BIF Exam Missed questions

Question 1

Saul, age 55, plans on retiring at age 65 and expects to live in retirement until age 85. His current income is $150,000 per year and he wants an income replacement of 80%, in today’s dollars, throughout retirement. Saul has asked you to calculate the amount of capital needed to be accumulated by day one of his retirement using the capital utilization approach. Assume an investment return of 8% and 2% inflation throughout the pre-and post-retirement period.

A. $1,793,595
B $1,551,084
C $2,241,991
D $1,693,951

Answer 1

A. $1,793,595
Step 1: Apply wage replace ratio and inflate current income to retirement age.

80% x $150,000 = $120,000
120,000, +/-, PV
10, N
2, I/YR
0, PMT
Solve FV: $146,279

Step 2: Present value of an annuity due in retirement.

BEGIN mode
146,279, +/-, PMT
0, FV
20, N
(8 – 2) ÷ 1.02 = 5.8824 I/YR
Solve PV: 1,793,595

Score: 0%

Question 2

Jiminy is the owner of an S-Corporation for playwriting company called ‘On Bardway.’ This year the S-Corporation disbursed $125,000 in salary to Jiminy and he received a $55,000 distribution. Jiminy had $250,000 in stock basis in the S-Corporation at the time the salary and distribution occurred. Currently, he is in the 22% marginal tax bracket.

Based on this information, calculate the taxes due on the distribution only.

$12,100
$39,600
$0
$27,500

Answer 2

S-Corporation distributions are tax-free to shareholders to the extent of their stock basis. Tax-free distributions are referred to as non-dividend distributions. If a distribution to a shareholder exceeds his/her stock basis, the excess amount is a short-term or long-term capital gain, depending on the shareholder’s holding period of the stock. S corporation distributions are not subject to FICA taxes (Social Security and Medicare taxes).

In this case, because Jiminy has sufficient basis, the $55,000 distribution will be tax-free.

Question 3

Keisha, age 55, takes a $150,000 distribution from her Roth IRA this year to purchase an interest in a small business. The Roth IRA account balance prior to the distribution was $200,000 and was comprised of the following:

$60,000 Regular Roth Contributions (first contribution 10 years ago)
$40,000 Roth Conversion (3 Years ago)
$100,000 Account Earnings
Assuming Keisha is in the 24% marginal federal tax bracket, what is the total tax attributable to the Roth distribution this year?

$17,000
$21,000
$12,000
$30,600

Answer 3

The $150,000 Roth distribution is attributed in the following order:

$60,000 regular contributions: no regular income tax; no penalty tax.
$40,000 Roth conversion contributions: no regular income tax; $4,000 penalty tax (10% penalty tax because the conversion is distributed within 5 years of the conversion).
$50,000 earnings: regular income tax at 24% plus 10% penalty tax for early withdrawal; $17,000.
Total tax: $21,000

Question 4

If a CFP® professional otherwise must comply with the Practice Standards, but the Client does not agree to engage the CFP® professional to provide Financial Planning, the CFP® professional may do each of the following EXCEPT:

Make ongoing support contingent on the Client accepting financial planning services.
Terminate the Engagement.
Limit the Scope of Engagement to services that do not require the application of the Practice Standards.
Not enter into the Engagement.

Answer 4

If a CFP® professional otherwise must comply with the Practice Standards, but the Client does not agree to engage the CFP® professional to provide Financial Planning, the CFP® professional must either:

Not enter into the Engagement;
Limit the Scope of Engagement to services that do not require application of the Practice Standards, and describe to the Client the services the Client requests that the CFP® professional will not be performing;
Provide the requested services after informing the Client how Financial Planning would benefit the Client and how the decision not to engage the CFP® professional to provide Financial Planning may limit the CFP® professional’s Financial Advice, in which case the CFP® professional is not required to comply with the Practice Standards; or
Terminate the Engagement.

Question 5

What amount of Social Security retirement benefits does Terry receive in 2023?

$25,200
$36,000
$21,040
$31,840

Answer 5

There are two issues causing Terry’s Social Security benefit being less than his primary insurance amount (PIA). First, Terry’s full retirement age (FRA) is 67 and he is claiming benefits at age 62. His PIA is $3,000 and the reduction for claiming benefits 60 months early is 30%, a $900 reduction per month, $10,800 for the year.

Secondly, Terry has earned income more than the allowable threshold of $21,240 (2023) for years prior to the year in which he attains FRA, so a portion of his monthly benefit will be withheld at a rate of $1 for every $2 of earned income in excess of $21,240. His earned income is $29,560. $29,560 - $21,240 = $8,320 ÷ 2 = $4,160 of benefits withheld.

His benefit in 2023 is $36,000 (PIA) - $10,800 - $4,160 = $21,040.

Question 6

If Terry liquidates his equity holdings in 2023, what amount is taxed at long-term capital gain tax rates?

$83,000
$53,000
$103,000
$88,000

Answer 6

If Terry liquidates all equity positions he has a net LTCG of $103,000.

YoCo stock: $20,000 LTCG

other LTCG: $8,000

other STCL: $5,000

Employer stock: $80,000 LTCG

Question 7

Using a capital utilization approach, it was calculated that to support Terry’s retirement income goal he needs to have retirement savings of $500,000. If Terry wishes to use, instead, a capital preservation approach, how much additional retirement savings must be added to the capital utilization amount to fund his plan?

$616,499
$116,499
$500,000
$243,924

Answer 7

The additional capital needed is calculated by discounting the capital utilization amount by the assumed investment return.

25, N
6, I/YR
500,000, FV
Solve PV = $116,499

Question 8

On a whim, Jeremiah decided to buy a lotto ticket on his way home and won a $1,000,000 jackpot. The Lottery Commission has given Jeremiah four payment options.

If all payments are made at the beginning of the year, which of the following options has the highest present value, assuming a risk-free rate is 5%?

$200,000 a year for 5 years.
$500,000 lump sum with $50,000 a year for 10 years.
$850,000 lump sum payment today.
$100,000 a year for 10 years.

Answer 8

$100,000 a year for 10 years: PV = $810,782.17 (BEG mode; $100,000 PMT, 5 I, 10 N, Solve for PV).

$850,000 lump sum payment today. PV = $850,000.

$200,000 a year for 5 years: PV = $909,190.10 (BEG mode; $200,000 PMT, 5 I, 5 N, Solve for PV).

$500,000 lump sum with $50,000 a year for 10 years: PV = $905,391.08 (BEG mode; $50,000 PMT, 5 I, 10 N, Solve for PV = 405,391.08 + 500,000).

Question 9

Terrence was hoping to take a $10,000 personal loan out from Loan Sherpas, Inc. He submitted a loan application that included his annual income, housing payments, and current debts. Five business days have passed, and Terrance has yet to hear about the status of his application.

Under the provisions of the Equal Credit Opportunity Act, he must receive a response from Loan Sherpas, Inc. indicating the approval or denial within _____ after his application was submitted.

7 days
30 days
60 days
14 days

Answer 9

The Equal Credit Opportunity Act states that: You have to receive a response from a creditor within 30 days after your application indicating whether your request has been approved or denied. If it was denied, the response must be in writing, and it must either explain the reasons for the denial or indicate your right to an explanation.

