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1
Q

What is Financial Planning?

A

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

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2
Q

What is not financial advice?

A

A communication that, based on its content, context and presentation would not reasonably be viewed as a recommendation, response to directed orders, and marketing materials, general financial education and general financial communications

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3
Q

Three questions to determine financial planning

A

Agreed to provide or provided financial planning, client have a reasonable basis to believe financial planning, does it require integration of relevant elements of the client’s personal and financial circumstances

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4
Q

What are the integration factors

A

Risk exposure, relevant elements, time, barriers % and $ of assets affected

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5
Q

What are approved methods of documentation

A

CRM software, handwritten notes, and emails

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6
Q

Seven steps of financial planning process

A
  1. Understanding the Client’s Personal and Financial Circumstance 2. Identifying and Selecting Goals 3. Analyzing the client’s current course of Action and Potential Alternative Courses of Action 4. Developing the Financial Planning Recommendations 5. Presenting the Financial Planning Recommendations 6. Implementing the Financial Planning Recommendation 7. Monitoring Progress and Updating
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7
Q

Client’s life cycle is determined by

A

Age, Marital Status and dependents, financial status, special needs, attitudes

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8
Q

Financial Statements Formula

A

Assets = Liabilities + Net Worth

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9
Q

Current Ratio and Implications

A

Current Assets/Current Liabilities - A higher current ratio greater than 1 indicates can pay off short term liabilities

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10
Q

Consumer Debt Ratio

A

Non-housing monthly debt payments/monthly net income - no greater than 20%

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11
Q

Housing Cost Ratio

A

All monthly non-discretionary housing costs/monthly gross income - less than 28%

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12
Q

Debt to income ratio

A

All monthly debt payments and housing costs/gross monthly income less than 36

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13
Q

What is the avalanche technique

A

It prioritizes the high-interest debt first then to lower-interest debt

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14
Q

What is a reverse mortgage

A

Used for elder people who want to build equity in the home. HECM. Lender pays the homeowner an income stream secured by equity in the home

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15
Q

Components of Mortgage payments

A

Principle, Interest, Taxes, and Insurance (PITI)

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16
Q

What are the goals of insurance companies

A

They keep insurers solvent, safeguard policyholders against substandard insurer practices, ensure coverage is available to all individuals and maintain competition

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17
Q

Difference between AOTC and Lifetime Learning Credit

A

AOTC - Undergrad, by student 100% on first 2k and then 25% on next 2k, Lifetime Learning - Undergraduate, by family, 2k overall

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18
Q

Employer Educational Assistance Program

A

Enrollment fees, books, supplies and equipment and they cover $5,250 per year

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19
Q

QTP Plans

A

Not subject to phaseouts, and unlimited amount to be contributed, change beneficiary at any time, transfers control by 18

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20
Q

CESA

A

Phaseouts, only allow for 2k per year, but can be used for any educational institution, be used before age 30

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21
Q

Expected Family Contribution

A

Smallest parent assets (5), then student assets and parent income (20 and 22-50), and largest student income (50)

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22
Q

What is the difference between ordinary annuity and annuity due

A

OA - Payments occur at the end (end mode), AD - Payments occur at the beginning (beg mode)

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23
Q

What is Securities Act of 1934

A

Established the SEC, Disclosure requirement, registration of organized exchanges, and outlawed insider trading

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24
Q

What to do if there is a billing dispute

A

Suspend payments but notify and give an explanation of error within 60 days

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25
Q

What debts cannot be discharged under Chapter 7

A

Back taxes (up to three years), Debts associated with illegal activities, alimony and child support, debt to intentional tort, student loans

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26
Q

What is conservatism bias

A

When clients originally assume a rational view but fail to change that view as new information becomes available

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27
Q

What is hindsight bias

A

A selective view of the past. Remember correct views and forget the errors

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28
Q

What is Fiduciary Duty

A

Act in the client’s best interest when providing financial advice to the client

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29
Q

What happens if a CFP is suspended?

A

Suspension of marks for five years if board believes it can be rehabilitated

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30
Q

If a incident against the practicant

A

Need to report to the board within 30 days

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31
Q

difference between universal life and whole life

A

whole life is for those with low tolerance, fixed premiums, and reliable payouts while universal is for those with more risk flexible premiums and borrow against it and unbundled insurance

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32
Q

tax treatment of annuities and life insurance

A

At withdrawal life insurance is tax free (unless above FV in which case taxable) and annuities are part return of premium and part OI. Pre life insurance is FIFO except for MECs (LIFO and 10 percent penalty) and annuities and LIFO with 10 percent penalty above basis

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33
Q

Exclusion ratio for annuities

A

Investment in contract/expected return (fixed annuity)
Investment in the contract/annuitants life (variable annuity)

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34
Q

Definition of presumptive disability and social security disability

A

Presumptive - certain definitions that automatically qualify, blindness, deafness, loss of speech, loss of two or more limbs.
SS - Disability lasted five months has to be expected to last at least 12 months or death.

