of majority - UTMA/UGMA/2503c - release funds!
24 - last year to be claimed as a dependent, if in school
26 years - when kids get removed from parents insurance (with COBRA can go to 29 years!)
55 years - $1K catch-up for HSA starts; withdrawal from 401k after separation from service
59.5 years - begin distributions from retirement accounts, annuities, life insurance, ???
60 years - age divorced spouse must atain as unmarried to recieve benefits
62 years - eligible for SS
65 years - eligible for Medicare
67 years FRA - SS at full benefits
85 years - when distribuions from QLAC must start

Answer 229

A

Employer securities purchased by an ESOP with borrowed funds do not give rise to UBTI, because this is a specific exception to the UBTI rules.
Dividends, interest, and royalties are also excluded from the calculation of UBTI.

Answer 230

A

Applies to transactions conducted by a qualifed plan trust
Any investment which is purchased with “leverage” or borrowed funds generate UBTI (capital gains), except for a qualifying ESOP or LESOP.
Any business enterprise run by a qualified plan is subject to UBTI. (e.g., installing vending machines) or direct investment in a business generates income which is UBTI.
NOT subject:
- Statutory exemption for rental income (e.g., renting raw land, buying apartment complex)
- Dividends, royalties,

Answer 231

A

At death,
- if payable to owner, then NOT included in gross estate or probate estate - as payments cease?
- if payable to spouse/other bene, then
  - included in gross and probate estate
  - Considered IRD (income in respect of a decedent)
  - no step-up in basis

Answer 232

A

will offer guranateed minimum death benefit, but not minimum cash value (that’s the variable part)_

Answer 233

A

Must pay SE taxes:

Sole Prop - Yes!
General Partnership - Yes!
Limited Partnership (no for the LPs, but yes for the GP?)
LLC - chooses how they’re taxed, so follow the base entity

If they file a Schedule C - then yes!

Do NOT pay SE taxes, canot have Keoghs!

C Corp
S Corp

Answer 234

A

Any plan allowed to integrate with SS, so all plans except ESOP, SIMPLE, and SARSEPs

Offset method is only allowed forDB plans

Excess method allows for DC and DB

Answer 235

A

When surrendering or discontinuing premium payments on a whole life insurance policy, options:
- Surrender for the cash value (most often used)
- Leaves cash value with the company and receive a smaller amount of fully paid-up insurance/single premium permanent
- Leaves the cash value with the insurance company in exchange for retaining the full value term insurance policy for a guaranteed period

Answer 236

A

not issued by treasury, instead, created by corporations
creates “phantom” income
imputed interest amount is taxed annually (meaning does not accumulate until sold)
Bond may be called

Answer 237

A

made at least annually
Over the life expectancy of the owner or the owner and a beneficary (like spouse)
For a qualified plan (e.g., 401K) or 403b - participant must have separated from service
payment must continue for the great of 5 years or until age 59.5

Answer 238

A

Amortizatized payments - must be over 5+ years or until owner reaches 59.5 - whichever is longer!
- Over the life expectancy of the owner or the owner and a beneficary (like spouse)
Can be done from qualified or tax-advantaged plans - not from pension plans
For tax advantated plans separation from service NOT required
- But for qualified plans (e.g., 401K) or 403b - participant MUST have separated from service
Payments made at least annually
Reminder: avoids 10% EWP, but still income taxed, if appropirate

Answer 239

A

Express - what they are allowed to do by the principal
Implied - stuff the agents needs to do their job, but not expressed
Apparent/ostensible - what the insured thinks the agent can do based on surrouding (what can get you trouble)

Answer 240

A

Preferences - always positive (IRS would ‘prefer to tax’)
- % depletion of oil and gas in excess of basis
- tax exempt interest on private activity bonds (except 2009 & 2010)
- exclusion of gain on sale of QSBS - qualifed small buisness stock (1202)
Adjustments - positive or negative
- std. deduction (only if used, vs. itemization)
- itemized deduction: property and state taxes
- medical expenses in excess of 7.5%
- Business depreciation (e.g., depletion)
- ISOs - Bargin Element ***most tested***

Regular Taxable Income

+ Positive AMT adjustments

- Negative AMT adjustements

+ Tax Preferences

= AMTI (Alternative Minimum Taxable Income)

AMT Exemption

= Minimum tax base

x AMT Rate

= Tentative AMT

Regular Income Tax

= AMT!!!!