Question 10

Celeste, age 55, had $132,000 of income in 2023 ($2,000 of net investment interest included). She will be filing Head of Household this year. Celeste made a $20,000 SEP IRA contribution, paid a total of $19,750 in Self-Employment Taxes, and will receive a Qualified Business Income Deduction (QBID) of $18,432.

She had the following additional expenses in 2023:

$8,000 in total medical expenses (received a $500 reimbursement)
$900 property tax (monthly)
$2,500 in margin interest expenses
$4,000 in mortgage interest on her primary residence ($250,000 of debt)
$5,650 in mortgage interest on her secondary residence ($325,000 of debt)
Calculate Celeste’s total below-the-line deductions in 2023 (rounded).

$21,650
$45,582
$40,082
$37,832

Answer 10

To find the total below-the-line deductions for 2023, begin by calculating Adjusted Gross Income (AGI). Celeste had $132,000 in income. Subtract the total SEP contribution of $20,000 and ½ of the Self-Employed taxes paid ($19,750 ÷ 2 = $9,875).

$132,000 - $20,000 - $9,875 = $102,125 (AGI).

Next, determine whether Celeste will take the standard deduction or itemize. The standard deduction for an individual filing Head of Household in 2023 is $20,800.

To find the total itemized deductions, calculate the following:

Unreimbursed Medical Expenses: $8,000 - $500 (reimbursement) = $7,500; AGI hurdle for unreimbursed medical expenses: $102,125 x 7.5% = $7,659.38. Since Celeste’s unreimbursed expenses do not exceed the $7,659.38 hurdle, these are non-countable for itemizing.
Property Taxes: $900 (monthly) x 12 = $10,800 total annual taxes; Because these are State And Local Taxes (SALT), there is a $10,000 cap on the amount that can be claimed as an itemized deduction each year. Therefore, Celeste can claim $10,000.
Margin Interest Expenses: Investment interest expenses are deductible up to net investment interest. Celeste had $2,500 in margin interest expenses but only $2,000 in net investment income. Celeste can claim $2,000.
Primary and Secondary Residences: There is a total of $575,000 in mortgage debt which is lower than the threshold of $750,000. As a result, Celeste can claim $4,000 + $5,650 = $9,650
Altogether, Celeste has the following itemized deductions: $10,000 + $2,000 + $4,000 + $5,650 =$21,650. Since this exceeds the standard deduction for Head of Household ($20,800), Celeste will opt to itemize this year.

$21,650 is added to the Qualifying Business Income Deduction (QBID) of $18,432 for total below-the-line deductions of $40,082.

Question 11

Normally, the Ellington family rented their beach home in Kennebunkport, ME for the majority of the calendar year. Then, for one week during the summer, the family vacationed in the beach home.

In the current year, the family spent four weeks in the Kennebunkport beach home because of a major renovation to their primary residence in Hudson, NY. Additionally, Duke, the eldest Ellington, stayed in the beach home for a week to repair the heating system. The beach home was rented every other day of the year.

Which of the following statements regarding the tax treatment of their property in the current year is CORRECT?

The property is considered mixed-use.
All expenses allocated to the rental property are allowed.
The rental income is not required to be reported.
Only mortgage interest and property taxes are deductible in the current year.

Answer 11

The beach home was rented for 47 weeks in the current year. Four weeks (28 days) were for personal use & one week (7 days) was for repairs. Therefore, the total rented days = 330 [365 days (one year) – 28 days (vacation) – 7 days (repair work) = 330]

To be considered a rental property, personal use cannot exceed the greater of:

14 days or
10% of the number of days the property is rented
10% of the rented days = 33 (330 days x 0.10). Using the rental rule, 33 days is greater than 14 days. Therefore, to retain its character as a rental property, personal use cannot exceed 33 days.

The Ellingtons used 28 days’ worth of personal use on vacation. Duke’s repairs do not count toward the personal use total. As a result, all expenses allocated to the rental property are allowed, and the property can produce passive losses subject to the passive activity rules ($25,000 loss limit).

Question 12

Giacomo passed away on 12/15 with the following assets. Estate valuation will be established as of the date of death.

$850,000 death benefit from a life insurance policy purchased in an ILIT last year
$700,000 Mountain Cabin (Tenancy in Common, 20% ownership share)
$900,000 Primary Residence (JTWROS, spousal; $100,000 purchase price)
$850,000 Second Residence (JTWROS, non-spousal; 30% initial contribution, $150,000 purchase price)
$250,000 in jewelry, art, and furniture
$700,000 in a Grantor Annuity Trust with a 10 Year term, established 4 years ago.
Calculate the value of the assets that will be included in Giacomo’s gross estate.

$1,965,000
$1,795,000
$2,645,000
$1,095,000

Answer 12

Since the ILIT purchased the $850,000 life insurance policy, it will not be included in the gross estate.

20% of the Mountain Cabin titled Tenancy in Common will be included in the gross estate. $700,000 x 0.20 = $140,000.

50% of the Primary Residence titled JTWROS will be included in the gross estate (since this is spousal JTWROS property). $900,000 x 0.50 = $450,000.

30% of the Second Residence titled JTWROS will be included in the gross estate (since this is non-spousal JTWROS & Giacomo purchased 30% of the property initially. $850,000 x 0.30 = $255,000.

All the $250,000 of personal property will be included in the gross estate.

The GRAT had a ten-year term & Giacomo was only two years into the trust term. As a result, the FMV of the trust on the date of death will be included in the gross estate. $700,000.

$140,000 + $450,000 + $255,000 + $250,000 + $700,000 = $1,795,000

Question 13

Marianna exchanges business real estate with a $70,000 adjusted basis for $10,000 cash and land with a $75,000 FMV. What would be her recognized gain?

$10,000
$15,000
$70,000
$65,000

Answer 13

Marianna is receiving $10,000 in cash, plus, land with FMV of $75,000. $10,000 + $75,000 = $85,000

She is giving business real estate with an adjusted basis of $70,000.

$85,000 - $70,000 = $15,000 realized gain

In a like-kind exchange, the recognized gain is the lesser of the realized gain and the net boot received. In this case:

Realized gain = $15,000
Net boot received = $10,000
Therefore, the recognized gain is $10,000.

Question 14

Your client, Gretchen, age 32, was married to Kayli, age 27, in the current year. Prior to your financial planning work together, Gretchen experienced three years of owing considerable taxes and failure to pay penalties. She is fearful that as a married couple, her tax situation will be more complex.

Her new wife, Kayli, has never worked with a financial planner before but has expressed interest in receiving future guidance on financial matters unique to their situation as a same-sex couple.

Based on the situation, which of the following is the BEST option?

Instruct Kayli to update her estate planning documents to include Gretchen as an agent.
Recommend that Gretchen submit an updated Form W-4 to her employer, indicating her new filing status as MFJ.
Terminate the financial planning engagement with Gretchen since she is now married.
Ask the couple to sign a new financial planning agreement with you.

Answer 14

After getting married, couples should consider changing their withholding. Newly married couples must give their employers a new Form W-4 Employee’s Withholding Allowance) within 10 days. Since Gretchen is currently working with you, it is best to share this time-sensitive recommendation with her.

Although Kayli should also submit an updated W-4 to her employer, you are currently not her financial planner and are unable to give recommendations specific to her financial situation. If the couple would like to work with you in the future, a new financial planning agreement will be necessary, however, given the fact that Gretchen has 10 days to submit an updated W-4 and she is an active client, it is best to address this ASAP.

Updating estate planning documents is an important financial planning item, but Kayli is not a current client.