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35
Q

Definition of hybrid and modified any occupation

A

Modified own/any occupation - (and I am not working anywhere else vs. sick or injured where I cannot perform a job that is suited for me)
Hybrid - Starts off as own occupation then modified occupation

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36
Q

What is the COBRA Disability Coverage

A

29 months

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37
Q

What qualifies you for COBRA

A

Death, Termination (all except gross misconduct), a change on status, divorce, child reaching 26, employee reaches Medicare age

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38
Q

What does Part A and Part B of Medicare Cover

A

Part A - Hospital Care, skilled nursing care, hospice care, and home health care

Part B - Physicians’ fees and outpatient services

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39
Q

What does Part C and Part D of Medicare Cover

A

Part C - Advantage Plans - Health plan options

Part D - prescription drugs

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40
Q

Definition of Chronic Illness

A

either inability to perform two of six activities of daily living for at least 90 days or chronic impairment

(BEDTTC) - Bathing, Eating, Dressing, Transferring from bet to chair, toileting, continence)

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41
Q

Difference between promise to pay, rabbi trust and secular trust

A

promise to pay - unfunded plan (may not get benefits)

rabbi trust - informally funded - (has language that is subject to the claims of creditors so no taxable event) so security

secular trust - funded plan, they will get it in the future, constructive receipt get tax deduction, may be a long time before received

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42
Q

Definition of ACV

A

Replacement Cost - Depreciation

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43
Q

How does land factor into replacement cost for insurance

A

It is excluded

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44
Q

How much coverage does Section B have?

A

10 percent of primary

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45
Q

What is the traditional coinsurance requirement

A

80 percent

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46
Q

To be legally binding a contract must have five things

A
  1. Offer and acceptance 2. Consideration 3. Legal object (legal purpose) 4. Legal capacity (not a minor and not of unsound mind) 5. Legal form (written and signed)
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47
Q

What is the collateral source rule

A

Damages assessed against a negligent individual shall not be reduced if they have another recovery avenue available.

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48
Q

Difference between waiver and estoppel

A

Waiver - the intentional and voluntary relinquishment of a known right
Estoppel - prevents denying an action if it had been accepted previously

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49
Q

How can dividends from life insurance be paid

A
  1. cash 2. used to reduce premiums 3. Left with insurance company to accumulate interest 4. purchase additional paid-up insurance 5. used to purchase one-year term insurance
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50
Q

What is Deferred Income Annuity

A

Longevity annuity, Future income start dates are selected at contract issue, great for those who may have other sources of income, can elect to annuitize up until age 85

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51
Q

Split Dollar Life Insurance

A

Is an arrangement typically between employer and employee in which costs and benefits of life insurance are shared, NOT disability insurance

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52
Q

What does life insurance need to do to be in a qualified plan

A

The 25 percent test (need to have majority term or universal) and 100:1 ratio rule a death benefit cannot exceed 100 times expected benefit for contributions

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53
Q

Difference between ISOs and NQSOs

A

At exercise - NQSOs W-2 compensation and AMT adjustment At sale - Capital gain or loss

ISO- at exercise AMT adjustment of basis and no tax. At sale if qualifying disposition, then LTCG and AMT adjustment

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54
Q

Tax treatment of ESPPs

A

Do not pay the income tax until sold then OI

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55
Q

Features of Cafeteria plan

A

Must include a cash option they want to choose package that best suits their needs

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56
Q

Two main features of health insurance

A

It must be noncancelable and guaranteed renewable

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57
Q

Difference between HMOs and PPOs

A

HMOs provides an network of health care providers for a fee where they finance and deliver the care whereas the PPOs do the same thing but allow treatment outside the network with higher deductibles

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58
Q

Lookback period for medicare

A

60 months

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59
Q

What is self-employment tax

A

Based on net income. 15.3% (12.4%(OASDI or Social Security Tax) + 2.9%(net income tax))

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60
Q

What does not count to medicaid

A

Primary residence, personal property, one motor vehicle, life insurance, trusts

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61
Q

Difference between HO-3 and HO-5

A

HO-5 = HO-3 + Open perils for personal property

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62
Q

What are the eight exclusions

A

Ordinance or law, earth movement, water damage (outside the home), power failure, neglect, war, nuclear hazard, intentional loss

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63
Q

What does the a/b/c mean for liability coverage for part A?

A

a - bodily injury for one person
b - total for all persons in accident
c - personal property coverage

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64
Q

Difference between Futures, Forwards and Options Contract

A

Options contract there may or may not occur in the future. Futures contract happens in the future, traded on exchanges, and standardized. Forwards happen in the future, not traded on exchanges, and suit individual needs.

