Brett Danko CFP

Question 1

Heuristics

Answer 1

Experiences and Biases that can facilitate problem-solving and probability judgements

Examples in daily life are “trial and error” and “rules of thumb”

These strategies are generalizations that can result in inaccurate or irrational conclusions

Question 2

Behavioral Finance

Answer 2

The study of how psychology affects finance

Question 3

Anchoring

Answer 3

The tendency of investors to become attached to a specific price as the fair value of a holding

Example: You bought a stock at $100 a share. It drops to $50. You believe that the stock’s real value is around $100 and based on this expectation you are inclined to hang on since it “should” come back around

Question 4

Attachment Bias

Answer 4

Holding onto an investment for emotional reasons rather than considering more practical applications

Example: My grandfather left me this stock so I can never sell it

Question 5

Endowment Bias

Answer 5

The feeling that because you own an asset, it is more valuable and special since it is yours. In reality, you might not even purchase the asset if you didn’t already own it.

Example: You inherited the family summer home and wouldn’t ever sell it even though it has become a money pit

Question 6

Cognitive Dissonance

Answer 6

The challenge of reconciling two opposing beliefs

Example: Remembering the positive part of an experience but forgetting the negative

Question 7

Confirmation Bias

Answer 7

The natural human tendency to accept any information that confirms our preconceived position or opinion and to disregard any information that does not support that preconceived notion

Example: An investor hears about a hot stock from an unverified source and is intrigued by the potential returns. That investor might choose to research the stock in order to prove its touted potential is real by only focusing on the positive aspects of the stock and disregarding any negative aspects

Question 8

Diversification Errors

Answer 8

Investors tend to diversify evenly across whatever options are presented to them

Example: Consider the style-box mania where investors feel compelled to own a piece of each box in order to be diversified. 401k participants tend to spread their money across whatever options they have

Question 9

Fear of Regret

Answer 9

The tendency to take no action rather than risk making the wrong one

Example: An investor holds onto a stock that’s losing value, because if they sold and it rebounded they would feel even worse

Question 10

Financial Infidelity

Answer 10

Couples or partners with shared money or finances being dishonest with each other

Example: One partner hiding excessive spending, debt, etc. from the other person

Question 11

Gambler’s Fallacy

Answer 11

An individual erroneously believes that the onset of a certain random event is likely to happen following an event or a series of random events

Example: Some investors believe that they should liquidate a position after it has gone up in a series of subsequent trading sessions because they do not believe that the position is likely to continue going up. Conversely, other investors might hold on to a stock that has fallen in multiple sessions because they view that further declines as improbable. The solution is investors should base their decisions on analysis

Question 12

Non-Community Property Interest

Answer 12

1. Income earned by spouses prior to marriage
2. Property received as a gift by one spouse
3. Property inherited by one spouse
4. Interest earned on separate assets held by one spouse as a sole owner

Question 13

Joint Tenancy With Rights of Survivorship (JTWROS)

Answer 13

1. Property can be held by husband and wife, parent and child/children, siblings, and business partners
2. Control, ownership, and enjoyment shared equally by all joint tenants
3. Upon death of each tenant, property immediately passes to surviving joint tenants in equal shares
4. Property NOT controlled by terms of the will
5. Property NOT subject to probate

Question 14

Tenancy by the Entirety

Answer 14

1. Ownership can only be held by a husband and wife
2. Transfer of property can only occur with the mutual consent of both parties
3. In most states, property is protected from the claims of each spouse’s separate creditors, but NOT protected from the claims of both spouse’s joint creditors

Question 15

Tenancy in Common

Answer 15

1. Two or more owners each own an undivided interest in the property
2. Any income is distributed according to each owner’s respective share in the property
3. Owners are free to transfer their respective share of the property to other individuals
4. Ownership stake goes through probate upon death

Question 16

Assets NOT Subject to Probate

Answer 16

1. Property conveyed by deeds of a title (IRA with bene)
2. Property held by JTWROS
3. Co-Ownership of government savings bonds
4. Revocable living trusts
5. Payable on death accounts (PODs)
6. Totten trust

Question 17

Assets Subject to Probate

Answer 17

1. “Singly” Owned assets
2. Property held by tenancy in common
3. Assets where the bene is the “estate of the insured”
4. Community property

Question 18

Assets Included in Gross Estate

Answer 18

1. “Singly” owned assets
2. Tenancy in common
3. Beneficiary is the estate
4. Community property
5. JTWROS/Entirety
6. Life Insurance
7. General Powers
8. 3-year gross-up on gift taxes paid (but NOT GST taxes paid)

Question 19

Life Insurance Added to the Estate if…

Answer 19

1. Proceeds are paid to the executor of the decedent’s estate
2. Decedent at death possesses an incident of ownership in the policy
3. Decedent transferred a policy with an incident of ownership within three years of death

Question 20

How is a gift valued for gift tax purposes?

Answer 20

For gift tax purposes, the value is the fair market value of the gift at the date of gift

Question 21

How is the basis of a gift decided?

Answer 21

1. If sold above the donor’s basis, use that basis (there is a gain)
2. If sold between the donor’s basis and FMV on the date of gift, there is no gain or loss (do not worry about basis)
3. If sold below the FMV of the date of gift, use FMV as the basis (there is a loss)

Question 22

What are Deductible Gifts/Qualified Transfers?

Answer 22

These gifts are exempt from being a taxable gift

1. Gifts to a spouse, provided they are not a terminal interest
2. Gifts to qualified charities
3. Qualified payments in any amount made directly to an educational institution for tuition
4. Qualified payments in any amount made directly to a medical care provider on behalf of any individual
5. Gifts to American political parties

Question 23

What are Taxable Gifts?

Answer 23

Gifts that exceed the annual exclusion of $18,000 per individual

Question 24

How do taxable gifts interact with an estate?

Answer 24

1. Taxable gifts are added to the taxable estate
2. Gift taxes paid/payable are generally allowed as a credit against the tentative tax
3. gift taxes paid on any gifts within three years of death are added to the gross estate

Question 25

Non-Durable Power of Attorney

Answer 25

Power ceases when the principal is no longer legally competent

Question 26

Durable Power of Attorney

Answer 26

Power continues when principal becomes incompetent

Question 27

Springing Durable Power of Attorney

Answer 27

Power starts when principal becomes incompetent

Question 28

Special Power of Appointment

Answer 28

Exercisable only with the consent of the creator of the power or a person having a substantial adverse interest

Question 29

Ascertainable Standard

Answer 29

Special “standards” that have to be met for a trust to release funds (HEMS)

Health
Education
Maintenance
Support

Question 30

General Power of Appointment

Answer 30

Holder may exercise power in any manner they want (think rev trusts. No difference from outright owning the property)

Question 31

“5 or 5” Power

Answer 31

Property subject to a general power will be included in a donee decedent’s estate (or considered a taxable gift) only to the extent that the property exceeds the greater of:

1. $5,000
2. 5% of the total value of the fund subject to the power as measured at the time of lapse

Question 32

How does having general power over a trust implicate gift taxation and estates?

Answer 32

Gift Taxation:
1. If power exercised, released, or lapsed - taxed
2. If power lapsed with a 5 or 5 power, not taxed

Estate Taxation
1. If power exercised, released, or lapsed - taxed
2. If power exercised, released, or lapsed with a 5 or 5 power - greater of the 5 or 5 is taxed

Question 33

When would a trust become defective/tainted?

Answer 33

1. If the grantor retains a right to use/enjoy trust property (beneficial enjoyment)
2. A reversionary interest exceeding 5% (retained interest)

Question 34

What are the elements of a trust

Answer 34

1. There must be property (corpus/principal)
2. There must be a grantor
3. There must be a trustee who received legal title to the property
4. There must be a beneficiary who has equitable title to the property
5. The grantor and trustee must be legally competent

Question 35

What are simple trusts?

Answer 35

They are merely a conduit for forwarding income to the beneficiaries (2503(b), Marital, QTIPs)

Question 36

What are complex trusts?

Answer 36

They are separate tax entities that…

1. Are irrevocable and the grantor has not retained any control
2. Income is accumulated

(2503(c))

Question 37

What is a Crummey Trust?

Answer 37

1. An irrevocable trust with demand rights
2. Demand right is given to a minor through their guardian
3. The bene has the right to demand a withdrawal from the trust that is the lesser of the annual gift exclusion ($18k) or the amount gifted
4. Bene has 30 days from the time of gift to execute their withdrawal

Question 38

Nonmarital “B” Trust

Answer 38

1. Property transferred to the trust at the time of a decedent’s death
2. Can be structured to provide a stream of income to surviving spouse or other individuals
3. Decedent has postmortem control
4. (Family, Bypass, Credit Shelter, Unified Credit Shelter)

Question 39

Qualified Terminal Interest Property (QTIP) “C” Trust

Answer 39

1. Provides surviving spouse with a stream of income for life, but the decedent has postmortem control of the trust property
2. Property qualifies for a marital deduction
3. Mainly used for 2nd marriages
4. Think LAME

Lifetime income for the spouse
Annual payments to the spouse
Mandatory payments to the spouse
Exclusively for the spouse

Question 40

What is a qualified domestic trust (QDT/QDOT)

Answer 40

1. No unlimited marital deduction
2. No estate tax due
3. Jointly held property between spouses is not considered one-half owned
4. Limited gift between spouses of only 100K (indexed) per year
5. Used for foreign spouses

Question 41

What are gift vehicles of present interest?