Terminating the relationship is not a good alternative in this situation.

Question 15

Your client, Laura, is a 35-year-old entrepreneur who asked you for help designing a simple portfolio for her brokerage account. She has narrowed her investment options to the following funds:

Laura agrees to proceed with a two-fund portfolio of VOO [80%] and FBNDX [20%] but asks several questions about investment risk with the new allocation. Specifically, she is wary of “big ups and downs” within the portfolio.

If the r-value between Investment Grade Bonds and U.S. Large Cap Equity is 0.26, which of the following is the MOST accurate statement?

• Total portfolio risk is 15.25%. Since Laura has a long investment horizon, however, investment risks are currently of minimal concern.
• The higher variability of VOO’s returns will be offset by FBNDX and the total portfolio risk will be lowered to 11.96%
• The total risk of the VOO + FBNDX 80/20 portfolio is 14.90%.
• The combined risk of the VOO + FBNDX portfolio at the agreed-upon allocations is 14.56%.

Answer 15

Since the client has stated that portfolio risk and variability is a concern, the standard deviation of a two-asset portfolio calculation should be used to identify the total risk. First, COV must be calculated:

COVij=ρijσiσj
COVij=(0.26)(6.19)(17.73)
COVij=28.54
Next, the standard deviation of a two-asset portfolio must be calculated:

σ=Wi2σi2+Wj2σj2+2WiWjCOVij−−−−−−−−−−−−−−−−−−−−−−−−−−√
σ=(0.80)2(17.73)2+(0.20)2(6.19)2+2(0.80)(0.20)(28.54)−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−√
σ=(0.64)(314.35)+(0.04)(38.32)+2(0.80)(0.20)(28.54)−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−√

σ=201.18+1.53+9.13−−−−−−−−−−−−−−−−−√
σ=14.56

Question 16

Tonya, age 60, has accepted a position with a new company and is planning to liquidate her profit-sharing plan account at her previous employer. She is not yet ready to sell the employer stock held in the profit-sharing plan. Her account balance is currently $100,000. The employer basis in the stock is $25,000 and the current value of the employer stock in her account is $60,000. If Tonya takes a qualifying lump-sum distribution from her account and makes a net unrealized appreciation election, what is the federal income tax payable this year related to the lump-sum distribution if Tonya is in a 24% federal income tax bracket?

$0
$6,000
$15,600
$9,600

Answer 16

The employer basis in the stock, $25,000, is taxable in the year of distribution. Also, there is an additional $40,000 in the lump-sum distribution that is currently taxable. $65,000 x 24% = $15,600.

The NUA portion of the lump distribution, $35,000, is not currently taxable and will be taxable as LTCG when the employer stock is subsequently sold.

Question 17

Chad has been deemed to be terminally ill and his team of physicians believes he has 4 years to live. He is considered to have ‘Ultra High Net Worth’ and is looking for tax-efficient ways to reduce the value of his gross estate within the next few years.

Each of the following strategies can be implemented by Chad to reduce his gross estate EXCEPT:

Transfer the estate to his spouse using the marital deduction.
Make direct transfers to his nephew to cover tuition costs.
Give his assets away to charity.
Transfer an existing life insurance policy on which he is listed as the owner into an ILIT.

Answer 17

Chad can lower his estate taxes by giving his assets away. However, a direct transfer to his nephew for tuition costs is not tax-efficient and will likely result in a taxable gift. Had Chad made the tuition payment directly to the educational institution, it would have been tax-exempt.

Charitable gifting is a tax-efficient transfer method that will reduce his gross estate. By transferring assets to his spouse under the unlimited marital deduction, his gross estate will be lowered as well without incurring taxes on the transfer.

Moving a life insurance policy into an ILIT will remove the policy from his gross estate since the three-year rule would not apply (Chad has a 4-year life expectancy).

Question 18

During an end-of-year tax planning meeting with your client, Willis, you ask if there have been any sales, transfers, or exchanges of property this year. Willis recounts that he sold 150 shares of CCD stock to his friend, Gregory, on March 5th when it was valued at $240.

Several days later, Willis called your office to note that he was reviewing his records and they show that he bought 150 shares of CCD stock from his Aunt Bertha four years ago when the price per share was $140. An old quarterly statement from Aunt Bertha’s brokerage account was attached to the file indicating an original purchase price of $200 per share with a $5 commission for the purchase of each share.

Willis files his taxes as Single and has $40,000 of taxable income in 2023. Which of the following statements regarding his tax situation is CORRECT?

Willis may use the losses from Aunt Bertha’s original purchase, but he will still have LTCG’s in the 15% bracket from his stock sale.
Willis is within the 0% LTCG bracket and will not owe any tax on the stock sale.
Willis has partially allowable losses that will offset all the gains on his stock sale to Gregory.
No taxable event occurred because Willis originally purchased the shares from a relative at a loss.

Answer 18

Since Aunt Bertha sold the CCD stock to Willis at a $9,750 loss ($21,000 (sale price) - $30,750 (original basis = [$200 + $5] x 150 shares)), the loss is suspended because Aunt Bertha and Willis are considered ‘related parties.’

When Willis sells the CCD stock to Gregory (an unrelated party), his basis is $21,000. Although there is a $15,000 realized gain ($36,000 (sale price) - $21,000 (Willis’s basis)), the $9,750 of losses from the original related party transaction serve to offset the gains.

As a result, there is a $5,250 recognized gain [i.e., reportable gain] ($15,000 (realized gain) - $9,750 (suspended losses)).

Willis may use the losses from Aunt Bertha’s original sale, but he will still have LTCG’s in the 15% bracket from his stock sale. His taxable income of $40,000 + the LTCGs of $5,250 = $45,250 which exceeds the 0% LTCG threshold for a Single filer in 2023 of $44,625, and places a portion of the gains in the 15% LTCG bracket.

Question 19

When non-parents are willing to make a distribution from their 529s towards a child’s college expenses, which of the following distributions will minimize the overall impact on financial aid eligibility?

Equal distributions from year 1 through year 4
Years 3 & 4
Years 2 & 3
Years 1 & 2

Answer 19

Distributions from accounts owned by relatives and other individuals in Years 3 and 4 maximize the potential for Financial Aid. This is due to the two-year lookback on the FAFSA form for income. By waiting until Years 3 and 4 of the child’s college enrollment, the family will not have the distributions factored into their Financial Aid.

Question 20

Which of the following is INCORRECT?

Portfolio G is inefficient.
Portfolios A, B, and G are inefficient.
Portfolios A, B, and D are all equally efficient
Portfolios D and E are equally efficient.

Answer 20

Portfolios A and B plot below the curve and are therefore inefficient.

Question 21

Keith operates GrowCo as a sole proprietorship. He has three full-time employees. GrowCo sponsors a SIMPLE IRA plan and GrowCo makes the required nonelective contribution to the plan each year. The following are eligible to participate in the plan and their respective salary deferral amounts are listed. What are GrowCo’s employer contributions to the plan this year?
GrowCo sponsors a profit-sharing plan with a 15% plan contribution rate. What is the profit-sharing contribution for Keith this year?

• $30,000
• $70,416
• $24,435\
• $28,108

Answer 21

Under a SIMPLE IRA plan, an employer is required to either make matching contributions of 100% of the first 3% a participant defers or make a nonelective contribution each year of 2% for each employee who is eligible for the plan, even if the employee does not make salary deferrals into the plan. The aggregate covered payroll of those eligible to participate in the plan is $640,000. GrowCo’s nonelective contribution must be 2% x $640,000 = $12,800.