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65
Q

How to figure out Intrinsic Value of Puts and Calls

A

C.O.M.E. Call Option Value = Market - Exercise and P.O.E.M - Put option Value = Exercise - Market

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66
Q

Value of the option Formula:

A

Value = IV + TV

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67
Q

Call Option vs Current Market Value, Exercise Price, Time to Expiration, Volatility of Return, and Risk-Free Rate of Return

A

Direct Relationship with all except exercise price inverse relationship

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68
Q

What is a Zero Cost Collar

A

protect gain in long position of a stock - Consists of long stock position, long put position, and short call option

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69
Q

Difference between warrant and rights

A

Warrants - purchase a certain amount of share

Rights - Buy more at a lower price to keep their proportion of control

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70
Q

At what level is Beta appropriate;

A

R2 > .70

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71
Q

Difference between Sharpe and Treynor

A

Sharpe - Total risk, Over the standard dev of portfolio

Treynor - systematic Risk, Over the Beta of portfolio

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72
Q

What do we use Information Ratio for an give formula

A

Measure of average return over benchmark
Alpha of portfolio with Benchmark over its standard deviation

Measures for manager beats benchmark

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73
Q

MPT - Markovitz

A

Three rules:

For any two risky assets with same E(r), choose one with lower risk

For any two assets with same risk, choose one with higher E(r)

Choose any asset that has a higher E(r) and lower risk

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74
Q

Formula for current yield:

A

Annual interest yield/price of bond

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75
Q

Conversion ratio

A

par value of convertible security/conversion price

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76
Q

Multistage Growth and trick

A

0 CF1, D1 CF2, D2 CF3, D3+D4/(r-g) CF4. IIR is r then NPV Use the constant growth rate and then select the next one down

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77
Q

Real Estate Valuation

A

Do not include mortgage costs, depreciation, and capital improvements. Subtract out vacancy rate and operating expenses

Net Operating Income/ Discount Rate

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78
Q

Geometric return

A

Take hypothetical $1 and grow it then use I/YR

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79
Q

Difference between DWA and TWA

A

TWA - Do not take into account additional shares will look at one share and how that grows (manager)

DWA - Takes into account additional purchases and sale of more than one share

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80
Q

Rules for selecting portfolios

A

a. Asset allocation - not going to get to more than 90 percent equities
b. Will have at least 10 to 20 percent in fixed income or MMF
c. 20 to 25 percent in international funds this includes emerging markets
d. Small Caps 15 percent max with the most aggressive investors

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81
Q

Margin Call

A

Debit Balance (DB)/(1-maint margin(MM)) - DB/(1-MM)

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82
Q

Taking a short and long position

A

Farmer (risk of falling price), natural position long, hedge short, Sell future

Baker (risk of rising price), natural position short, hedge long, buy a future

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83
Q

What are the systematic risks

A

PRIME, Purchasing Power Risk, Reinvestment Rate Risk, Interest Rate Risk, Market Risk, Exchange Rate Risk

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84
Q

Difference between liquidity and marketability

A

Liquidity is the ability to convert to cash easily marketability is the ability to find a ready market

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85
Q

SEC yield

A

Standardized calculation used to compare yields

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86
Q

APT

A

Arbitrage Pricing Theory - Says that return are a factor of various returns

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87
Q

Which bonds are more susceptible to interest rate changes and what to do when rates rise/fall?

A

Low coupon rates with long maturities. If rates rise put more in short term if rates fall put more in long term

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88
Q

Free Cash Flow to Equity Evaluation

A

V = FCFE1/(r-g)

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89
Q

Inventory Turnover Ratio

A

Cost of goods sold/average inventory

90
Q

What is P/E Ratio

A

P/E/ = market price per share/earnings per share

91
Q

What is CV

A

Coefficient of Variation = standard deviation of asset / expected return of asset

92
Q

What kind of property should never be gifted

A

Loss property

93
Q

What is the difference between deductions for Charities?

A

Public and Private Operating vs. Private Nonoperating Foundations

94
Q

What property when making charitable deductions can we choose between basis and FMV

A

Intangibles tangibles and real property

basis (50%) or FMV (30%)

95
Q

How to calculate kiddie tax

A

Take Unearned Income - $2300 then that is at parent’s rate, then take overall income and subtract the main deduction (1150 to 12950) and then get taxable income, subtract the first amount to get amount taxed at parent’s rate

96
Q

What is the 1250 income tax

A

Real-estate The recapture of the depreciation is taxed at OI rates (25%) rest is at LTCGs

97
Q

What is 1245 income tax treatment

A

Below basis - Ordinary Loss
Above Basis and less that Original Basis - Ordinary Income
Above Original Basis - Ordinary Income and Long Term Capital Gain

98
Q

Section 121

A

Pass use and ownership test, primary residence past two years can subtract 250,000 each per taxpayer

99
Q

Definition and use of rental vs. personal use

A
  • Personal property
    o If the property is rented less than 15 days a year
    o Excluded rental income from gross income
  • Rental Use
    o Property rented at least 15 days a year not used for personal use more than the greater of 14 days per year of 10% of rental days
    o Allocate the expenses
    o Can deduct loss up to 25k on business a reduced amount allowed for MFS
  • Mixed Use
    o Rented more than 14 days and personal use exceeds the standard for rental
    o Allocate the expenses
    o Cannot deduct losses
100
Q

How does Section 1031 - like-kind exchanges work

A

If boot is given then you increase in basis if you rec. the boot then there is a recognized gain while basis would remain as the original property you gave. Use the FMV to see who is giving and who is receiving. The person would then have a recognized gain of the lesser of boot or realized gain

101
Q

1035 exchange (order)

A

LMAL Life Insurance, MEC, Annuity, Long-Term Care

102
Q

Related party transaction

A

Cannot recognize any loss and the receiving party has a double basis

103
Q

Wash Sales Rule

A

Take the loss that you tried to take and add it to the basis of the new stock you now hold.