Answer 41

1. UGMA/UTMA
2. 2503(c) Trust
3. Section 529 College

Question 42

What are charitable transfers that would provide the donor with income?

Answer 42

1. Charitable Remainder Annuity Trust (CRAT) - 5%
2. Charitable Remainder Unitrust (CRUT) - 5%
3. Pooled Income Fund - no 5% distribution required
4. Charitable Gift Annuity - no 5% distribution required

Question 43

What charitable transfers would provide the charity with income?

Answer 43

1. Charitable Lead Trust (CLAT/CLUT) - no 5% distribution required
2. Private Foundation - 5% but can give money to individuals

Question 44

What are the intrafamily transfers if the donor needs income?

Answer 44

PIGS need income

Private Annuity
Installment Sale
Grantor annuity trusts (GRAT/GRUT)
Self-canceling installment note (SCIN)

Question 45

What are the intrafamily transfer if the donor wants to gift assets?

Answer 45

1. A partnership/S-corp
2. A family limited partnership (FLP)
3. A gift leaseback
4. A qualified personal residence trust (QPRT)

Question 46

When can someone disclaim inherited property?

Answer 46

1. The disclaimer must be an irrevocable refusal to accept the interest
2. Refusal must be in writing
3. Refusal must be received within nine months
4. The intended donee cannot have accepted any interest in the benefit
5. The interest will pass, without any input from the disclaimer, to someone else

Question 47

What is a Section 303 Stock Redemption?

Answer 47

A way to provide a closely held business owner’s estate with liquidity

1. The business must be incorporated (closely held)
2. The value of the business must exceed 35% of the decedent’s adjusted gross estate
3. Redemption cannot exceed the sum of the estate taxes plus administration expenses

Question 48

What is a Section 6166 Installment Payment of Estate Taxes?

Answer 48

A way to provide a closely held business owner’s estate with liquidity

1. The Value of the business must exceed 35% of the decedent’s adjusted gross estate
2. During the first 4 (of 14) years the estate can pay interest only on taxes due

Question 49

What is a way to reduce estate taxes with a closely held property?

Answer 49

A Section 2032A Special Use Valuation

1. 25% of the gross estate consists of real property
2. Must be in qualified use - 5 out of 8 year rule before death and 10 years after death

Question 50

What is a risk?

Answer 50

A condition where there is a possibility of loss or a situation where to an exposure to loss exists

Question 51

What is a peril?

Answer 51

The cause of a possible loss, the event insured against perils like windstorm, fire, and theft

Question 52

What is a hazard?

Answer 52

A condition that may create or increase the chance of loss arising from a given peril

EX: Owning a home by a river

Question 53

What makes something insurable?

Answer 53

1. The loss must be definite and measurable
2. Must be fortuitous or accidental
3. There must be a large number of homogeneous exposure units
4. The loss must not be catastrophic for the insurance company

Question 54

What are methods to avoid and/or reduce loss?

Answer 54

1. Avoidance (renting property instead of owning it)
2. Diversification (having property in multiple warehouses instead of one
3. Transfer (insurance)
4. Retention (co-insurance/deductibles)
5. Reduction (safety programs)

Question 55

When is it worth insuring something?

Answer 55

You should insure risks what have a high severity and low frequency

Any other risk with high frequency would be too expensive to insure

Question 56

What are the perils covered with basic insurance?

Answer 56

The policy covers WHARVES/FLT

Windstorm
Hail
Aircraft
Riot
Vandalism
Vehicles
Explosion
Smoke

Fire
Lightning
Theft

Question 57

What are the perils covered with broad insurance?

Answer 57

Everything basic insurance covers (WHARVES/FLT) plus the RAF

Rupture of a system
Artificially generated electricity
Falling objects
Freezing of plumbing

Question 58

When must insurable interest be present for life insurance?

Answer 58

It only needs to be there when the policy is purchased

Question 59

When must insurable interest be present for property/casualty insurance?

Answer 59

It must be there when the policy purchased and at the time of the claim

Question 60

What are features of a defined benefit qualified plan?

Answer 60

1. Favors older employee/owners
2. Provides a certain retirement benefit (max $275k)
   Can be used to meet a certain retirement objective
3. Company must have very stable cash flow
4. Past service credits are allowed
5. Forfeitures must be applied to reduce employer contributions
6. PBGC insured

Question 61

What are the features of a money purchase pension plan?

Answer 61

1. Up to 25% of employer contributions are deductible
2. Mandatory fixed contributions - business must have a stable cash flow
3. Max annual contribution of 100% of salary or $69,000

Question 62

What are the features of a target benefit pension plan?

Answer 62

1. Up to 25% of employer contributions are deductible
2. Mandatory fixed contributions - business must have a stable cash flow
3. Favors older workers.
4. Benefits are not guaranteed. They are based on the employee’s balance at retirement (can be higher/lower)
5. Follows section 415 contribution limit

Question 63

What are the features of a profit sharing plan?

Answer 63

1. Up to 25% of employer contributions are deductible
2. Flexible contributions must be “recurring and substantial”. It is okay to not contribute anything for a year or two
3. Follows section 415 contribution limit
4. Can have 401k & SIMPLE provisions (SIMPLE 401k is exempt from creditors

Question 64

What are the features of a section 401k plan?

Answer 64

1. Qualified profit sharing or stock bonus plan that allows plan participants to defer salary into the plan
2. Max deferral is $23,000
3. Max contribution is $30,500 (deferral plus catch up if age 50 and over)

Question 65

Section 415 annual additions limit

Answer 65

Includes employer contributions, employee salary reductions, and plan forfeitures. It is the lesser of…

1. 100% of compensation
2. $69,000

Question 66

Safe harbor nondiscrimination

Answer 66

A safe harbor 401k plan automatically satisfies the nondiscrimination tests involving highly compensated employees (HCEs) with either an employer matching contribution or a nonelective contribution

Question 67

Safe harbor match/vesting

Answer 67

Employer contributions must be immediately vested

If employer chooses nonelective deferral method they must contribute 3% of employee’s comp no matter what

If employer chooses match, they must contribute 100% of the first 3% and then 50% on the next 2% deferred

Question 68

What are the features of a stock bonus/ESOP plan?

Answer 68

1. Up to 25% of employee comp is deductible
2. Flexible contributions
3. Follows section 415 contribution limit
4. 100% of contribution can be invested in company stock
5. ESOP cannot be integrated with social security or cross tested

Question 69

What is net unrealized appreciation (NUA) and how is it taxed?

Answer 69

The basis of stock in an ESOP is taxable as ordinary income

The NUA, which is the difference between the basis and market value of stock at the time of distribution, is always an LTCG

Anything above the NUA is taxed as a capital gain depending on how long it is held (short/long)

Question 70

How much can you contribute to a Keogh/HR-10 Plan?

Answer 70

This plan is only for sole proprietorships and partnerships only. To find the max contribution,

1. If a 15% contribution plan, multiply business profit X 12.12%
2. If a 25% contribution plan, multiply business profit X 18.59%

Question 71

What are the features of a SIMPLE plan?

Answer 71

1. Company must have fewer than 100 employees
2. Employer cannot maintain any other plan
3. Participants are always fully vested
4. It is easy to administer and funded by employee salary reductions and an employee match
5. Has a $16,000 max deferral and a $3,500 catch up contribution

Question 72

What are the features of a SEP?

Answer 72

1. Can only make employer contributions which are not required
2. If self employed, contributions are the same as Keogh plans
3. Max contribution is the lesser of 25% of salary or $69,000
4. Always immediately vested
5. Can be integrated with social security
6. To be eligible employees must be 21 years or older, paid at least $750, and have worked 3 out of the past 5 years

Question 73

What are the features of an IRA?

Answer 73

1. No loans from the IRA are allowed
2. No life insurance can be put in one
3. Always immediately vested
4. May not be creditor protected (state specific)
5. Must be 59 1/2 (not 55) for no 10% penalty
6. Must take RMDs at 73 (even if not an owner)

Question 74

What are the features of a tax-deferred annuity (TDA)/tax sheltered annuity (TSA)/403b?

Answer 74

1. Only 501(c)(3) organizations and public schools can establish them
2. Subject to ERISA only if employer contributes
3. Follows section 415 contribution limits

Question 75

What are the age and service rules for qualified plans?

Answer 75

1. The max age and service requirements are age 21 and 1 year of service (21 and 1 rule)
2. Could require two years of service but the employee must be immediately vested
3. A year of service is 1,000 hours or 500 hours while being with the company for 3 years

Question 76

What makes a highly compensated employee (HCE)?

Answer 76

1. A greater than 5% owner (or the child, grandchild, parent, and spouse of one)
2. Any employee earning in excess of $155,000 in the preceding year
3. Used for discrimination testing

Question 77

What makes a key employee?

Answer 77

1. A greater than 5% owner (or the child, grandchild, parent, and spouse of one)
2. An officer who makes more than $220,000
3. A greater than 1% ownership who makes more than $155,000 a year
4. Used to look at vesting

Question 78

What vesting schedules must a DC plan/top-heavy DB plan use?

Answer 78

1. A 3-year cliff vesting schedule
2. a 2-6 year graded vesting schedule
3. 100% vested with a 2-year eligibility

Question 79

What vesting schedules must non-top-heavy DB plans use?