Question 22

Mecayla’s Option A variable universal life insurance policy has failed the 7-pay test. The policy death benefit is $500,000 with a current cash value of $200,000. She has paid total premiums into the policy of $150,000, including the most recent annual premium of $10,000.

Mecayla, who is age 60, makes a policy loan of $100,000 from the policy and dies a month later. Mecayla’s estate is the beneficiary of the policy. What amount of the death benefit is paid income tax-free to the estate?

$150,000
$700,000
$500,000
$400,000.

Answer 22

Although the policy is considered a modified endowment contract (MEC), the death benefit remains income tax-free. The death benefit under Option A is the original face amount of the policy less any outstanding policy loan. The policy pays an income tax-free death benefit to the estate of $400,000 [($500,000 (death benefit) - $100,000 (policy loan)].

Question 23

Charles, age 93, made the gifts listed below in the current year. To date, he has used $0 of his unified lifetime gift and estate tax exemption and $0 of his GSTT exemption. Each of the gifts below was the only one given to each of the recipients this year.

$17,861,000 gift to his son, Arthur, in April 2023
$10,017,000 gift to his grand-daughter, Elizabeth, in July 2023
Calculate the total gift tax that Charles must pay in 2023.

• $4,006,400
• $5,969,600
• $1,145,600
• $5,982,400

Answer 23

Since Charles has used $0 of his unified lifetime gift and estate tax exemption and the gifts listed were the only ones given to Arthur & Elizabeth this year, the annual exclusion amount & lifetime gift exemption must be applied.

Arthur’s gift was transferred first. The total gift of $17,861,000 must be reduced by the annual exclusion amount of $17,000 to find the taxable gift. $17,861,000 - $17,000 = $17,844,000.

Then, the lifetime gift exemption of $12,920,000 (2023) can reduce the taxable gift further. $17,844,000 - $12,920,000 = $4,924,000. The remaining taxable gift of $4,924,000 is taxed at a 40% gift tax rate. $4,924,000 x 0.40 = $1,969,600 of gift tax due on the transfer to Arthur.

Next, the total gift for Elizabeth must be reduced by the annual exclusion amount to find the taxable gift. $10,017,000 - $17,000 = $10,000,000. Since the lifetime gift exemption was fully depleted with the gift to Arthur earlier in the year, the entire $10,000,000 is taxable at a 40% gift tax rate. $10,000,000 x 0.40 = $4,000,000 of gift tax due on the transfer to Elizabeth.

Total gift tax due = $1,969,600 + $4,000,000 = $5,969,600

Question 24

Maya, age 70, owns a property she wants to transfer to her daughter, Elise, age 50, using a private annuity. The property is currently valued at $1,500,000. Under the terms of the private annuity, Maya will receive $80,000 per year with a term of 20 years.

If Maya dies at age 92, what amount will Elise have paid for the property?

$1,500,000
$1,600,000
$1,750,000
$1,760,000

Answer 24

Payments under a private annuity are for the life of the seller. If Maya lives to age 92, she will have paid $1,760,000 for the property.

Question 25

An investor owns a concentrated position in Microsoft (MSFT) common stock. As their planner, you are concerned with the risk this poses to their financial stability. If MSFT is trading at $250 per share and the investor would be willing to sell the position above $300, what would be the best options strategy to protect the investor?

Buy $220 put contract and sell $300 call contracts..
Sell $275 call contracts.
Buy $300 put contracts and sell $220 call contracts.
Buy $220 put contracts.

Answer 25

Given the concentration and the short-term nature of most options contracts, a protective put would be too expensive over time. The collar strategy is best. The investor indicated the desire to sell above $300 per share. The strategy would be to write out-of-the-money calls and buy out-of-the-money puts as a collar strategy.

Question 26

Last month, Jessie opened a Registered Investment Advisory in her hometown of Taos, NM. To market her firm, she has been providing customized portfolio design services to members of her community free of charge. Based on the provisions of the Investment Advisers Act of 1940, is Jessie currently considered an Investment Adviser?

• No, Jessie is exempt from the provisions of the Investment Advisers Act of 1940.
  No, Jessie is engaged in the business of providing advice to others about securities, but she is not currently receiving compensation.
  Yes, Jessie has been offering customized investment advice through her portfolio design services.
  Yes, Jessie opened a Registered Investment Advisory and is considered an Investment Advisor.

Answer 26

The Investment Advisers Act of 1940 defines an investment adviser as any person or firm that:

for compensation;
is engaged in the business of;
providing advice to others or issuing reports or analyses regarding securities.
A person must satisfy all three elements to fall within the definition of “investment adviser,” which the SEC staff has addressed in an extensive interpretive release explaining how the Act applies to financial planners, pension consultants, and other persons who, as a part of some other financially related services, provide investment advice.

Since Jessie is not currently receiving compensation, she is not considered an Investment Adviser under the Act.

Question 27

The public radio station announced that they had reached their fundraising goal on January 1, 2024, and Xavier started his monthly contributions, as promised. He’s interested in understanding how much of the pledged donation is deductible on his 2023 tax returns.

What is the CORRECT information to share with Xavier?

Nine months’ worth of monthly pledged donations will be deductible on the 2023 tax return, subject to the public charity AGI ceiling for cash contributions.

Promised donations are not tax-deductible donations until you actually give the money. No deductible donations were made to the public radio station in 2023.

Donations for the 2023 tax year be made up to April 15, 2024. The four months of contributions will be included on the 2023 tax return.

The pledged donation may be deductible with documentation of the donation and a donor acknowledgment letter.

Answer 27

The correct information for Xavier to share with his client is that promised donations are not tax-deductible donations until you actually give the money. Therefore, no deductible donations were made to the public radio station in 2023.

Question 28

Assume that Xavier files his taxes Single and his AGI this year is $100,000. He’s received a $50,000 bonus at work. In addition to the listed donations, he would like to give $32,500 of the bonus this year to a qualifying charity. He wants the donation to create a large tax deduction that will reduce his gross tax for the year.

Which of the following giving strategies will result in the greatest tax deduction in the current year?

Donating the portion of the bonus to the Jon Swansong campaign.
Treating the portion of the bonus as a new contribution to a Donor Advised Fund (DAF).
Making a cash contribution with the portion of the bonus to the Presley Trope Foundation.
Adding the portion of the bonus with the existing Year 3 Donor Advised Fund (DAF) distribution for a combined donation.

Answer 28

When the owner of a donor-advised fund makes a gift to the fund, it can create an immediate tax deduction to apply against current income. The deduction for a gift made in cash is limited to 60% of the giver’s adjusted gross income. For Xavier, the current year ceiling for deductible donations is $60,000 (his AGI of $100,000 x a 60% of AGI ceiling, since the contribution will be in cash). Therefore, a new donation to a Donor Advised Fund (DAF) will generate a $32,500 deduction in the current year.

Tax deductions into DAFs are taken during the year of contribution. There are no deductions available when funds are later distributed to qualified charities. Therefore, Xavier is unable to combine a current-year contribution with an existing-year distribution to maximize the deductible amount.

A cash gift to the Presley Trope Foundation would have a current-year deductible ceiling of $30,000 (AGI of $100,000 and a private foundation cash contribution ceiling of 30% of AGI). This would create a $30,000 limit for this year’s contribution, with a carryover of $2,500, beginning in the next tax year.