104
Q

Tax on Section 1202 stock

A

Exclude 50 percent of the gain of small business stock

105
Q

What is the surtax on net investment income

A

3.8%

106
Q

What is AMT, what kind of income is taxed and what is a good strategy

A

What is it? - Separate Alternative tax that targets high income earners. If it results in a larger number than TI then pay AMT
What kinds of income? - Interest on Private Aciivity Bonds, Sale 1202 stock, B.E> exercise of ISOs
What would be considered good strategy? - Best strategy would be to push into lower income year and pull it out of higher income year.

107
Q

Section 179

A
  • Allows me to take an expense for a capital expenditure
  • Designed to allow a medium sized business to take an immediate expense if they want to
  • Up to 1.08 million reduced if purchase greater than 2.7 million
  • Example if 2.8 million there is 100,000 over
  • Then we subtract 100,000 from 1.08 million to get 980.000
  • Depends on if we have the cash to purchase the machine or not
108
Q

Life Insurance - Taxation on surrenders and installment payments

A
  • Lump-sum payments - OI above basis
  • Interest payments - Interest income -O.I
  • Installment Payments - Part T.F. Part O.I.
109
Q

Installment Sales

A
  • Don’t have to recognize all gain on the sale
  • Split into principle and Interest
    o Principle - 40% LTCG and 60% TF
    o Interest - Ordinary Income
  • Section 1245 not eligible for installment sale treatment
  • Section 1250 does not apply
  • If a portion consists of the LTCG then the 25 percent gain before the 50
110
Q

Nonviatical sale

A

Take selling price minus (original basis-cost of insurance) to get total gain, subtract ordinary income (cash value-original basis) rest is at LTCG

111
Q

Self employment tax

A

Based on net income. 14.13% of schedule C income

112
Q

Interest on educational loan

A

Can take $2,500 per person phased out at certain MAGIs

113
Q

Home office deduction

A

Simplified version - $5 per square foot of home used for expense or percentage of home used for business, where you can allocate or get the 1500 simplified deduction

114
Q

What is Section 165

A

Losses of nonbusiness property are limited to losses from federally declared disaster
It is reduced by $100 floor and 10% of AGI
Amount of loss is the lesser of the adjusted basis or decline in FMV resulting from the event

To calculate Loss - Insurance Reimbursement - $100 - 10% of AGI

115
Q

What is the additional standard deduction and what is it used for

A

Either $1750 or $1400 per person and is used for those over 65 and who are blind

116
Q

How does converting from FIFO to LIFO impact the taxes

A

The changes of valuation might need to recognize the additional valuation in inventory in income and taxed as such

117
Q

What is considered a capital asset

A

ACID Accounts and notes receivable, Copyrights and creative works, Inventory, Depreciable property or real estate

118
Q

How does payment of gift tax impact basis

A

Donor’s adjusted basis + ((unrealized appreciation(FMV at gift-basis))/(FMV(when gifted)-donor’s annual exclusion amount used for the gift)) x gift tax paid

119
Q

1033 gain coming from involuntary conversion

A

So we will keep the old basis, realized gain between the cash given and old basis, deferred gain the difference between the new property and original basis, recognized gain is the difference between the amount given and cost of the gain

120
Q

Section 1244 stock

A

Losses are excluded up to $50,000 per year as ordinary loss. The rest is LTCL

121
Q

How to calculate AMTI

A

Regular taxable Income + Positive AMT Adjustments - Negative AMT adjustments + Tax Preferences = AMTI

122
Q

Taxes that apply to C corporations

A

Personal holding company tax (50% owned by five or fewer or consists of personal holding company)

Personal service corporation tax (95% held by internal, 21%)

Accumulated earnings tax (tax avoidance 20%)

123
Q

Difference in S corp and C corp taxation

A

S corporation filed with K-1 and taxed to the individual and C corp taxed to the entity

124
Q

Why is Sole Proprietorship a red flag

A

No protection from creditors

125
Q

Beneficiaries from trusts are taxed on what

A

Just the tax that was distributed to them

126
Q

What is NUA treatment

A

Net Unrealized Appreciation for Qualified Plans, Moving employer stock from inside the plan to outside. At distribution the basis is taxed at OI, then at sale FMV at distribution- Basis is LTCG, then growth are also taxed at LTorSTCG

127
Q

What is the difference between profit sharing and pension in-service withdrawals?