Answer 79

1. A 5-year cliff
2. A 3-7 year graded vesting schedule

3.100% vested with a 2-year eligibility

Question 80

What is the minimum contribution for a top-heavy DC plan?

Answer 80

The minimum employer contribution must be at least 3%

(C is the 3rd letter in the alphabet)

Question 81

What is the minimum contribution for a top-heavy DB plan?

Answer 81

The minimum benefit must be at least 2% of compensation

(B is the 2nd letter in the alphabet)

Question 82

When are rollovers between plans not permitted?

Answer 82

1. Transfers from a non-governmental 457 plan to a different plan. They must go into another 457
2. Hardship distributions cannot be rolled into any other plan
3. RMDs cannot be rolled over

Question 83

When can life insurance be used to fund a retirement plan?

Answer 83

Life insurance benefits must be merely “incidental” to the primary purpose of the plan which means either…

1. The premiums paid for a participants death benefit must be less than the following percentages of the plan cost for that participantOrdinary Life Insurance - 50%
   Term Insurance - 25%
   Universal Life - 25%
2. The participant’s death benefit must be no more than 100 times their expected monthly benefit

Question 84

What qualified plan early distributions (before age 59 1/2) are exempt from the 10% penalty?

Answer 84

1. Death
2. Disability
3. Equal periodic payments following separation from service
4. Distributions following separation from service at age 55
5. Distributions in accordance with a QDRO
6. Medical expenses in excess of 7.5% of AGI or health insurance costs while unemployed
7. Distributions used to pay insurance premiums after separation of employment (must file for unemployment)
8. $5,000 withdrawal for birth/adoption for a child
9. A federal declared disaster (limited)

Question 85

What is the required beginning date for IRA RMDs?

Answer 85

1. April 1st of the year following the year when the individual attained age 73
2. December 31st of each year thereafter

Question 86

When is the required beginning date for qualified retirement plan RMDs?

Answer 86

1. April 1st of the year following the year when the individual attained age 73 or retired
2. December 31st of each year thereafter
3. Biggest point is that no RMDs are required if the employee is still working

Question 87

When is the required beginning date for qualified retirement plan RMDs of a greater than 5% owner?

Answer 87

1. April 1st of the year following the year when the individual attained age 73
2. December 31st of each year thereafter

Question 88

What makes an IRA contribution deductible?

Answer 88

1. If neither spouse is an active participant in an employee plan (not 457 plans), the IRA contribution is deductible
2. If one spouse is an active participant, the other spouse’s IRA contribution is deductible if AGE is less than $230,000 - $240,000
3. If both spouses are active, AGI limits apply - $77,000 - $87,000 (single) and $123,000 - $143,000 (married)

Question 89

What IRA early distributions (before age 59 1/2) are exempt from the 10% penalty?

Answer 89

1. Death
2. Disability
3. Substantially equal payments
4. 1st home expenses up to $10,000
5. Qualified education expenses
6. Medical expenses in excess of 7.5% of AGI or health insurance costs while unemployed
7. Distributions used to pay insurance premiums after separation of employment (must have received unemployment for 12 weeks)
8. $5,000 withdrawal for birth/adoption for a child
9. A federal declared disaster (limited)

Question 90

In what order are Roth IRA’s distributed?

Answer 90

1. Any contributions (not conversions) are withdrawn first
2. Conversions are withdrawn second
3. Earnings are withdrawn last

Question 91

If inherited, how must a Roth IRA be distributed?

Answer 91

1. It must be distributed within 5 years of the owner’s death
2. It muse be distributed over 10 years (stretch eliminated)
3. If spouse is beneficiary, they can roll the Roth into their own or take distributions until the decedent would have turned 73

Question 92

What is a salary reduction plan (NQDC)?

Answer 92

It uses some portion of the employee’s current compensation to fund the plan benefit

Question 93

What is a salary continuation plan (NQDC)?

Answer 93

It uses employer contributions to fund the plan benefit

Question 94

What are the features of a rabbi trust?

Answer 94

1. Assets in a rabbi trust are available for company’s creditors only if the company declares bankruptcy
2. Used when fear that ownership/management may change before comp is paid out
3. Irrevocable trust. Only creditors if bankruptcy can access the funds
4. Think of mergers, acquisitions, or a change of ownership when considering a rabbi trust

Question 95

How long must an ISO be held to retain its tax advantaged status?

Answer 95

Think EGG (1 E for 1 year from exercise date. 2 G’s for 2 years from grant date)

1. 1 year from exercise date
2. 2 years from grant before selling
3. Violating either causes a disqualifying disposition and turns it into an NSO

Question 96

How are NSOs taxed?

Answer 96

At exercise, the difference between basis and market value is ordinary income. Any excess above the the market value at exercise is a capital gain

Question 97

How are ISOs taxed?

Answer 97

If EGG before sale, anything above the basis is an LTCG.

Note that at exercise the bargain element (difference between market value and basis) is an add back item

Question 98

What are features of a 457 deferred comp plan?

Answer 98

1. They are NQDCs for governmental agencies and non-church tax exempt organizations
2. Deferral limited to section 415 limits
3. Only governmental plans allow for a catch up contribution
4. Salary deferrals are not aggregated with other plans
5. Non-governmental plans can only be rolled into other 457s

Question 99

How are DC plans integrated with social security?

Answer 99

Base % + Permitted Disparity = Excess %

Base % - the DC plan contribution for compensation below the integration level

Permitted Disparity - the lesser of the base % or 5.7%

Excess % - The DC plan contribution for compensation above the integration level

Question 100

How are DB plans integrated with social security?

Answer 100

Base % + Permitted Disparity = Excess %

Base % - the DB plan contribution for compensation below the integration level

Permitted Disparity - the lesser of the base % or 26.25%

Excess % - The DB plan contribution for compensation above the integration level

Question 101

What is the limit for elective deferrals into multiple retirement plans?

Answer 101

They are always aggregated to the section 415/SIMPLE contribution limits

Question 102

What is the limit for annual additions into multiple retirement plans?

Answer 102

1. If the employers are related entities, the additions are aggregated and cannot be more than the section 415 limit
2. If the employers are separate, the additions can be $69,000 to each plan (deferral limits still apply, but one employer could put in $35k and the other $45k)

Question 103

What are the related entities for businesses?

Answer 103

Parent-Subsidiary: One entity that owns at least 80% of another entity

Brother-Sister: Five (or fewer) owners of two or more entities own at least 80% of each entity

Affiliated Service Group: A service organization and a professional organization

Question 104

What are the parts of an insurance contract?

Answer 104

Remember DICE

Declarations Page - Factual statements that identify the specific person, property, or activity being insured

Definitions - Explanation of key policy terms

Insuring Agreements - Spells out the basic promise of the insurance company

Conditions - Spells out in detail the duties and rights of both parties

Exclusions - Circumstances when the insurer will not pay

Question 105

How are inherited items taxed?

Answer 105

As long term capital gains

Question 106

What are the ratings for insurance rating companies?

Answer 106

A.M. Best - A++ to F

S&P - AAA to CCC

Question 107

What is in section 1 of a homeowner’s policy?

Answer 107

Remember ABCD

A - Dwelling and attached structures
B - Structures separated from dwelling (fences, shed)
C - Contents and personal property
D - Loss of use

Question 108

What is in section 2 of a homeowner’s policy?

Answer 108

Remember EF

E - Liability
F - Medical payments

Question 109

What property is excluded from personal property coverage?

Answer 109

1. Animals, birds, fish
2. Motorized land vehicles and aircraft
3. Property of roomers, boarders, and other tenants
4. Property contained in an apartment regularly rented or held for rental to others by the insured (unless specifically covered)

Question 110

What perils are covered by the Other Than Collision provision of a PAP?

Answer 110

1. Breakage of glass
2. Loss caused by…
   -Falling Objects
   -Fire
   -Theft
   -Explosion
   -Earthquake
   -Windstorm
   -Hail
   -Water
   -Flood
   -Riot or civil commotion
   -Contact with birds or animals

Question 111

What is umbrella liability insurance?

Answer 111

1. Provides liability coverage (BI/PD) for catastrophic legal claims
2. Requires policy owner to carry certain underlying coverage of specified minimum amounts
3. Professional acts are specifically excluded
4. Nearly always a right answer since it is smart coverage

Question 112

What is malpractice insurance for?

Answer 112

It is for bodily injury/physical claims (doctors, dentists)

Question 113

What is E&O insurance for?

Answer 113

It is for monetary damages (financial advisors, lawyers, etc.)

Question 114

What are features of workers compensation?

Answer 114

1. Unlimited medical expenses
2. Disability income (benefits are tax free)
3. Death benefits
4. Rehabilitation (medical and vocational)
5. Absolute liability

Question 115

Medicare does not cover…

Answer 115

1. Routine foot care, glasses, hearing aids, dental work
2. Emergency care outside the U.S. (some exceptions for Canada, Mexico, and the Caribbean)

Question 116

What is a step transaction?

Answer 116

When the individual transactions are ignored and the ultimate transaction is taxed instead

Question 117

What are the sources of federal tax code?

Answer 117

Internal Revenue Code - Primary source of all tax law

Treasury Regulations - Great authority, but not law

Revenue Rulings and Revenue Procedures - Administrative interpretation/may be cited

Congressional Committee Reports - Indicate the intent of congress/may not be cited

Private Letter Rulings - Apply to a specific taxpayer

Judicial Sources - Court decisions interpreted

Question 118

What is the tax basis for a partnership/LLC?