Charitable contributions to political campaigns or candidates are not eligible for deduction.

Question 29

In addition to attending the Presley Trope Foundation fundraiser, in 2023 Xavier offered 5 hours of one-on-one business consultations that were held at the Foundation’s headquarters in Queens, NY. His normal rate for consulting is $750/hour.

Xavier traveled from Akron, OH, 450 miles away, spending a total of $125. He also paid out-of-pocket for three meals while traveling totaling $175, plus, $50 in tips. Prior to traveling, Xavier paid $150 for the renewal of his car registration. His spouse, Renada, also came along on the trip and they went sightseeing in Manhattan for 4 days before heading back home to Akron.

Identify the allowable deductions for all of Xavier’s contributions to the Presley Knope Foundation in 2023.

A portion of the cost of the fundraiser tickets.
Five hours of Xavier’s rate for the contribution of his services.
Travel costs at the per-mile rate for charitable contributions of services.
The full cost of meals, including tips.

Answer 29

Xavier will receive a deduction for the auction item. Only the excess of the amount paid above the FMV of the meals and costs incurred by the charity is considered deductible to the individual. In Xavier’s case, he paid $2,500 each for two tickets, for a total of $5,000. The market value of the meals and services provided at the event was $750/person. Therefore, the deductible amount to Xavier is $5,000 - $1,500 ($750 x 2 tickets) = $3,500

The IRC states that the value of donated time and services is not considered a charitable contribution.

Because a substantial amount of time was spent sightseeing with his spouse in Manhattan, the IRS would likely treat Xavier’s travel expenses and out-of-pocket expenses to be more personal in nature. Therefore, he would not be eligible for deductions related to the contribution of services.

Question 30

Glennon set up a Qualified Personal Residence Trust (QPRT) with a 15-year trust term and transferred her primary residence into the trust. She originally paid $400,000 for the home. At the end of the trust term, the home was valued at $750,000 and ownership was transferred to the remainder beneficiaries, who intend to sell the house. Glennon paid $35,000 in gift taxes even after utilizing her annual exclusion amount.

What is the basis of the home for Glennon’s beneficiaries? Round to the nearest $10.

$416,710
$435,000
$400,000
$418,310

Answer 30

One of the disadvantages of a QPRT occurs when beneficiaries intend to sell the home acquired. In that case, the original basis is transferred & increased by a portion of any gift taxes paid.

To calculate the adjusted basis for the beneficiaries, first, calculate the gift tax adjustment:

Step 1: Calculate the ‘Appreciation Factor’ [(FMV – Basis) ÷ (FMV – Annual Exclusion)]

[($750,000 - $400,000) ÷ ($750,000 - $17,000)] = [$350,000 ÷ $733,000] = 0.4775

Step 2: Multiply the ‘Appreciation Factor’ by the Gift Tax Paid

0.4775 x $35,000 = $16,713

Step 3: Add the gift tax adjustment to the original basis to find the adjusted basis.

$16,713 + $400,000 = $416,713 or, $416,710 (rounded)

Question 31

Each of the following is included in the at-risk amount of a limited partner in a partnership EXCEPT:

The amount that the partnership has borrowed and is liable.
The amount that the taxpayer has borrowed and is personally liable.
Cash contributions
Additional Investments

Answer 31

Cash contributions, additional investments, and any amount that the taxpayer has borrowed and is personally liable for are included in the limited partner’s basis/at-risk amount.

The liabilities of the partnership are not included in the at-risk amount of a limited partner.

Question 32

CCP Games is an Icelandic company that invested €1,000,000 into an American VR company when the exchange rate was $1.50 to €1. After one year the investment was a success and CCP Games saw a 33% return on their investment. In addition, due to the political environment, the Euro (€) fell against the dollar to $1 to €0.90.

How much is CCP Games’ initial investment now worth after converting back into Euros?

€1,795,500
€1,500,000
€2,216.666
€1,995,000

Answer 32

Step 1: Convert €1,000,000 into dollars at $1.50 to €1.
€1,000,000 x 1.5 = $1,500,000

Step 2: Inflate the investment by 33%
$1,500,000 x 1.33 = $1,995,000

Step 3: Convert $1,995,000 back into Euros at a rate of $1 to €.90.
1,995,000 x 0.9 = €1,795,500

Question 33

Boris, a CFP® Professional, recently received a complaint from CFP Board Counsel surrounding high-frequency transfers between deferred annuity contracts with CDSCs. He responded with a detailed answer within the required timeframe and delivered the requested hearing documents, additional written statements, and stipulations. Following an appearance before the Hearing Panel, recommendations for Boris’s disciplinary action were finalized.

According to the CFP Board Disciplinary Hearing Process outlined in the Procedural Rules, what happens next?

A Settlement is Negotiated with CFP Board Counsel

Disciplinary and Ethics Committee (DEC) Review of the Recommendation(s)

Appeal to the Board of Directors Appeals Committee

Disciplinary and Ethics Committee (DEC) Issues a Final Order

Answer 33

After Hearing Panel recommendations are issued, the Disciplinary and Ethics Committee (DEC) reviews the recommendation(s). Then, a Final Order is issued from the DEC. Finally, the Respondent (i.e., the CFP® Professional) can appeal to the Board of Directors’ Appeals Committee.

Note: Appeals are not available to CFP® Professionals receiving a Revocation of their CFP® marks.

Question 34

https://www.bostonifi.com/hubfs/mock/Case.pdf
Based on the information available, what was the net profit margin for Lord of the Wings last year (Year 2)?

3.26
3.22
3.04
4.26

Answer 34

Net Profit Margin = Net Income ÷ Total Sales

5,077.00 ÷ 166,809.00 = 0.0304 = 3.04%

Question 35

https://www.bostonifi.com/hubfs/mock/Case.pdf

Based on the current information available, the price-to-earnings ratio (P/E) for one share of LOTW stock is ___________.

20.08
39.70
45.52
26.02

Answer 35

Price-to-earnings ratio (P/E) = Market Capitalization ÷ Net Income

249,926.50 ÷ 6,295.00 = 39.70

Question 36

https://www.bostonifi.com/hubfs/mock/Case.pdf
Based on the current information available, the price-to-earnings ratio (P/E) for one share of LOTW stock is ___________.

20.08
39.70
45.52
26.02

Answer 36

Price-to-earnings ratio (P/E) = Market Capitalization ÷ Net Income

249,926.50 ÷ 6,295.00 = 39.70

Question 37

https://www.bostonifi.com/hubfs/mock/Case.pdf
Greg wants to invest in a company that is on the upswing that he can hold for a long time. He would like a company that is accelerating its market development & has continued future growth potential.

Review Lord of the Wings P/E ratio over the last 3 years and provide an investment recommendation to Greg.

Greg should invest in LOTW because its P/E ratio has decreased over the past 3 years.
Greg should not invest in LOTW because the P/E ratio has increased over the past 3 years.
Greg should not invest in LOTW because the P/E ratio has decreased over the past 3 years.
Greg should invest in LOTW because the P/E ratio has increased over the past 3 years.