A

For pension plans you can withdraw after the age of 62, In-service withdrawals are only allowed if the plan documents permits

128
Q

What is a pension allowed to invest in

A

They are only allowed to invest 10% in company stock

129
Q

What are the standard eligibility requirements for pension plans

A

(21 and 1) rule for so they must be 21 years old and have worked for at least one year. If they go to 21 and 2 then they need to be 100 percent vested

130
Q

Which vesting schedules are used for which plans

A

3-7 year and 5 year vesting for defined benefit pension plan 2-7 year and 3 year vesting for a defined contribution plan

131
Q

Qualified plans must meet one of these tests

A
  1. General test (safe harbor test) (percentage)
    #NHC covered/#NHC employees eligible under years of service and age > or equalt to 70
  2. Ratio test
    (% NHC covered)/(% HC employees covered) > 70%
  3. Average benefits test
    Average benefits % NHC/Average benefits % HC > 70%
132
Q

What is a highly compensated employee

A

Greater than 5% owner in current or preceding year OR Compensation > $135,000

Family attribution rules still apply

You could also use the top 20 percent election

Only replaces the rule where compensation > 135k

Used for discrimination in qualified plans for the amount contributed

133
Q

What is a key employee?

A

Officer with compensation greater than $200,000 (2022)

OR

A greater than 5% owner

OR

A greater than 1% owner with compensation > $150,000 (not indexed)

Used for discrimination in qualified plans for the total amount

134
Q

What is the 40/50 test

A

Additional test either need to cover the lesser of:

50 employees
40% of all employees

This is for defined benefit plans

135
Q

What is a safe harbor rules

A

Avoids ACP/ADP test
Assume meets T.H. requirements
Employer contributions 100 percent vested
Matching at least 100% of the first 3% deferred by the employee and 50% of the next 2%
Nonelective conribution at least 3%
Employer wants to give highest incomer earners the ability to put in max

136
Q

What are the ACP vs. ADP rules and why they matter?

A

Used to distinguish HC vs. NHC

ADP Test - Actual Deferral Test
CODA - Cash or Deferred arrangement
Do they want to take Cash compensation or defer it into the plan
This tests pretax and Roth Deferrals
ADR
ACP Test - Actual Contribution Percentage
2x, +2, 2.25

All qualified DC plans
matching contributions, mandatory employee contributions, and employee after-tax contributions (Excludes Roth 401(k) deferrals

137
Q

If there is a failure of ADP and ACP test what can be done?

A

Corrective distribution
Send it out to the NHC employee
Could either make a Qualified nonelective contribution (QNEC)
Or qualified matching contributions (QMAC)

138
Q

What is the most includable comp in a pension plan for DB

A

The most includable comp is 305k the limit applied to the DB plans is that the first-year plan cannot exceed the lesser of 100% of includable compensation over the last three years

139
Q

What is the difference between money purchase and cash balance plans

A

Money Purchase plan
-Defined Contribution plan
- Employer Contributing to each account
- Will have mandatory contribution

Cash balance plan
-defined benefit plan
-More investment risk
-interest rate needs to be fixed

140
Q

Shortcut for SE tax to determine max contribution

A

18.6% of Schedule C income

141
Q

Difference between an age-weighted plan and a target benefit plan?

A

Age-weighted - profit sharing and D.C.
Target benefit plan - D.C. and leaning more towards D.B.

142
Q

What are Kehog plans

A

Can be any type of plan but only for self-employed individuals

143
Q

What are hybrid plans

A
  1. Between DC and DB plans
    1. The funding is designed to produce a target amount at retirement
    2. The actual benefit rests on the employee to choose the appropriate investments
    3. Employers are required to make contributions
    4. Requires an actuary when the plan is implemented
    5. Participants have their own accounts
    6. Plan needs to be cross-tested
  2. Can be discriminated more so
144
Q

What is SS integration

A

What is the maximum permitted disparity
3/4 of 1% of 75 basis points multiplied by years of service
It is going to go above the 147k
The excess is higher integration above a certain level
More contributions and it favors those above 147k and below 305k

145
Q

What is the difference between SEP and Simple

A

SEP all employees who make above 650 a year and older than 21 and are part-time are eligible while in SIMPLE all those who make above 5,000 are eligible for the plan. SEP for businesses of all sizes and simple for small businesses. Only employers can contribute to SEPs while SIMPLE both can. Contributions limits are different for both.

146
Q

What is a Roth IRA recharacterization look like

A

It is taking money that was put into a Roth IRA and putting it into a Trad iRA

147
Q

What are Roth IRA distribution orders

A
  1. Contributions (T.F./P.F)
  2. Conversions FIFO (T.F./Penalty?)
  3. Earnings (Taxed/Penalty?)
    No 10% penalty
    Aged 5 years
    Not taxable @ conversion
    EWP exception applies
148
Q

What are qualified distributions for ROTH IRA

A

Made after five years and ONE of the following:
Age 59.5
Death
Disability
First-time home purchase

149
Q

What 10 percent penalty exceptions apply to qualified plans and IRAs?

A

Age 59.5
Death
Disability
Substantially equal periodic payments
5 years or 59.5 age
Medical expenses
Greater than 7.5% AGI

150
Q

What 10 percent penalty exceptions apply just to qualified plans and just to IRAs?

A

Qualified plans only
-QDRO
-Age 55 and separated from service

IRA’s only
- Higher Education
- Purchase a home (10k max)
- Pay health insurance premiums if unemployed

151
Q

What is the difference between currently insured and fully insured?