Answer 118

The basis is made up of…

1. Cash invested
2. Direct loans made to the partnership
3. Loans made to the partnership, not the partner

NOTE: S Corp basis does NOT include bank loans even if the S Corp owner personally guarantees the debt

Question 119

What are the different property classes for MACRS?

Answer 119

Remember CORN (and CAT for 5-year property)

Computers, Autos, and Trucks - 5 year (1245 property)
Office equipment except computers - 7 year(1245 property)
Residential rental property - 27.5 year(1250 property)
Non-residential real property - 39 year(1250 property)

Question 120

What are the rules for recognizing gain of boot?

Answer 120

1. No boot received means recognized gain is zero
2. When boot is received it is the recognized gain of the exchange
3. New basis is basis from previous property plus the boot paid

Question 121

What are the market caps for companies?

Answer 121

Large: Market value exceeds $10 billion

Mid: Market value is between $2 - $10 billion

Small: Market value is less than $2 billion

Micro: Market value is less than $300 million

Question 122

What is an American Depository Receipt (ADR)?

Answer 122

1. A foreign stock held by US banks
2. Prices are quoted in US dollars
3. Dividends are paid in US dollars
4. Dividends are declared in foreign currency

Question 123

What are the three types of the efficient market hypothesis (EMH)?

Answer 123

The Strong Form - All information is reflected. Nothing can outperform the market

The Semi-Strong Form - All publicly known information is reflected. Nothing can outperform the market except inside information

The Weak Form - Historical price data is already reflected. Fundamental analysis may produce superior results

Question 124

What are features of an HMO?

Answer 124

1. Provider paid monthly fee regardless of services rendered (capitation)
2. Out-of-network care not covered at all

Question 125

What are features of a PPO?

Answer 125

1. Provider paid for actual services rendered
2. Out-of-network partially covered (usually 70%)

Question 126

What are some active investing strategies?

Answer 126

1. Market timing
2. Tactical asset allocation
3. Technical analysis

Question 127

How do you calculate EOY capital gains and losses?

Answer 127

1. ST capital gains and losses are netted. LT capital gains and losses are netted
2. If a gain and a loss remain, they are again netted
3. If a loss remains only $3,000 can be used to offset ordinary income

Question 128

What are the features of a Section 121 sale?

Answer 128

1. Sale of a personal residence
2. If lived in home for 2 out of last 5 years $250k/$500k (Single/Joint) gain is tax free
3. Exception to 2 year rule is if taxpayer moves for work/health. They would receive a prorated benefit based on how long they lived there

Question 129

What qualified plans are can be integrated with social security?

Answer 129

1. Defined benefit plans
2. Cash balance plans
3. Money purchase plans
4. Target benefit plans
5. Profit sharing plans
6. Profit sharing 401ks
7. Stock bonus plans

Question 130

How are ESOPs different from other qualified plans?

Answer 130

They cannot be integrated with social security or cross tested

Question 131

What is a straddle?

Answer 131

The investor buys a put and call with the same strike and expiration

Question 132

What is a collar?

Answer 132

The investor sells a call (out of the money) and buys a put at a lower strike price. They do own the stock

Question 133

What is a protective put?

Answer 133

When an investor owns stock and buys a put as insurance incase the underlying declines (good answer for the exam)

Question 134

How are warrants different from call options?

Answer 134

1. Warrants are issued by corporations while calls are created by individuals
2. Warrants typically have maturities of several years
3. Warrant terms are not standardized, call options are standardized

Question 135

How would someone trade futures if they are long a commodity?

Answer 135

They would need a short hedge, in case the underlying’s price declines, and would sell a contract

Question 136

How would someone trade futures if they are short a commodity?

Answer 136

They would need a long hedge, in case the underlying’s price rises, and would buy a contract

Question 137

What are the keys of Arbitrage Pricing Theory (APT)?

Answer 137

1. Unexpected inflation
2. Unexpected changes in industrial production
3. Unanticipated shifts in risk premium
4. Unanticipated changes in structure of yields

Remember YIIR

Yields
Inflation
Industrial Production
Risk Premium

Question 138

What qualifies an accredited investor for Reg D?

Answer 138

1. Having a net worth of $1,000,000
2. Being an individual with an annual income over $200,000
3. Being a couple with a joint income over $300,000
4. Offerings can be sold to an unlimited number of accredited investors

Question 139

What qualifies a non-accredited investor for Reg D?

Answer 139

1. Offering can only be sold to a max of 35 investors
2. Must use a purchaser representative if individual is not sophisticated

Question 140

What retirement plans immediately vest and are cheap to install?

Answer 140

1. SEP
2. SAR-SEP
3. Thrift or savings plan
4. 403(b)

Question 141

What is beta?

Answer 141

An index of volatility used in a diversified portfolio and is a measure of systematic risk

Question 142

What is standard deviation?

Answer 142

STD measures variability of returns used in a non-diversified portfolio and is a measure of total risk

Question 143

What is the difference between Geometric/Time Weighted return and IRR/Dollar Weighted return?

Answer 143

Geometric evaluates the performance of the PM while IRR compares absolute dollar amounts

Question 144

What is the difference between the real return and nominal return?

Answer 144

The real rate of return is the nominal return adjusted for inflation

Question 145

What is the holding period return?

Answer 145

The HPR is the total return (Income + Price Appreciation + Dividends - Margin Interest) over the entire period divided by the cost of the investment

Question 146

What is important to remember about duration?

Answer 146

1. Years to maturity and Duration is positively related
2. Duration and coupon rate is inversely related
3. YTM and current yield are inversely related with duration

(remember coupon & yield are INterest rates and therefore INversely related)

Question 147

What are some features of zero coupon bonds?

Answer 147

1. Duration is equal to their maturities
2. There is no coupon interest, but they still produce phantom income
3. No reinvestment rate risk
4. Sold at deep discounts to par
5. Fluctuate more than coupon bonds with same maturities

Question 148

How would you use duration to manage bond portfolios based on changing interest rates?

Answer 148

1. If rates are expected to rise, shorten duration (UPS - Interest rates UP, Shorten duration). Buy high coupon bonds with short maturities
2. If rates are expected to fall, lengthen duration (FALLEN - Rates are FALling, LENgthen duration). Buy low coupon bonds with long maturities

Question 149

How does the coupon rate affect a bond’s price fluctuations?

Answer 149

The smaller the coupon, the greater the price fluctuation (longer duration)

Think of how zero coupon bonds are the most sensitive

Question 150

How does the term to maturity affect a bond’s price fluctuations?

Answer 150

The longer the term to maturity, the greater the price fluctuation (longer duration)

Question 151

How does the market interest rate affect a bond’s price fluctuations?

Answer 151

The lower the market interest rate, the greater the price fluctuation

Question 152

What is convexity for bonds?

Answer 152

1. The degree to which duration changes as YTM changes
2. Largest for low coupon bonds, long-maturity bonds, and low-YTM bonds (Longer duration for all)
3. Allows investors to improve the duration approximation for bond price changes

Question 153

How is return on equity (ROE) calculated?

Answer 153

ROE = EPS/Book Value

Question 154

How is the dividend payout ratio calculated?

Answer 154

The dividend payout ratio = Common Dividends Paid/EPS

Question 155

What is the tax penalty for negligence?

Answer 155

20% of the portion of underpayment attributed to negligence

Question 156

What is the tax penalty for fraud?

Answer 156

75% of the portion of the tax underpayment attributable to fraud

Question 157

What is the tax penalty for failing to file?

Answer 157

5% of the tax due per month, with a max penalty of 25%

Question 158

What is the tax penalty for failing to pay?

Answer 158

.5% per month the tax is unpaid up to a maximum of 25%

Question 159

What is the tax penalty for a frivolous return?

Answer 159

$5,000

Question 160

How do you prevent getting a federal withholding tax underpayment penalty?

Answer 160

To avoid, pay the lesser of…

1. 90% of the current year’s liability
2. 100% of the prior year’s tax liability (or 110% if last year’s AGI exceeded $150,000

Question 161

What are the itemized deductions for schedule A?

Answer 161

1. Real estate taxes
2. State & local taxes
3. Personal property taxes
4. Medical, dental, and LTC (7.5% of AGI)
5. Casualty & theft losses
6. Investment interest expense
7. Home mortgage interest
8. Charitable gifts

Question 162

How do you calculate the deductible loss of a casualty loss (schedule A)?

Answer 162

1. Make sure it is a federally declared disaster
2. Use the lesser of basis or FMV
3. Subtract any insurance coverage
4. Subtract $100 (floor)
5. Subtract 10% of AGI

Question 163

What is the intrinsic value of an option?

Answer 163

The minimum price that the option will command

It is the difference between the market price and exercise price

Question 164

What is the exercise/strike price of an option?

Answer 164

It is the price at which the stock can be purchased or sold on exercise of the option

Question 165

What is the premium of an option?

Answer 165

It is the market price of an option

As the option approaches expiration, the premium approaches intrinsic value

Question 166

What is the time premium of an option?

Answer 166

It is the amount that the market price exceeds its intrinsic value

IV + TV = Premium

Question 167

What makes a company eligible to be an S Corp?