Answer 37

LOTW P/E Ratio (Year 1) = 200,000.05 (Market Cap ) ÷ 4,430.00 (Net Income) = 45.15

LOTW P/E Ratio (Year 2) = 212,234.00 (Market Cap ) ÷ 5,077.00 (Net Income) = 41.80

LOTW P/E Ratio (Current Year) = 249,926.5 (Market Cap ) ÷ 6,295 (Net Income) = 39.70

A stock with a high P/E ratio indicates higher earnings growth in the future when compared to companies with a lower P/E ratio. The last 3 years of data show that LOTW growth has started to slow (falling P/E ratio over the past 3 years).

Therefore, Greg should not invest in LOTW because the P/E ratio has decreased over the past 3 years.

Question 38

https://www.bostonifi.com/hubfs/mock/Case.pdf
Comparing LOTW to similar stocks in the market, which stock has the highest required rate of return for Greg?

Planet of the Grapes Wine, Inc.
Lord of the Wings Chicken Co.
Frying Nemo Seafood
Pita Pan Bread, Inc

Answer 38

The Required Return Rate is calculated using the Capital Asset Pricing Model (CAPM)

[Note: This formula is on the provided formula sheet].

ri = rf + (rm − rf)βi

ri = the investor’s required rate of return
rf = risk-free rate (T-Bill rate serves this end)
rm = return of the market (S&P 500 or some broad index)
βi = Beta of the security being measured for the required return

Lord of the Wings = 4.0 + (9.0 - 4.0)0.85 = 8.25%

Pita Pan Bread, Inc. = 4.0 + (9.0 - 4.0)0.90 = 8.50%

Frying Nemo Seafood = 4.0 + (9.0 - 4.0)0.80 = 8.00%

Planet of the Grapes Wine, Inc. = 4.0 + (9.0 - 4.0)0.89 = 8.45%

Question 39

https://www.bostonifi.com/hubfs/mock/Case.pdf
Based on the provided data, which stock offers the best relative risk-adjusted performance?

Lord of the Wings Chicken Co.
Pita Pan Bread, Inc.
Planet of the Grapes Wine, Inc.
Frying Nemo Seafood

Answer 39

To determine which risk-adjusted performance measure should be used, review the R2 of each stock to find if it is higher than 0.70. In this case, the R2 for each of the stocks is above 0.70. This means that the Beta statistic (β) is reliable and most of the stock’s movements can be explained by the overall market performance.

The question asks for the ‘best relative risk-adjusted performance.’ When Beta is reliable, either Jensen’s Alpha or the Treynor Ratio can be used, however, for ‘relative’ results, Treynor should be selected. [Note: This formula is listed on your CFP Board provided Formula Sheet]

Tp= (rp−rf) ÷ βp

Tp = Treynor Ratio

rp = return of the portfolio

rf = risk free rate of return

βp = beta of the portfolio being measured

Below is the Treynor Ratio calculation for each stock:

Planet of the Grapes Wine, Inc. = (11.0 – 4.0) ÷ 0.89 = 7.87
Frying Nemo Seafood = (9.0 – 4.0) ÷ 0.80 = 6.25
Pita Pan Bread, Inc. = (8.0 – 4.0) ÷ 0.90 = 4.44
Lord of the Wings Chicken Co. = (10.5 – 4) ÷ 0.85 = 7.65

Question 40

https://www.bostonifi.com/hubfs/mock/Case.pdf
Considering that Greg does not want to buy LOTW now, but ultimately wants to own LOTW at a lower price sometime, what would be the worst trade for Greg to make?

Buy a restaurant-based ETF
Buy a Straddle on LOTW
Sell a naked Call option on LOTW
Sell a naked Put option on LOTW

Answer 40

The restaurant-based ETF is not relevant to the situation and can be eliminated.

The maximum risk in buying a straddle is the premium you pay for the contract which is low in comparison to the other options.

Selling a naked Put has the maximum possible loss of the value of the stock going to $0.

However, selling a naked Call has unlimited potential risk as the value of LOTW could theoretically go up to an unlimited price which Greg would then be obligated to deliver to the buyer.

Question 41

https://www.bostonifi.com/hubfs/mock/Case.pdf
Greg is a dedicated dividend investor and places a great deal of trust in the discounted dividend valuation model. He has determined that he needs a 30% rate of return to be happy with the stock.

Based on the dividend growth model what should you tell Greg? Assume that the current growth rate will continue into the future.

He should buy LOTW because it is overvalued.
He should buy LOTW because it is undervalued.
He should not buy LOTW because it is undervalued.
He should not buy LOTW because it is overvalued.

Answer 41

First, calculate the dividend growth (see the dividend-growth section of financial data):

0.16, PV; -0.24, FV; 2, N; Solve for I/YR = 22.48%

To find the intrinsic value of the stock, use the Constant Growth Dividend Discount Model:

V = D1 ÷ (r − g)

D1 = next year’s dividend [D1 = D0 × (1+g)]
r = the investor’s required rate of return
g = the dividend growth rate

[0.24 x 1.2248] ÷ (0.30 - 0.2248)

0.2940 ÷ 0.0752 = $3.91

The current FMV of the stock is $55.98

He should not buy LOTW because it is overvalued based on the Constant Growth Dividend Discount Model.

Question 42

https://www.bostonifi.com/hubfs/mock/Case.pdf
To provide an additional source of income in his portfolio, Greg has decided that he wants to invest his money into a bond. The bond he has selected has a face value of $1,000 with a maturity date of seven years. The bond’s coupon rate is 6.25%, compounded annually. Today, the bond sells for $1,185.00. The bond states that it can be called for $1,100 after five years.

Calculate the yield to worst.

3.00%
3.25%
3.95%
6.25%

Answer 42

YTM: -1,185, PV; 1,000, FV; 62.50, PMT; 7, N; Solve for I/YR = 3.25%
YTC: -1,185, PV; 1,100, FV; 62.50, PMT; 5, N; Solve for I/YR = 3.95%

YTM = 3.25%

Question 43

https://www.bostonifi.com/hubfs/mock/Case.pdf
If the market risk premium were to increase, the value of common stocks, including LOTW Company stock, (holding all other factors constant) would ______________________.

Increase to compensate an investor for increased risk.
Not change because the market risk premium does not affect stock values.
Decrease to compensate an investor for increased risk.You correctly checked this.
Increase because of higher risk-free rates.

Answer 43

The market risk premium is the rate of return required for investors to take market risk. As the rate increases, the value of investment assets should fall. In other words, as risks increase in the market, investors adjust downward return expectations, which then depresses the value of a common stock. As a result, stock prices go down

Question 44

https://www.bostonifi.com/hubfs/mock/Case.pdf
Recent market volatility has prompted Greg to call your financial planning office to discuss his various holdings and the likelihood of each generating negative returns. He has mentioned that he’d feel uncomfortable with losses that exceeded -15% on his Frying Nemo Seafood stock.

Based on the stock’s data, what is the probability that Frying Nemo Seafood will have returns lower than -15% this year?

2.5%
16%
50%
5%

Answer 44

Use the normal distribution curve and probability to find the solution.

The mean return for Frying Nemo Seafood is 9%; the standard deviation (σ) is 12%.

-1σ = -3% [9% - 12%]

-2σ = -15% [(-3%) – 12%]

There is approximately a 95% probability that the actual return will lie within + / - two standard deviations from the mean.

Stated otherwise, 5% of the actual return will lie outside of + / - two standard deviations from the mean. Of this 5%, 2.5% of the returns will fall above +2σ and 2.5% of the returns will fall below -2σ.