A

Fully insured has the 40 credits necessary and currently insured is at least 6 credits in the last 13 quarters

152
Q

How much can a spouse and child take of benefits

A

Spouse takes 50% PIA

Cannot be taken until worker has been taken
Unmarried child < 18
The unmarried dependent child could take if still in high school

Could take the 50% benefits
Also for spous if caretaker of child < 16 or disabled
Divorced spouse was separated and did not marry before age 60

Treated same as spouse

153
Q

What is the max reduction of SS benefit for one who chooses to take it early?

A

Max reduction of SS benefits is 30% max increase is

154
Q

What is the limit of a qualified plan loan?

A

Lesser of 50% of account balance or $50,000 no greater than five years unless reasonable

155
Q

What is the definition of provisional income

A

Used to determine SS taxation MAGI + 50% of SS benefit

156
Q

What are 457 plans?

A

Section 457 plans options

Employer may include a Roth provision
Not considered active participant status
Deferrals to a 457 are not aggregated with other plan deferrals

157
Q

What is the difference between a stock bonus plan and ESOP

A

Advantages
Stock bonus plan - publicly traded stock
Distributions
ESOP can borrow money to purchase those stocks
Voting rights - still have the voting rights
NUA
Disadvantages
Nondiversidied portfolio
Appraisal costs
Dilution of ownership
Thought sometimes specifically used to sell shares
Stock bonus plan vs. ESOP
ESOP may borrow funds to purchase stock
When it comes to Social Security Integration
Plan has made calculations or benefits for social security
Stock can be integrated with SS and ESOP cannot be
Main reason want to use stock is to encourage performance

158
Q

what is the ss age of retirement?

A

67

159
Q

What kinds of titled assets pass through probate and are included in the gross estate?

A

Fee simple assets, when the client has death during the term, and when the client has TIC (% of assets) those pass through probate and are include in the gross estate. Life estate and death after the term of interest are not included in the gross estate.

160
Q

What are the exceptions to community property

A

Property acquired before marriage, property acquired by gift during marriage, property inherited, property acquired by court award, and donated property

161
Q

How does one avoid probate?

A
  1. Operation of law (JT/TbyE)
  2. Operation of Contract (Bene)
  3. Trust
162
Q

Purpose of a buy-sell agreement and pros of cross and entity agreements

A

Buy Sell Agreement is something put in place for the succession of the business
It Simplifies estate and reduced complexity
Attracts investors because it will continue should they die
Provides for the continuation of the business, so there is a cross-purchase agreement

Cross-purchase is great but impractical with a higher number of partners
EP, the business itself, buys insurance on all
- with EP The purchase of stock or ownership with your cash may be treated as dividends and taxed as such
- rest of the owners percentage share might not actually change

163
Q

What assets are included in the gross estate lookback period?

A

Only life insurance, taking effect at death, retained life interests, those that can be changed, and gift taxes

164
Q

Bargain Sale

A

Sale of assets less than FMV
Part Gift part sale
Part of the discount is the gift
The rest above the basis of the sale price is a sale

165
Q

Gift/Leaseback

A

involve tangible property of the business
Senior family members own a farm
Might decide at some point to give to kids and lease back from them
Pay a lease payment from parents to kids
If there is some arbitrage and payment to the taxable income to kids

166
Q

Installment Note

A

I hold this note while I provide capital to person and they pay it back slowly over time
Good idea to cancel the note when die
Works for everyone except Uncle Sam
Needs to have a premium that factor in mortality tables
Not a good idea if going to outlive expectancy

167
Q

Private Annuity:

A

Could also hold an annuity that the children pay to the adult
Used for when the adult plans to die
Cannot have collateral
Not good if die too soon might then have too low a basis for kids

168
Q

Family Limited Partnership (for family) and Corp Recapitalization (anyone)

A

Partnership with a general partner and at least one limited partner
Senior members want to give gifts to family members to reduce taxes
Partnership is made up of general partnership interest and other 99 percent
Two discounts that show us it isn’t really worth nine million
Minority interest discount - If they are not in control then Limited partners can receive a discount
Lack of marketability - hard to find a market to sell interest
Case by case depending on valuation of business interest
Reduces gift and estate taxes
Identification of partnership assets as separate
Reduce probate costs
Discounting greater for illiquid assets

169
Q

At death how is joint property treated

A

Joint property owned by nonspouses
- Percentage includible in gross estate receives a stepped-up basis
Percentage includible in gross estate depends on percentage originally contributed by the decedent

Joint property owned by spouses
- 50% of the property receives a stepped-up basis

Community property
-Both halves receive stepped-up basis

170
Q

What is 203A?

A

Real estate used in farming or business
Get appraised at the highest and best use
Reduced valuation for current actual use
Qualified use and material participation in five out of eight years
Pass to qualified heirs
value must be 25% of GE

171
Q

What is section 303?

A

Stock in closely held corporation where treated as disposition of assets (Captial gain) instead of receipt of dividends (OI)
Requirements
Stock included in gross estate
Stock value must exceed 35% of adjusted gross estate
Redeemed amount cannot exceed death taxes plus funeral and administrative expenses

172
Q

What is section 6166?

A

Farm or closely held business assets
Value must exceed 35% of gross estate
taxes are Deferred for up to five years, then payable in 10 annual installments

173
Q

What is a skip person?