Answer 167

1. There can only be up to 100 shareholders
2. The corporation can only have a single class of outstanding common stock (no preferred allowed), but the common stock can be voting or non-voting
3. Must be a domestic corporation
4. Only individuals, estates, and certain trusts can be shareholders
5. Nonresident aliens (people who are neither citizens nor permanent residents of the US) cannot be shareholders

Question 168

How do you calculate self-employment tax payable?

Answer 168

Multiple self-employment income by .1413

Note: Self-employment income will never exceed $168,000 (SS tax stops at $168,000)

Question 169

What counts as self-employment income?

Answer 169

1. Net schedule C income
2. General partnership income (K-1 Income)
3. Board of directors fees
4. Part-time earnings (1099)

Question 170

What does not count as self-employment income?

Answer 170

Wages or K-1 distributions from an S Corp

Question 171

How do you calculate AGI?
What are the deductions?

Answer 171

You subtract top of the line deductions from gross income. The main deductions are…

1. IRA Contributions
2. Self-employment tax (half of it)
3. Self-employment health insurance (100%)
4. Keogh or SEP
5. Alimony paid (pre-2019 divorce)

Question 172

What are AMT add back items?

Answer 172

1. ISO bargain element
2. Property and income taxes

Question 173

How would you postpone/eliminate any AMT payable?

Answer 173

1. Purchase public purpose muni bonds instead of private purpose bonds
2. Defer the exercise of an ISO (preference item) to a later date
3. Disqualify an ISO so that it becomes an NSO (subject to ordinary tax)
4. Accelerate receipt of taxable income or defer payment of any itemized deductions (such as charitable giving) to increase your taxable income

Question 174

What items are not deductible for AMT?

Answer 174

1. The standard deduction is not allowed

Question 175

What is the historic rehabilitation program credit?

Answer 175

1. If a historic rehabilitation program is held as a PASSIVE activity it can generate a deduction-equivalent tax credit of up to $25k
2. The benefit phases out between $200k and $250k AGI
3. The credit works by multiplying your max marginal bracket and multiplying it by $25k to get the credit amount

Question 176

What is the low-income housing credit?

Answer 176

1. If a low-income housing program is held as a PASSIVE activity it can generate a deduction-equivalent tax credit of up to $25k
2. The credit is allowed annually over a ten-year “credit period”. The depreciation is straight-line over 27.5 years
3. You would multiply your max marginal bracket by $25k to get the credit amount
4. Because there is no phaseout, it produces a higher credit

Question 177

What are the types of phantom income?

Answer 177

Insurance - Lapse of a policy loan, Section 162 life/disability

Investments - Zero/Strip income, TIPS, declared but not paid

Tax - K-1 income from an LP/FLP, recapture

Retirement - NUA, 20% withholding on plan distributions, secular trust

Question 178

How do you calculate the amount of a charitable gift deduction?

Answer 178

1. Calculate the max deductible amount - 60% of AGI
2. Calculate the eligible amounts given to 50% organizations (public charities) like churches, schools, hospitals, ETC.
3. Calculate the eligible amounts given to 30% organizations (private charities) such as war veteran groups, fraternal orders, and private non-operating foundations

Question 179

How is the kiddie tax calculated?

Answer 179

All net UNEARNED income of a child who has not turned 18, or turns 19-23 while being a full-time student, is taxed at their parent’s tax rate

1. The first $1,300 is tax free ($1,300 standard deduction)
2. The second $1,300 is taxed at 10%
3. Anything above that is taxed at their parents marginal tax rate

Question 180

What is the cash accounting method?

Answer 180

Mandatory where the taxpayer’s records reflect only cash transactions and there are no inventories

Always use for smaller businesses

Question 181

What is the accrual accounting method?

Answer 181

Mandatory for purchases or sales where there are inventories

Question 182

What is the hybrid accounting method?

Answer 182

Combines accrual for inventory portion of a business and cash for cash portion of a business

Question 183

What is the percentage of completion accounting method?

Answer 183

It is for long term contracts where the contract will not be completed within the taxable year started

Question 184

What is R-Squared?

Answer 184

The square of the correlation coefficient. It describes how funds move relative to other funds

A high R-squared indicate a diversified fund while a low R-squared indicates a non-diversified fund

Question 185

When are the dates for paying estimated taxes?

Answer 185

April 15th, June 15th, September 15th, and January 15th

Question 186

What is a sham transaction?

Answer 186

A transaction that lacks business purposes. Economic substance will be ignored for tax purposes

Example: A sale from XYZ to ABC, but both companies are owned by the same person

Question 187

What does substance over form mean?

Answer 187

The substance of a transaction and not merely its form governs its tax consequences

Example: The president of XYZ has the company loan him the money he needs. He never intends to repay the loan or take a salary

Question 188

What is assignment of income?

Answer 188

Income is taxed to the tree that grows the fruit even though it may be assigned to another prior receipt

Example: Mr. T owns XYZ, an S Corp. He directs all income be paid to his son so that he reports no income

Question 189

What are the main tax credits?

Answer 189

1. Earned income credit (refundable)
2. Foreign tax credit
3. Elderly and disabled credit
4. Adoption credit
5. Child tax credit ( up to $1,700/child and could be refundable)
6. Credit for child & dependent care expenses

Question 190

How are call options taxable as a writer?

Answer 190

1. If the contract lapses without exercise the premium is a short-term gain
2. If the contract is exercised the premium paid is added to the sale price as an STCG. (if covered call and underlying is held longer than a year, can be an LTCG)

Question 191

How are call options taxable as a buyer?

Answer 191

1. If purchased and not exercised, premium paid is a STCL

Question 192

Who is not covered under social security?

Answer 192

Almost all workers are covered except…

1. Federal employees continuously employed since before 1984
2. Some Americans working abroad
3. Student nurses & students working for a college/college club
4. Railroad employees
5. A child, under age 18, who is employed by a parent in an UNINCORPORATED business
6. Ministers, members of religious orders, and Christian Science practitioners if they claim an exemption
7. Members of tribal councils

Question 193

How is social security taxed if taken before FRA while still working?

Answer 193

If income (MAGI) plus 1/2 of social security benefits (and any muni bond income) is…

1. Above $25k Single ($34k MFJ), 50% of social security is included in income
2. Above $34k single ($44k MFJ), then 85% of social security is included in income

Question 194

What are the AMT preference items?

Answer 194

Remember IPOD

Intangible excess drilling costs
Private-activity muni bonds
Oil & gas percentage depletion
Depreciation (ACRS/MACRS) - but not straight line

Question 195

What is qualifying property for section 179 depreciation?

Answer 195

1245 property and tangible personal property

Question 196

What is non-qualifying property for section 179 depreciation?

Answer 196

1250 property, real estate, and intangible assets (such as owning a franchise)

Question 197

What is the capital utilization approach for calculating life insurance needs?

Answer 197

Uses annuitization to provide needed income but leaves no money at the end of a planned for period

Question 198

What is the capital needs (retention) approach for calculating life insurance needs?

Answer 198

Uses interest only, so the original capital is still left at the end of the income period (Also called capital retention - think perpetuities)

Question 199

How is a charitable gift made of cash deductible?

Answer 199

100% of the cash gift up to 60% of AGI is deductible

Question 200

How is a charitable gift made of long-term appreciated property deductible?

Answer 200

Using FMV, up to 30% of AGI is deductible

Question 201

How is use-unrelated property/STCG property deductible as a charitable gift?

Answer 201

Using basis, up to 50% of AGI is deductible

Question 202

How does FIFO apply to a mutual fund’s tax basis?

Answer 202

FIFO means that the first shares bought are the first shares sold

Question 203

How does the average cost method apply to a mutual fund’s tax basis?

Answer 203

It allows an investor to divide the total cost of all shares held by the number of shares held

Question 204

How does the specific ID method apply to a mutual fund’s tax basis?

Answer 204

It allows the seller to specify certain lots that are sold to create gain, neutralize gain, or create a loss (most flexible)

Question 205

How do you calculate the tax equivalent yield of a muni bond?

Answer 205

tax exempt yield / (1 - marginal tax rate)

Question 206

How do you calculate the tax exempt yield of a taxable bond?

Answer 206

Tax equivalent yield x (1 - marginal tax rate)

Question 207

When should you use the Sharpe ratio to compare risk adjusted return?

Answer 207

You should look for the highest Sharpe ratio if R-squared is less than 60% (the portfolio is not diversified)

Question 208

When should you use Alpha to compare risk adjusted return?

Answer 208

You should look for the highest Alpha if R-squared is greater than 60% (the portfolio is diversified)

If no Alpha, look for the highest Treynor ratio

Question 209

What happens when a sole proprietor takes depreciation and then sells the equipment for a gain?

Answer 209

They must…

1. Look back and recapture the lesser of cost recovery deduction (CRD) or gain realized as 1245 gain (ordinary income)
2. Recover any excess gain as 1231 gain (capital gain)

Question 210

How do you calculate when an investor will receive a margin call?

Answer 210

((1-initial margin price) / (1-maintenance margin price)) x stock’s purchase price

Shortcut: If minimum maintenance is 25% margin call is at 2/3 of purchase price

If minimum maintenance is 30%, take 2/3 of purchase price and find the next highest number

Question 211

How are social security benefits reduced if taken before FRA?

Answer 211

From age 62 to FRS, benefits are reduced by $1 for every $2 earned over $22,320

Question 212

What is net operating income (NOI) and how is it calculated?

Answer 212

Improved land is normally income producing. Income properties include residential rental, commercial, and industrial properties. The intrinsic value of a real estate property can be computed using an NOI computation

Gross rental receipts
+Nonrental income (laundry machines, etc.)