Therefore, there is a 2.5% probability that Frying Nemo Seafood will have a return that is lower than -15%.

Question 45

Raphael, age 55, paid premiums totaling $250,000 over 20 years into a flexible premium non-qualified tax-deferred variable annuity. The current account value is $400,000. Raphael is in a 22% marginal income tax bracket. He is choosing to annuitize the contract under a life-only option. The expected monthly life-only annuity payment is $1,600. His life expectancy is 30 years.

What is Raphael’s annual taxable income relative to the annuity payments?

$10,867
$16,250
$8,333
$19,200

Answer 45

First, the monthly payment must first be expressed annually, $1,600 x 12 = $19,200.

Next, the annual annuity payment is multiplied by 30 years to find the total expected payments, $19,200 x 30 = $576,000. This is the denominator in the annual exclusion allowance calculation. The numerator in the calculation is Raphael’s basis of $250,000.

Then, use the exclusion ratio to determine the percentage of each annuity payment that is taxable. $250,000 ÷ $576,000 = 0.4340. 43.4% of the annuity payments are tax-free. The taxable portion of the annuity payments is 1 - 0.434 = 0.5660. 0.566 x $19,200 = $10,867 taxable income.

Question 46

Ying, age 65, has a partnership long-term care insurance policy. After a 90-day elimination period, the policy provides $300 per day for 3 years for qualifying long-term care expenses. Ying’s only personal asset is a brokerage account valued at $500,000.

Ying fell down a flight of stairs and has been confined to a wheelchair for the past 48 months. She has been unable to get in and out of bed or get on and off the toilet without standby assistance from a caregiver who stays at her home with her during the day while her brother is at work. Ying has exhausted the benefits of her long-term care insurance policy and feels she may need to apply for Medicaid for assistance in paying for her home health caregiver.

What amount of Ying’s assets will she be able to shelter during the Medicaid spend-down requirement?

$2,000
$328,500
$0
$171,500

Answer 46

Because Ying owned partnership long-term care insurance, she may shelter an amount equal to the benefits paid from her partnership LTCi policy before the benefits were exhausted. Her policy paid $300 per day for 3 years (1,095) days. As a result, she may shelter $300 x 1,095 days = $328,500 under the Medicaid spend-down period.

Question 47

The U.S. economy is currently characterized by the following features:

interest rates have been artificially kept low for a prolonged period
housing and rents are becoming unaffordable
unemployment rate that is below the normal rate
Which Fiscal Policy action is likely to be implemented?

Raising the discount rate.
Increasing taxes.
Selling Treasury securities.
Enacting tax cuts.

Answer 47

Based on the overview, the U.S. economy seems to be reaching the peak of the business cycle and will soon be headed into a contraction, or, possibly, a recession. As a result, a restrictive approach will be implemented by the Fed (Monetary Policy) and/or Congress (Fiscal Policy). Of the options available, only two involve Fiscal Policy actions: tax cuts and increasing taxes. Since the economy is likely on the cusp of overheating, increasing taxes will result in less money for households and businesses and can facilitate a restrictive approach to the economy.

Question 48

Under COBRA, the maximum period of continuation coverage for the family members of an employee who enrolls in Medicare is _________.

29 months
18 months
5 months
36 months

Answer 48

The family members of an employee who enrolls in Medicare can extend the coverage the employee had at their employer for 36 months.

Question 49

Stephanie, a U.S. Army Reservist, purchased a home 5 years ago for $200,000. Six months later, she was called to active duty and served for four years in Eastern Europe. Upon returning to the U.S., Stephanie lived in her home for another six months then sold the home for $550,000.

Following the sale of her home, she bought a condo for $450,000. Stephanie files her taxes as Single and has not used any home sale exclusions previously.

Identify the CORRECT tax treatment of Stephanie’s sale proceeds.

• Stephanie qualifies for the full exclusion amount available since she owned the home for five years.
• A proportionally reduced exclusion will apply because Stephanie had to relocate due to unforeseen circumstances but did not fulfill the required tests.
• Because Stephanie did not meet the ownership and use tests, any gains above her purchase price will be fully taxable upon sale.
• Stephanie will pay taxes on the gains generated from the residence sale, but these may be reduced by the deduction for moving expenses for members of the Armed Forces.

Answer 49

Stephanie has not fulfilled the ownership or use tests to qualify for the full exclusion amounts on gains under Section 121 (Exclusion on the Sale of a Personal Residence). If active-duty service members don’t meet the ownership and use tests because they’ve moved or changed duty stations, they can still qualify for the exclusion, but at a reduced amount. Because she has this qualifying exception (i.e., called to active duty and serving overseas), Stephanie is eligible for a reduced exclusion.

Within the last 5 years, Stephanie owned the home for 5 years but ONLY lived in the home for 1 year. As a result, a reduced exclusion applies, calculated as follows:

Reduced Exclusion: $250,000 X 365/730 = $125,000
Gain: $550,000 - $200,000 = $350,000
Taxable Amount: $350,000 - $125,000 = $225,000

Therefore, a proportionally reduced exclusion will apply because Stephanie had to relocate due to unforeseen circumstances but did not fulfill the required tests.

Question 50

Shauna and Jayson are a married couple preparing to send their oldest child, Bryce, off to college. Though they have been working with a CFP® professional for comprehensive financial planning for twelve years, they are $80,000 short of the education funding they need.

To quickly earn extra money to put towards Bryce’s college expenses, Jayson contacted the CFP® professional and instructed her to withdraw $50,000 from a Roth IRA account. He mentioned the withdrawal was for “a no-brainer, all-upside investment opportunity with a couple of college buddies.” The CFP® professional processed the request. Upon receipt of the withdrawn funds, Jayson sent an email to the CFP® asking that she “not share this with Shauna.”

How should the CFP® professional proceed?

Reveal the withdrawal during a presentation of an “investment snapshot” report during their next in-person meeting.

Remind the couple that open and honest communication will improve their financial wellness.

Call Shauna immediately to let her know about the withdrawal.

Meet one-on-one with Jayson to discuss how the withdrawal impacts the couple’s retirement plan.You shouldn’t have checked this.

Answer 50

In this situation, there is dishonesty around the couple’s financial situation. The best option to facilitate financial wellness is to remind the clients that open and honest communication is essential.

Question 51

Gigi is listed as owner and insured on a Universal Life insurance, Option B policy. Eighteen months ago she transferred the policy into an Irrevocable Life Insurance Trust (ILIT) and will be using the annual exclusion amount to pay the policy premiums. Gigi’s spouse, Lorne, is listed as the beneficiary on the policy. To date, Gigi has deposited $150,000 into the policy and the average interest rate is 2.35%. The policy’s current face value is $500,000.

If Gigi were to predecease Lorne and pass away today, what amount of the Universal Life insurance policy would be included in her gross estate?

The life insurance policy will be excluded from Gigi’s estate.
The lesser of the FMV or interpolated terminal reserve.
The face value only.
The face value and cash value.

Answer 51

The death benefit on a Universal Life, Option B policy is both the face value and cash value, combined.

Gigi transferred an existing policy on which she was the insured and owner into an ILIT and only eighteen months had elapsed before her passing. As a result, the face value and cash value will be pulled back into the gross estate.

Question 52

Uncle Bartholomew gave his niece, Lisa, a residential house in the current year. He originally purchased the house ten years ago for $320,000. The appraisers determined that the value of the house on the date of the gift was $315,000. In the year prior to the transfer, Uncle Bartholomew added a new roof for $25,000 and spent $3,000 to repair damaged floorboards.