A

Related person two or more generations below donor
Trust when all beneficiaries are two or more generations below the donor
Unrelated person younger than donor by 37.5 years
Unless they are married
Direct Skip: transferring assets to another person

174
Q

What is the difference between a taxable termination and a taxable distribution

A

Taxable terminations: a trust interest terminates, and only a skip person holds an interest. Trust is responsible for GSTT tax
Taxable distributions: trust distribution to skip person. Beneficary is responsible for paying GSTT tax

175
Q

How much is GSTT tax?

A

40 percent

176
Q

Benefits and drawbacks of probate

A

Orderly - efficient
Can be costly
Take time
No privacy

177
Q

what is a dynasty trust?

A

Allows passing of wealth from generation to generation free of estate tax, gift tax, and GSTT
What are four critical design issues
Transfer assets into the trust and provide benefits to future generation
Don’t have to include it again and again
Trustee may make distributions using HEMS
Healthcare, Education, Maintenance and Support
Does not cause inclusion in the estate
Charity is the backstop
Avoid significant amount of taxes for future generations

178
Q

What is the crummey provision?

A

Allows gift of future interest to qualify for annual exclusion
Limited withdrawal power given to benes
Usually limited to lesser of amount contributed to trust or annual exclusion amount
If multiple beneficiaries - withdrawal also limited to greater of 5% of contribution of $5000 or greater to avoid gift tax issues from the beneficiaries

179
Q

What is AVD?

A

Six months after date of death
Executor makes election
Allowed if lowers both gross estate and the estate tax
Applies to all assets except which two broad categories
Sold assets
Wasting assets

180
Q

What is a special needs trust?

A

Only for those receiving SSI or other government assistance
State by state
Set aside assets that still allow them to qualify for aid
Specific language saying won’t distribute

181
Q

What is the difference between 2503b and 2503c trusts?

A

Both allow for the annual gift exclusion

2503(b) trust
- income paid annually
- Does not have to pay principle
- Must be distributed beyond the age of majority
- Bad boy - if they turn 21 and are being bad don’t have to pay out

2503© trust
- Income does not have to be paid annually
- Need to be paid by 21
- Present Interest gift

182
Q

What is a custodial account?

A

Assets of the minor
Minor’s tax consequences
UI >$2300 will be at the parent’s bracket

183
Q

Features of EE Bonds

A

In a normal year considered taxable income, and interest is not taxed. The parents are owners and payments to CESA and QTP qualify

184
Q

401k rules on contributions and distributions?

A
  1. Do not need to make regular contributions
    1. All funded by elective deferrals by the employee - subject to FICA and FUTA
    2. Employees are 100% vested
    3. Employers make some sort of matching for employees, usually up to 3% of total salary
    1. Can provide annuity distributions
      1. Spouse needs consent for someone else to be beneficiary
      2. Taxed as OI
      3. Must come from either death, attainment of 59.5, separation of service or disability
      4. Eligible for 10-year forwarding
      5. Can have hardship withdrawals
    2. If ADP and ACP tests fail then corrective distribution or additional contribution to NHC employees
185
Q

Simple IRA contributions

A
  1. Employees can contribute up to 14k and catch up of 3k
    1. Excluded from gross income
    1. Employers can match up to 3% (Dollar for dollar), as little as 1% in certain years, or a 2% match
      1. Deductible if made before the tax return
    2. Fully vested
    3. No more than 305k can be considered for income
186
Q

What is the withholding from retirement plans?

A
  1. If there is a distribution from a qualified plan there will be a 20% tax withholding
    1. No withholding for distributions from IRAs
187
Q

1035 more details

A

To figure out the basis of exchange - the basis of old + adjusted basis of boot given - FMV of boot received - loss recognized
1. Then realized gain is not what you report
2. Then recognized gain is lesser of realized gain or boot received

188
Q

What is the dividend exclusion for corporations

A
  1. Distributions to shareholders are not taxed to org
    1. 20 to 80 percent will have deductions from investing in another businesses stock
    2. From 50 to 65 to 100 percent of the gain will have exclusions
189
Q

How long is revocation and how many years after suspension can a candidate reapply?

A
  1. Suspension is for those that the board believes can be rehabilitated
    1. It should not exceed five years
    2. Need to prove that they have been rehabilitated, then they can use the marks again
190
Q

What is the inverted yield curve?

A
  1. raised short-term interest rates
    1. Short-term borrowing costs are higher than long-term borrowing costs
    2. Investors should favor longer maturities
191
Q

What happens when the gift tax has been exhausted?

A
  1. It is what happens when a net gift tax is decided
    1. It is considered part sale and part gift
    2. Annual exclusion still applies but the donee will pay
192
Q

What happens with NQSOs and ISOs for disqualifying dispositions?

A
  1. ISO - non-qualified disposition
    1. sales price-Basis = W-2 income
    2. This is not subject to payroll tax
  2. ISO - just the exercise
    1. Exercise price-Cost Basis = AMT Adjustment
  3. NQSO - nonqualified disposition
    1. Exercise Price - Cost Basis = W-2 Income
    2. This is subject to payroll tax
  4. NQSO - Just the exercise
    1. Exercise Price - Cost Basis = W-2 Income
193
Q

What is the Excise for Overfunding the HSA?