=Potential Gross Income (PGI)

• Vacancy and collection losses
• Operating expenses (excluding interest and depreciation)

= Net Operating Income (NOI)

Question 213

What are LTC benefits provided by Medicare?

Answer 213

1. 100% of the first 20 days of skilled care is covered. Then everything over a specific amount is covered for the next 80 days. After 100 days nothing is covered
2. Only pays for skilled care, admission to a nursing home must follow within 30 days of a hospital stay (3 days or more), and the patient’s condition must be expected to improve

Question 214

How is a distribution from a MEC taxed?

Answer 214

MEC distributions are LIFO and treated as taxable income

Question 215

Are guaranteed payments from a partnership subject to the self-employment tax?

Answer 215

Yes

Question 216

When is a 5th dividend option a good idea?

Answer 216

When the client has borrowed substantially against their whole life policy and is concerned about their reduced death benefit

Question 217

What is the self-affirmation bias?

Answer 217

The belief that when something goes right, it is because you were smart and made the right decision. If it does not work out, it is someone else’s fault or simply bad luck

Question 218

What are the features of an HSA?

Answer 218

1. It is used in conjunction with a high deductible health plan
2. Distributions tax-free if used for health care
3. Contributions not spent are carried forward in the owner’s name and are portable
4. Unused assets become property of named beneficiary upon death
5. Distributions for non-medical are ordinary income taxable plus 20% penalty if under 65

Question 219

What does it mean for a policy to be noncancellable?

Answer 219

It is a continuous term policy guaranteeing the insured’s right to maintain the policy at the stated premium

Question 220

What does it mean for a policy to be guaranteed renewable?

Answer 220

Continuous right to maintain the policy, but the insurer may increase the premium by class of insureds

Question 221

What instances are excluded from a homeowner’s policy?

Answer 221

1. Earth movements (earthquakes)
2. Flood
3. Neglect
4. Intentional Loss
5. Ordinance/Law
6. Power failure
7. War
8. Nuclear Hazard
9. Sinkhole is a covered peril for the exam

Question 222

What is hindsight bias?

Answer 222

The 20/20 vision we have when looking at a past event and thinking we understand it, when in reality we may not

Question 223

How do you calculate what an HO policy will pay?

Answer 223

If amount of insurance is less than 80% of replacement cost insurance will pay the greater of…

1. ACV less any depreciation
2. The (insurance carried / (replacement cost x coinsurance %)) x loss - deductible

If amount of insurance is greater than 80% of replacement cost insurance will pay 100% of claim

Question 224

What are the requirements for a vehicle to be covered by a personal auto policy?

Answer 224

1. The vehicle must be owned by an individual/couple living in the same household
2. It must be a private passenger automobile
3. It must not be rented to others
4. It must not be used as a public or livery conveyance

Question 225

What does uninsured motorist protection cover against?

Answer 225

Liability for the other driver if they are uninsured

Question 226

How are health reimbursement accounts (HRAs) funded?

Answer 226

Solely by the employer

Question 227

What is an elder care attorney?

Answer 227

Someone who specializes in legal & care issues for the elderly

Question 228

What are the three exchanges for a 1035?

Answer 228

1. Life to life
2. Life to annuity
3. Annuity to annuity

Question 229

Other than LTC insurance, what Medicare product provides nursing home coverage for longer than 100 days?

Answer 229

Medicaid

Question 230

Can a company deduct interest from a whole life policy loan they own on key employees?

Answer 230

Yes, but it is limited to a $50,000 loan on each policy

Question 231

How does the cost of group disability compare to individual policies?

Answer 231

It is normally cheaper

Question 232

Are occasional tickets a taxable benefit?

Answer 232

No as long as they are occasional

Question 233

What kind of benefits can a voluntary employee beneficiary associations (VEBA) provide?

Answer 233

Anything similar to insurance/care benefits, but they cannot provide anything similar to a pension or annuity

Question 234

How are flexible spending accounts (sec 125) deductible?

Answer 234

They are not because they are funded by the employee

Question 235

What are exceptions for a transfer of value?

Answer 235

1. A sale or transfer to the insured
2. A sale or transfer to a partner or a partnership in which the insured is a partner
3. A sale or transfer to a corporation in which the insured is a shareholder or officer
4. A transfer of property incident to a divorce

Question 236

How do you calculate the monthly taxable benefit for an annuity payout?

Answer 236

You divide the basis by the total payout (monthly payment x 12 x amount of years) to get the tax free portion of the monthly benefit

The other half is taxable

Question 237

Is personal use of a company apartment a taxable benefit (fringe)?

Answer 237

Yes

Question 238

What are the parts for an auto insurance policy?

Answer 238

Part A - Limited to third parties (BI/Liability)

Part B - Medical Payments

Part C - Uninsured/underinsured motorists

Part D - Damage to the covered auto

Question 239

What is the “Covered Auto” as used under a PAP?

Answer 239

1. Any vehicle shown on the declarations page
2. Any of the following vehicles which you acquire during the policy period
3. Any trailer you own listed on the declarations page
4. Any auto or trailer you do not own while used as a temporary substitute for any covered vehicle which is out of normal use (EX rental while it is in the shop)
5. There is no coverage for pickups, panel trucks, or vans used in a business

Question 240

Who is insured under the medical payments coverage of a PAP?

Answer 240

1. The named insured and any family member who suffers bodily injury caused by accident while occupying the covered auto
2. The named insured and family members who if, while a pedestrian, are struck by any motor vehicle designed for use on public roads, or by a trailer
3. Other persons while occupant of the insured’s auto (passengers)

Question 241

How are lump sum annuity payouts taxed?

Answer 241

They are taxed as LIFO

They are taxable as ordinary income plus a 10% penalty under age 59.5

Question 242

What re the features of a flexible spending account (FSA)?

Answer 242

1. Must be used by March 15th or forfeited to company (use it or lose it - medical only). Dependent care must be used by 12/31
2. Not subject to income tax, FICA, FUTA
3. Health FSA may not be used to reimburse an employee premiums paid for other health plans (such as an MSA, HSA, and LTC)
4. Expenses for LTC services cannot be reimbursed under a health FSA, but other medical expenses can be reimbursed

Question 243

What fringe benefits are tax-free?

Answer 243

1. Health care premiums
2. Insurance premiums on non-discriminatory group life policies up to $50k
3. A company car for working conditions only
4. Employer-provided transit passes ($315/ month cap) or parking ($315/ month cap)
5. Occasional overtime meal money, cab fare, theater or sporting event tickets
6. Discounts on services limited to 20% of selling price charged to customers

Question 244

What fringe benefits are taxable?

Answer 244

Any health insurance premiums paid for self-employed, partners, and more than 2% owners of S-corps are taxable income. 100% is deductible as an adjustment to to income on the front of the 1040. This can include all types of health insurance programs

Question 245

What are features of permanent (whole & UL) life insurance?

Answer 245

1. Low risk tolerance
2. Insurance company controls investment return
3. Assets part of general account

Question 246

What are features of variable life products?

Answer 246

1. High risk tolerance
2. Client controls investment return
3. Assets part of a separate account

Question 247

What are the dividend options for an insurance policy?

Answer 247

Remember CRAPO

Cash
Reduce premium
Accumulate with interest
Paid-up additions
One-year term/5th dividend

Question 248

What are the nonforfeiture options for an insurance policy?

Answer 248

Cash

Extended term

Paid up reduced amount

Question 249

What are the settlement options for a life insurance policy?

Answer 249

Cash

Pure life/single life (highest payout)

Refund - return on premium

Period certain

Specified income/period

Interest only

Question 250

When is an insurance policy a MEC?

Answer 250

1. It was entered into after June 21, 1988
2. It fails to meet the “seven pay test” (all single premium policies fail the test)

Question 251

How is a MEC taxed?

Answer 251

1. Distributions/withdrawals are taxed as LIFO (Interest first)
2. Distributions under 59.5 are also subject to a 10% federal penalty (if not disabled)
3. Death benefit is tax-free

Question 252

When is a transfer of value taxable?

Answer 252

If an interest in a life insurance policy is transferred for cash/property (not a gift) the proceeds in excess of the cash received, combined with any premiums paid by the owner, are taxable as ordinary income

Question 253

Can you 1035 exchange an annuity into a life insurance policy?

Answer 253

No

Question 254

What is a stock redemption Buy Sell?

Answer 254

1. The entity is the owner and bene
2. No step up in cost basis

Question 255

What is a cross purchase Buy Sell?

Answer 255

1. The individual is the owner and bene
2. The other owner gets a step up in cost basis

Question 256

What is unsystematic risk?

Answer 256

1. Can be diversified away
2. Mainly business risk (how a company is run) and financial risk (how the firm finances their assets)

Question 257

What is systematic risk?

Answer 257

1. Risk that cannot be removed not matter how well diversified
2. The risk of the overall market

Question 258

What risk do government bond face?

Answer 258

Remember RIP (no default or credit risk)

Reinvestment risk
Interest rate risk
Purchasing power risk

Question 259

What are the definitions of disability?

Answer 259

1. Own occupation - best definition for insured
2. Modified any occupation
3. Split definition - own then modified
4. Any occupation (social security definition)
5. Loss of income

Question 260

What are the types of systematic risk?