Within 3 months of receiving the house, Lisa converted it to a rental property when it was valued at $350,000.

Identify the CORRECT statement about the basis that will be used for depreciating Lisa’s rental property.

• Because Uncle Bartholomew and Lisa are related and the property was transferred at a loss, the basis cannot be determined until Lisa sells the property.
• Lisa will use the value of the home on the date she converted it to a rental property as the basis for depreciation.
• Lisa will add the cost of the roof to Uncle Bartholomew’s purchase price to determine the basis for depreciating the rental property.
• Lisa will add the roof costs and floor repairs to the fair market value of the property on the date of the gift to determine the basis for depreciating the rental property.

Answer 52

When a personal residence is converted to business use (or for use in the production of income), its starting point for the basis for depreciation is the LOWER of:

the adjusted basis on the date of conversion, or
the property’s fair market value (FMV) at the time of conversion.
The property’s fair market value at the time of conversion was $350,000.

The adjusted basis of the property was $320,000 (original basis) + $25,000 (capital improvement) = $345,000.

Therefore, Lisa will add the cost of the roof to Uncle Bartholomew’s purchase price to determine the basis for depreciating the rental property (i.e., $345,000).

Related party rules do not apply in Lisa and Uncle Bartholomew’s transaction because the property was GIFTED at a loss, NOT SOLD.

The repaired floorboards would not be considered a substantial improvement to the property which would increase the basis.

Question 53

Mecayla’s whole life insurance policy has a face amount of $300,000 with a current cash value of $100,000. The annual premium is $10,000. Policy dividends have been used to purchase paid-up additions which now total $100,000.

Mecayla, who is age 50, has been certified by a physician to be terminally ill and is expected to die within 12 months. She sells her policy to a viatical settlement company for $100,000. The company continues to pay the annual premium and Mecayla dies five years later.

What is the after-tax benefit at Mecayla’s death to the viatical settlement company assuming a 21% corporate tax rate and the same current policy values?

$300,000
$347,500
$237,000
$316,000

Answer 53

The total death benefit payable to the viatical settlement company is $400,000 under a whole life policy, consisting of the original $300,000 face amount plus the $100,000 paid-up dividend additions. The viatical settlement company’s basis is $150,000 ($100,000 (amount paid originally) + $50,000 (additional over 5 years)). The taxable gain is $400,000 - $150,000 (basis) = $250,000. The gain is taxed at 21% ($250,000 x (1 – 0.21) = $197,500 after-tax). The after-tax amount of $197,500 is added to the basis of $150,000 for a total after-tax benefit to the viatical company of $347,500 ($197,000 + $150,000).

Question 54

Cheri established a Grantor Retained Annuity Trust (GRAT) in January of 2023 and transferred several stocks and cash into the trust. The initial valuation of the trust corpus was $2,000,000 and the trust income rate is 4%. The valuation of the trust in 2024 is $1,400,000.

If Cheri was in the 35% marginal tax bracket in 2023, calculate the tax due on the trust income received. Round to the nearest $100.

$24,600
$19,600
$28,000
$27,900

Answer 54

Grantor trust income is taxable to the grantor at their individual marginal tax rates. In this case, the valuation of the trust at inception was $2,000,000. The trust income was based on a 4% rate, therefore, $80,000 of income was received in 2023 ($2,000,000 x 0.04). The $80,000 is taxed at Cheri’s marginal rate of 35%; $80,000 x 0.35 = $28,000 of tax due.

Note: The trust and estate tax tables provided on your CFP Board tax tables are for non-grantor trusts. Grantor trust income received is taxable to the grantor at their individual rates.

Question 55

Blake attained age 73 on July 1, 2023. He has three traditional IRAs with respective account balances on December 31, 2022, of IRA-A: $200,000, IRA-B: $50,000, and IRA-C: $150,000. Blake is still employed and plans on retiring on January 1, 2025. His employer sponsors a Section 401(k) plan, and Blake’s account balance was $100,000 at the end of 2022. The respective account balances are projected to be the same on December 31, 2023. The IRS Table I required minimum distribution divisor for age 73 is 16.4 and 15.6 for age 74.

If Blake delays his first required minimum distribution until April 1, 2024, what total required minimum distributions must be made in 2024?

$51,282
$56,441
$25,641
$50,031

Answer 55

If Blake delays his first RMD to April 1 of 2024, he must also take his 2024 RMD by December 31, 2024. Because he has not yet retired, Blake may continue to defer RMDs from the Section 401(k) plan until he actually retires.

The 2023 RMD is $400,000 ÷ 16.4 = $24,390

The 2024 RMD is $400,000 ÷ 15.6 = $25,641.

Question 56

A financial planning client calls your office to explain that a debt collector has contacted them and requested repayment of a debt from 4 years ago. Your client seems to be confused by the call and sounds distraught as you talk to them.

The client states that they cannot recall any outstanding debts and mentions that this is the first call from any debt collector that they have ever received. They ask for your review of the situation and guidance on the next steps.

What is the FIRST action to take in this scenario?

Suggest that the client wait for follow-up calls or mailed letters from the debt collector before moving forward.
Review your client’s credit report for outstanding debts and missed payments.
Advise that the client pay the debt to avoid penalties and potential legal action.
Recommend that your client contact the debt collector directly for additional information.

Answer 56

Since your client has no recollection of any previous missed payments, the unpaid debt is from years ago, and this seems to be the first communication from a debt collector, it is possible that your client may have been contacted by a scammer.

A reasonable first step would be to review their current credit report.

In general, information such as late or missed payments remains on a credit report for seven years. Because this supposed unpaid debt is from four years ago, any missed/late payments from the client would be included there.

Question 57

Dawn, age 57, is attending school at a qualifying educational institution to pursue a master’s degree in accounting. This year the cost of attendance was $11,250 and Dawn received a $4,000 scholarship. Her daughter, Maritza, is currently in her fifth year at Central Midwest University, majoring in engineering. Maritza’s tuition & required enrollment fees this year totaled $8,000. Dawn files her taxes as Single and her Modified Adjusted Gross Income (MAGI) this year is $87,000.

Calculate the total educational tax credits available to Dawn & Maritza this year.

$1,450
$4,500
$3,950
$600

Answer 57

Neither Dawn nor Maritza is eligible to claim the American Opportunity Tax Credit (AOTC) since they are not in their first four years of undergraduate studies.

Both Dawn and Maritza have expenses that qualify for the Lifetime Learning Credit (LLC). The pool of eligible educational expenses for a tax year is $10,000 per return, regardless of the number of students. For Dawn, the cost of attendance was $11,250, but a $4,000 scholarship lowers her qualified expenses to $7,250. Maritza had $8,000 of qualified expenses, however, only $2,750 are eligible for LLC. Dawn and Maritza, therefore, have a total of $10,000 in qualified education expenses under the LLC.

This translates into a $2,000 maximum credit ($10,000 X 20%), however, Dawn’s MAGI falls within the phaseout range for the LLC of $80,000 to $90,000. As a result, the $2,000 tentative credit will be reduced.

Phaseout calculation: ($90,000 (upper limit) - $87,000 (MAGI)) ÷ $10,000 (entire phaseout range) = 0.30 x $2,000 (tentative LLC) = $600.