Answer 241

A

Immediate - begin paying within 1 year
QLAC - qualified longevity annuity contract
- max of 25% of account balance (IRA/401K) or set amount per year ($135K in 2021)
- but don’t need to start taking until as late as 85
annuity is an insurance contract, NOT an investment -
win by living a long time and collecting more than you put in (opposite of life insurance where you win by dying young!)

Answer 242

A

A- Liability - how it’s listed: 100/300/100 (only part A is actually mandatory!)
B: Medical Payments - covers everyone (including you) in or around the car, also covers you and family as pedestrians
C: uninsured motorist
D:
collision
comprehensive - other damages
endorsments - toys - must have liability damage
*

Answer 243

A

SML is drawn based (a representatoin of) the CAPM
Assets above SML are undervalued
Asset below SML are overvalued

***can get returns ABOVE the efficient frontier, by borrowing/trading on margin*** (of course, this adds risk)

Answer 244

A

1) 1,000/$18 (conversion price) =55.56 shares
2) 55.56 shares×$16.75 market price = $930.63 conversion value

Answer 245

A

relative measure of total risk per unit of return
SD divided return of asset
lower is better (unlike Sharpe and Teynor - where higher is better)

Answer 246

A

<500EEs
50% matching on first 4%
automatic enrollment
combo of DB and 401k - easier than separate plans

Answer 247

A

Either:

2 to 6 years graded
3 year cliff

Answer 248

A

will continue to recieve forever, unless marry an able bodied person

Answer 249

A

married for at least 10 years
didn’t remarry before age 60
once the divorced spouse reaches 62, they qualify for coverage without regard to status of previous husband

Answer 250

A

New Rate - Old Rate divided by Old Rate (?)

Answer 251

A

Form 5500

Must be filed by the end of the seventh month after the plan year ends
Must be filed for all profit sharing plans

SPD - Summary of Plan Description

made available to the EEs periodically, often on website

Answer 252

A

Must be filed with the SEC each year and must be filed no later than 90 days after the end of the adviser’s fiscal year.
Allows the SEC to know whether the investment adviser is still in the business.
Allows the SEC to know if there have been any changes in the adviser’s information.
Gives the investment adviser an opportunity to submit a current balance sheet.

Answer 253

A

Survivorship

Fully = 1 credit for every year since age 21 (age - 22)
- Spouse 100% for FRA, 82% at 62, 72% at 60
- umarried child <18 = 75%
- spouse with disabled child = 75%
- parents - 75%
Currently insured = 6 of the last 13 quarters
- Spouse 0%
- umarried child <18 = 75%
- spouse with disabled child = 0%
- parents - 0%

$255 sent to spouse

Answer 254

A

if elected applies to ALL gifts given by EITHER spouse!

Answer 255

A

The group model - of the HMO is an arrangement that is sometimes known as the network model
staff model - Is a corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO.
IPA - Is a type of HMO organization that is made up of physicians who have their own office locations.

ALL HMOs employ gatekeepers.

Answer 256

A

represent all points where an investor is equally satisfied with the risk/return tradeoff.
the higher the indifference curve, the happier the investor
For risk averse investors, indifference curves are concave from above with increases in risk required for increasing returns.