Answer 260

Remember PRIME

Purchasing power risk - loss of purchasing power through inflation

Reinvestment rate risk - risk that proceeds available for reinvestment must be reinvested at a lower rate than the instrument that generated the proceeds

Interest rate risk - risk that a change in interest rates will cause the market value of the fixed income security to fall

Market risk - risk of the overall market

Exchange rate risk - risk associated with changes in the value of currency

Question 261

What is the yield ladder if bonds are discounted?

Answer 261

All yields are higher than coupon

Y - Yield to call
M - Yield to maturity
C - Current yield
A - Annual coupon rate

Question 262

What is the yield ladder if bonds are selling at a premium?

Answer 262

All yields are lower than coupon

A - Annual coupon rate
C - Current yield
M - Yield to maturity
Y - Yield to call

Question 263

What are features of EE bonds?

Answer 263

1. Non-marketable, nontransferable, cannot be used for collateral
2. Sold at face value
3. Interest rate based on the 10-year treasury note yields
4. Fixed interest rate that is in effect at the time of purchase
5. Subject to federal taxation when redeemed (unless used as education bonds)
6. Not subject to state or local taxes

Question 264

What are features of I Bonds?

Answer 264

1. Non-marketable, nontransferable, cannot be used for collateral
2. Sold at face value
3. Interest rate is composed of two parts (a fixed base rate and an inflation adjustment which changes every six months)
4. Subject to federal taxation when redeemed (unless used as an education bond)
5. Not subject to state or local taxes

Question 265

What are general obligation bonds?

Answer 265

Muni bonds that are backed by the full faith, credit, and taxing power of the issuer. GO bonds are usually considered the safest type of muni credit

Question 266

What are revenue bonds?

Answer 266

Muni bonds that are backed by a specific source of revenue to which the full faith and credit of the issue is not pledged. Because revenue bonds are backed by a single source of funds (like toll roads or hospitals) they have a greater credit risk than GO bonds. As such, they trade at higher yields

Question 267

What are insurers of muni bonds?

Answer 267

The insurers pay timely interest and principal when the issuer is in default.

Muni bond insurers are AMBAC (American Muni Bond Assurance Corp.) and MBIA (Municipal Bond Insurance Association Corp.)

Question 268

What types of systematic risk do corporate and muni bonds have?

Answer 268

Remember DRIP

Default risk - a creditor may seize the collateral and sell it to recoup the principal

Reinvestment risk - as payments are received from an investment, interest rates fall. When the funds are reinvested, the investor receives a lower yield

Interest rate risk - Rising interest rates may cause bond prices to fall

Purchasing power risk - Inflation may lower the value of bond interest payments and principal repayment, thereby forcing prices to fall

Question 269

How are disability benefits taxed if the individual owns the contract and pays the premium?

Answer 269

1. Premiums are not deductible
2. Benefits are tax-free

Question 270

How are disability benefits taxed if the employee owns the contract and the employer pays the premium under a bonus arrangement (sec 162)?

Answer 270

1. Premiums are deductible by the employer as a bonus. (Employee pays ordinary income on premiums)
2. Benefits are tax-free

Question 271

How are disability benefits taxed if the employee owns the contract and the employer pays the entire premium under a salary continuation plan?

Answer 271

1. Premiums are deductible by the employer
2. Benefits are taxable to the employee

Question 272

What is herd behavior?

Answer 272

The tendency for individuals to mimic the actions of a larger group (think FOMO, or when Logan rushes into a uranium stock after news comes out and it runs up 40%)

Question 273

What is inappropriate extrapolation?

Answer 273

The tendency to look at recent events (or market performance) and assume that those events or conditions will continue indefinitely

Example: The bond market outperformed the stock market for the past year and will continue to do so because of the continued economic downturn

Question 274

What is analysis paralysis?

Answer 274

When someone overanalyzes a situation, becomes overwhelmed, and ends up “paralyzed” so that a solution is never determined

Example: Investing is too complex so I will analyze all the various asset allocation strategies and create a plan. In the end, the investment plan is never created, and the money is still in cash

Question 275

What is loss aversion and risk taking?

Answer 275

When investors are risk averse for gains (they do not want to give them up) but risk seekers when it comes to losses (they will take big risks to avoid realizing them)

Example: An investor sold a strong-performing winner to lock in gains without considering whether the investment remains attractive or any other options. Instead the used some of the proceeds from the sale to add to a losing stock in hopes that a partial rebound will cover the loss

Question 276

What is prospect theory?

Answer 276

Describes how losses have a much greater negative impact than a similar gain will have positive

Example: In a traditional way of thinking, the amount of utility gained from receiving should be equal to a situation in which you gained $100 and then lost $50. The result is the same, which is must people view a single gain of $50 more favorably

Question 277

What is mental accounting?

Answer 277

When someone looks at sums of money differently, depending on their source or the intended use

Example: When some investors may divide their investments between a safe investment portfolio and a speculative portfolio in order to prevent the negative returns that speculative investments may have from affecting the entire portfolio

Question 278

What is the outcome bias?

Answer 278

The tendency to make a decision based on the desired outcome rather than on the probability of that outcome

Example: The investor wants to double his money in an investment account without doing enough research

Question 279

What is overconfidence?

Answer 279

The tendency to place too much emphasis on one’s own abilities. It often works hand in hand with confirmation bias

Example: Overconfident investors tend to believe they are better at timing the market than others even though professional fund managers often struggle

Question 280

What is a market overreaction?

Answer 280

When investors emotionally react towards new market information

Example: Good news comes out on a stock that should raise the price accordingly. However, investors overreact by creating a larger-than-appropriate effect on the security

Question 281

Who owns a split-dollar insurance policy with the endorsement method?

Answer 281

1. The employer is the owner
2. The employee is not a shareholder
3. At surrender or death, the employer gets the greater of cash value or premiums paid and the bene gets the death benefit

Question 282

Who owns a split-dollar insurance policy with the collateral assignment method?

Answer 282

1. The employee is the owner
2. The employee is a shareholder
3. The employee assigns the policy
4. At surrender or death, employer received premiums paid while employee gets cash value (or bene gets death benefit)

Question 283

When could a life insurance policy that has been grandfathered in before 1988 turn into a MEC?

Answer 283

1. If the death benefit increases by more than $150k the policy could turn into a MEC
2. If the policy increases by any amount and the insured must prove insurability, the policy could turn into a MEC
3. If the death benefit increases by $150k or less and the insured as guaranteed insurability, the policy will NOT lose its grandfathered status

Question 284

How much does the FDIC insure bank accounts?

Answer 284

They insure by $250k per individual, per account type at each bank

Trusts are insured by $250k per each beneficiary

Question 285

What happens when an investor overweighs the recent past?

Answer 285

When an investor finds a recent pattern or study without doing much else research thinking that the same pattern will repeat itself

Example: An investor reads a study saying short-term mutual fund winners tend to persist and allocates a portion into said mutual funds without any other research

Question 286

What is uninsured motorists (UM) coverage?

Answer 286

Coverage that pays the amount an injured insured could have collected from the uninsured driver if such driver had carried auto liability insurance

Note: UM is liability protection, NOT medical payments

Question 287

When must an employer offer COBRA coverage?

Answer 287

When they have 20 full/part time employees

Only to employees who are participating in the plan

Question 288

What COBRA coverage is provided when an insured quits/changes from full time to part time?

Answer 288

Up to 18 months for the employee and their dependents

Any other situation is 36 months

Question 289

What does an indenture agreement cover?

Answer 289

1. The form of the bond being offered
2. The amount of issue
3. The property pledged
4. The protective covenant, including any provision for a sinking fund
5. Working capital and the current ratio
6. Redemption rights, call, put or conversion provisions

Question 290

Who should own STRIPS?

Answer 290

Anything tax deferred (pensions or IRAs). Doing so means no phantom income has to be realized

Question 291

What is the status quo bias?

Answer 291

The tendency of investors to do nothing when action is actually called for?

Question 292

What are money scripts?

Answer 292

Subconscious beliefs people have regarding money, many of which were developed in childhood. Personal experience and family values can impact money scripts

Question 293

What is money avoidance?

Answer 293

A money script

Feeling that money has a negative connotation and ignoring finances to avoid emotional distress

Examples: Money is the root of all evil

Question 294

What is money worship?

Answer 294

A money script

Feeling that happiness externally comes from, and is directly related to, having more wealth

Example: Compulsive spending towards a never-ending goal of obtaining monetary things to provide happiness

Question 295

What is money vigilance?

Answer 295

A money script

Being concerned and aware of one’s financial well-being, with importance and emphasis being placed on savings and being prepared

Example: Being overly cautious with money to the extent that enjoyable things (like vacation) are sacrificed

Question 296

What is money status?

Answer 296

A money script

The belief that one’s internal value and self-worth is directly correlated to their financial worth, and that to be a better person, they need more

Example: Hiding finances from others and associating shame with a lack of money

Question 297

What is the framing effect?

Answer 297

Cognitive bias, in which a person makes decisions based on whether the various options are presented in a positive or negative way, meaning individuals can tend to overlook factual data

The person is more affected by how the information is worded rather than the actual information. This can manifest itself in investment decisions

Question 298

What is money illusion?

Answer 298

An economic theory positing that people have a tendency to view their wealth in nominal dollar terms rather than real terms which must take inflation into consideration. This can also be called “price illusion”

Question 299

When a CFP moves or changes their physical address, they must notify the board within how many days?