A

6%

194
Q

What bad debts can be forgiven?

A

The bad debts need to be written down and signed by both parties

195
Q

How to calculate Medical deduction

A

Take medical expenses subtract 7.5% of AGI and see if that or 7.5% of AGI is less then take that

196
Q

What is the difference between a funded and unfunded ILIT?

A
  1. Proceeds included in the estate if the transfer is within three years of death
    1. Avoids probate, restricts the use of funds by beneficiaries
    2. Unfunded - grantor pays premiums at a later time - reduce the gift tax
    3. Funded - contributes cash or property to trust - results in a large taxable gift in the first year
197
Q

Does a defined benefit plan or a defined contribution have separate accounts?

A

Defined contribution

198
Q

What are the features of the grantor trust, what happens if they die and what is considered a gift?

A
  1. If the grantor dies, then annual annuity or other payment without reducing or invading principal
    1. Income is taxed to the grantor during lifetime
    2. Gift to the extent the value of the transferred property exceeds the present value of the retained income interest
    3. Value of the gift at trust creation is FMV or peppery minus the value of the grantor’s retained interest
199
Q

How to calculate the probate estate?

A
  1. Gross estate - ABCD (Administration, Burial, Casualty, Debts) = Adjusted Gross Estate
    1. Adjusted Gross Estate - (Charitable, Marital, and State Death Tax) = Probate estate
200
Q

What is the difference between a funded and unfunded NQDC

A
  1. Unfunded - one where the employee has the promise to pay in the future
    1. Tax deferral because subject to creditors
    1. Funded - assets set aside from the claims of creditors
      1. Included in the gross income
201
Q

What is the goal when selecting bond?

A

The duration matches the time horizon

202
Q

How should you calculate the emergency reserves?

A
  1. Cash and cash equivalents
    1. Three to six months worth of nondiscretionary expenses
      1. Mortgage, car loans, credit car loans, and taxes
203
Q

What is the underinsured motorist principle?

A
  1. You may only receive what you can collect from the underinsured motorist unless you add on an underinsured motorist endorsement
    1. This endorsement allows you to collect any additional claim amount, up to your policy limit, above the underinsured motorist’s coverage amount from your own insurance company
204
Q

How does the charitable deduction work in future years?

A
  1. Carryover allowed up to five years for disallowed amounts
205
Q

SEP contributions are subject to what?

A

FICA and FUTA taxes

206
Q

What is the transfer for value rule

A

If an existing policy is transferred (sold) for valuable consideration, the insurance proceeds are includible in the gross income of the transferee (buyer) to the extent that the proceeds exceed the basis (amount paid for policy plus any subsequent premiums paid), meaning that the death benefit loses its tax-free status

207
Q

What is part B coverage for PAP?

A

It covers medical coverage necessary

208
Q

What is the inputted interest in the loan?

A

If the loan is less than or equal to $100,000 and the unearned income of the borrower is greater than $1,000, the imputed interest is the difference between the interest at the federal rate less the interest charged, not to exceed the borrower’s net investment income.

209
Q

What does not qualify for employer’s tuition assistance

A

Meals, transportation, and lodging

210
Q

What is a nonforfeiture provision?

A

When a policyowner discontinues premium payments in a cash value policy, the policyowner is entitled to either the cash value or surrender value

211
Q

What happens to a stock when there is a tax free distribution?

A

The basis decreases by the amount of the tax free distribution

212
Q

What form of interest is not taxable

A

Municipal Bond Interest

213
Q

What is a revocable standby trust?

A

A standby trust is a separate legal entity you create to own property for you (like a house, boat, or mutual fund shares). It is a tool you can use to give your trustee (the person you name to run the trust) the power to manage your property if you become incapacitated.

214
Q

COBRA applies to what businesses?

A

Businesses that have over 20 employees

215
Q

What is a reverse QTIP

A

A reverse QTIP is used to make use of the decedent’s GSTT. The election treats the QTIP property as if the QTIP election was not made for GSTT purposes.

216
Q

What is a morale hazard?

A

Intentional cause of a loss

217
Q

What is the difference between a long straddle and short straddle?

A

Long straddle expects that the price of the stock will become volatile and shift down or up in value while short straddle believes that the stock will stay at its current price.

218
Q

Why should you invest in short term securities

A

Once an investor has a forecast of interest rates, the bond portfolio’s maturity can be lengthened when interest rates are expected to decline, or shortened when interest rates are expected to rise. So when interest rates rise get into short term securities

219
Q

What is a durable power of attorney?

A

It allows the attorney-in-fact to expedite the principal’s Medicaid eligibility, arrange for in-home or nursing home care, hire necessary health care personnel, or employ companions

220
Q

What plans do not get an early withdrawal penalty?

A

457 plans

221
Q

How are worthless securities treated?

A

The realized loss is based on disposal at the end of the year. Then only 3k is allowed to be recognized in that year

CFP (2 decks)

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