Answer 257

A

For buy-sell - NOT deductable (you want the full proceeds to buy the business)
For entity purchase, when firm own, NOT deductable

Answer 258

A

Spousal
- No gift taxes
- ½ of FMV goes into gross estate
- Survivor receives stepped-up basis on the decedent’s half
Nonspousal
- Federal gift tax (if unequal initial contributions)
- Federal estate tax – 100% assumed to be owned by the decedent, unless survivor can prove otherwise

Answer 259

A

Based on net self-employment income (earnings)

determine net Schedule C/Schedule K1 income
Subtract deductible portion of SE tax (half)
Multiply result by net contribution rate

Short cuts:

to get deductable portion of SE tax = 7% of net income

to jump to answer = 18.6% of net income

Answer 260

A

Describes the shape of the standard deviation curve

Platykurtic - like a plate - flat and spread out (small cap, EM)
Leptokurtic - spike in the middle - (tbills)

Investors like Leptokutic as there’s less variation in return

Answer 261

A

Price where margin call will occur = 1-Initial Margin % / 1-Minimum Margin % X’s Price of Stock
debit balance/1-Margin
Current Fed Rate = 50% Intial Margin

Answer 262

A

Risk measure is Standard Deviation, not Beta
Also need correlation between the asset classes

Answer 263

A

should enroll within 120 days
if missed, can still enroll, but there is an increase in premium
if still employeed, becomes a secondary source of coverage (only applies to ERs with >20 EEs)
ERs cannot discontinue coverage because someone has reached age 65

Answer 264

A

develops model regulation, but then the states still ned to pass

Answer 265

A

Cash surrender - lump sum cash distribution (most likley)
reduced paid up - reduces face value, still has cash value, but no more premiums
extended term - becomes a term policy

Answer 266

A

can do from ANY qualified plan (401K, ESOP, Stock Bonus)
If all company stock, and distribution….assume NUA! - “lump sum distribution of ABC stock”
Pays marginal tax rate on basis
then gains in the account at time of distribution are LTCG
and gains after distribution are LT or ST depending on holding period

***I can do this in my 401K, how to get stock into my plan? Can I do from RSUs? or maybe only works if on ER stock in plan???***

Answer 267

A

- 10k to 20k = 10K
20K to 100K = 50% of vested balance
>100K = $50K

typically lessor of 50% of account balance or $50K

Answer 268

A

which entities can have: Sole prop, general partnership, LLC….but NOT a C or S Corp! (if corp, have W2 income on Schedule C)

types - always defined contribution

profit sharing
money purchase
target benefit

Determine Net Schedule C or K1 income
Subtract deductable amount SE tax (.0765%)
Multiply result by contribution rate (usually 20%)

short cut for max contribution = 18.6% of salary (must be below the taxable wage base (148K))

if already deducted SE tax, then use 20% of income or $58 as max ER contribution to pplan

Answer 269

A

TMV calc

FV= 200,000

I/YR= 4.8077 [(1.09 ÷ 1.04) − 1] × 100

N= 6

PV= 0

PMT= (29,546.11)

Find 2nd payment

29,546.11 × 1.04 = 30,727.95

30,727.95 × 1.04 = $31,957.07

Answer 270

A

30 year maturity
gurantee minimum payment
principal adjusts based on CPI….not the interest paid!

Answer 271

A

SS Credit - get one for each $1470 paid, up to 4 each year
40 credits to be fully insured, so 10 years
PIA - primary insurance amount
Me = 100%
Spouse 50% for FRA, 35% at 62, 0% at 60
umarried child <18, 19 if in High School, or disabled before 22= 50%
spouse with disabled child = 50%
parents - nada

Answer 272

A

Fully - get Retirement, Survivor, and Disability (if meet additional recentcey criteria)!

Need minimum of 6 and max of 40
1 for each year, calc is Age minus 22

Disability - get Disability

must be Fully insured AND
need 20 of last 40 and meet definition of disables (e.g., not able to do ANY occ, 5-month waiting period)

Currently Insured - very limited survivor benefits ONLY

6 of last 13 quarters

Answer 273

A

EEs get to vote their stock
Stock Bonus - usually public companies
ESOP - usually a private company
LESOP - allows plan to borrow to buy stock
ESOP - cannot be integrated with SS

Answer 274

A

Failure to Pay = 5% per month or partial month (counts for full month)
Failure to File = 0.5% per month or partial month (counts for full month)

***combined max is 5% per month***

Answer 275

A

Sensitive to interest rates (opposite direction)

Answer 276

A

ordering:
typical, buy….sell, buy (within 30 days)
but also!, buy….buy, sell (original lot within 30 days)

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