Answer 299

The must notify the board within 30 days

Question 300

When can a CFP licensee release a client file to other persons?

Answer 300

1. When an attorney or court subpoenas the file
2. At the client’s request
3. As a defense against charges of wrongdoing

Question 301

When should a client have a 3 month emergency fund?

Answer 301

1. If they are single with a 2nd source of income
2. If they are married and both work
3. If they are married, only 1 spouse works, but they have a 2nd source of income

Question 302

When should a client have a 6 month emergency fund?

Answer 302

1. If they are a single wage earner
2. If they are married and only 1 spouse works

Question 303

How do you calculate the current ratio?

Answer 303

It is current assets/current liabilities where…

Current assets: cash equivalents, marketable securities, accounts receivable, inventory

Current liabilities: Accounts payable, credit card debt, taxes payable

Question 304

Total monthly debt should be below what % of gross income?

Answer 304

It should be 36% or lower of gross income

Question 305

Consumer debt should be below what % of gross income?

Answer 305

It should be 20% or lower of gross income

Question 306

What is PITI and what % of gross income should it be?

Answer 306

It is the four main components of a monthly mortgage payment and should be 28% or lower of gross income

Principal
Interest
Taxes
Insurance

Question 307

What is the income phaseout for educational bonds (MFJ)?

Answer 307

$145,200 - $175,200

Question 308

What is the income phaseout for the lifetime learning credit (MFJ)?

Answer 308

$160k - $180k

Question 309

What is the income phaseout for the American Opportunity Credit?

Answer 309

$160k - $180k

Question 310

What are the keys for a 529?

Answer 310

1. The donor can retain control
2. Lump sum gift up to $90,000
3. K-12 for tuition allowed up to $10,000/yr
4. Can be used to pay student loans ($10,000/ student over lifetime)

Question 311

What does it mean when the Fed repos?

Answer 311

It is when the Fed buys securities. It is expansionary and indicates an easy money policy

Question 312

What does it mean when the Fed reverse repos?

Answer 312

It is when the Fed sells securities. It is contractionary and indicates a tight money policy

Question 313

What is gross domestic product (GDP)?

Answer 313

1. It is the total dollar value of all goods and services produced within the US Only
2. GDP counts economic activity without regard to yearly price fluctuations
3. It does not include any income generated outside the US or adjustments for foreign currencies

Question 314

What is a recession?

Answer 314

It is two consecutive quarters of economic decline (negative GDP)

Question 315

What is a depression?

Answer 315

It is six consecutive quarters of economic decline (negative GDP)

Question 316

What are the exceptions to filing as an investment advisor?

Answer 316

1. Remember BLAT (advice is incidental)

Banks
Lawyers
Accountants
Teachers

2. Broker/dealers or reps whose performance is incidental and who get no special compensation for advice
3. Publishers of bona fide newspapers
4. Those who give advice solely relating to US government securities

Question 317

Which advisors are exempt from filing as an investment advisor?

Answer 317

1. Advisors whose only clients are insurance companies
2. Family offices

Question 318

How does an advisor register with the SEC?

Answer 318

1. Initially, the advisor files ADV part 1 and 2 with the SEC
2. Pays a minimum filing fee of $150
3. The RIA must submit part 1 of the ADV and schedule 1 annually

Question 319

How does an advisor register with FINRA?

Answer 319

1. The individual associates with a broker dealer
2. They register w/ FINRA through broker/dealer on form U-4
3. Takes and passes appropriate exam
4. Is issued a CRD number (central registration system)

Question 320

What are the basic components of a legal insurance contract?

Answer 320

1. Offer & acceptance - 2 parties: offeror and acceptor
2. Consideration - something of value (money)
3. Legal object - legal in purpose
4. Competent parties - principal must have legal capacity to execute contracts
5. Legal form - contract must meet requirements

Question 321

Who does not have legal capacity to execute a contract?

Answer 321

1. Intoxicated adults
2. Minors for anything other than other than necessities (can execute contracts for food, clothing, and shelter)

Question 322

What does the Series 6 let you sell?

Answer 322

Mutual funds, Variable products, and only newly offered UITs

Question 323

What does the Series 7 let you sell?

Answer 323

General securities and UITs on the secondary market

Question 324

What is the Series 63 exam?

Answer 324

The uniform securities agent state law exam

Question 325

What is the Series 65 exam?

Answer 325

The uniform investment advisor law exam

Question 326

What is the Series 66 exam?

Answer 326

The combined state law exam. It combines the Series 63 and the Series 65

Question 327

What is express authority?

Answer 327

Written, explicit direction from principal to agent

Question 328

What is implied authority?

Answer 328

That which the public believes the individual holds and includes signage, rate books, etc. Implied authority is actual authority that the agent must carry out the principal’s business

Question 329

What is apparent authority?

Answer 329

Arises out of negligence of the principal in allowing the agent to appear to have the authority because of certain actions of the agent in the past. This typically affects terminated agents

Question 330

What is the Securities Act of 1933?

Answer 330

Required that new issues purchasers be provided with a detailed prospectus before a purchase was completed

Question 331

What is the Securities Act of 1934?

Answer 331

Passed to regulate the secondary market (trading of issued securities). This act also created the SEC to enforce securities laws

Question 332

What is the Investment Company Act of 1940?

Answer 332

Authorized the SEC to regulate UITs and managed investment companies (closed-end& open-end funds) plus variable products

Question 333

What is the Securities Investors Protection Act of 1970?

Answer 333

Established the SIPC to supervise securities firms that get into financial difficulties. The SIPC insures investors against losses arising from the failure of a brokerage firm

Question 334

What does it mean when an investor spots trends that are not there?

Answer 334

It is when investors seek patterns that help decisions sometimes without adequate confirming research

Example: When the NFC wins the Super Bowl is not a basis for an investment decision

Question 336

What are the inputs to the Markowitz Model (modern asset allocation)

Answer 336

Risk, return, and covariance. The model is sensitive to these inputs

Negatively correlated assets are not required

Question 337

What performance metric should you use when you have a diversified and undiversified portfolio?

Answer 337

Use the Sharpe ratio

Question 338

What does the CFP board recommend when a client does not understand/has a wrong view on a subject?

Answer 338

Always try to educate the client

Question 339

What should you do if one of two owners of a JTWROS, who have recently split, tries splitting the joint account by taking only the better performing stocks?

Answer 339

You should say you need to meet with both clients due to the potential conflict of interest

Question 340

How do you calculate accrued interest?

Answer 340

Interest earned minus any costs and commission paid that year

Question 341

Can closed end funds trade at a discount or premium of their NAV?

Answer 341

Yes they can

Question 342

How can you tell if a stock is riskier compared to another?

Answer 342

Use the coefficient of variation which is a measure of variability

Divide STD by return

The higher CV is riskier

Question 343

How do you find the duration of a coupon paying bond?

Answer 343

Choose the next lower reasonable number under the years to maturity

Question 344

How do you find the duration of a coupon paying bond?

Answer 344

Choose the next lower reasonable number under the years to maturity

Question 345

What index is price weighted?

Answer 345

The Dow Jones Industrial Average

Question 346

What index is price weighted?

Answer 346

The Dow Jones Industrial Average

Question 347

Are LTCGs and Qualified Dividends included in AGI?

Answer 347

Yes even though they are taxed at different rates

Question 348

How much of employee meals are deductible?

Answer 348

50%

Question 349

How much of employee meals are deductible?

Answer 349

50%

Question 350

How do you calculate FICA tax paid?

Answer 350

1. The employee & employer pay 6.2% (FICA) and 1.45% (Medicare) on everything up to $168,600 (total of 15.3% on W-2 earnings)
2. Anything above is only subject to 1.45% (Medicare taxes) which the employee & employer pay (2.9% total)

Question 351

How do you calculate FICA tax paid?

Answer 351

1. The employee & employer pay 6.2% (FICA) and 1.45% (Medicare) on everything up to $168,600 (total of 15.3% on W-2 earnings)
2. Anything above is only subject to 1.45% (Medicare taxes) which the employee & employer pay (2.9% total)

Question 352

When can the adoption credit be claimed?

Answer 352

In the year the adoption is finalized

Question 353

What tax credits are refundable?

Answer 353

1. The child tax credit ($1,700)
2. The earned income credit

Question 354

What does it mean for a tax credit to be refundable?

Answer 354

Refundable credits can generate a tax refund. Non-refundable credits can only reduce your tax liability to zero

Question 355

How do net operating losses work?

Answer 355

The are carried forward and offset future income

CANNOT be carried back

Question 356

Can non-publicly traded partnership (RELP) losses create a refund?

Answer 356

No. They can only offset income from other RELPs up to the amount of income

Question 357

Do I Bonds produce phantom income?

Answer 357

No they are tax deferred

Question 358

What kind of deduction is alimony in regards to AGI?

Answer 358

It is for AGI (hence above the line)

Question 359

How much of investment interest is deductible?

Answer 359

100% of profits (including income, STCGs, and non-qualifying dividends)

Do not assume that dividends are non-qualified unless the question specifically says so

Question 360

What is schedule C income?

Answer 360

Form 1040. Used to report income or loss from a sole proprietor ship. Can deduct business expenses from income

Income after expenses is subject to self-employment tax (.1413)

Question 361

What is Schedule H?

Answer 361

Used for Household employees. An example would be if you employ someone to care for your children

Question 362

What can operate as either an itemized deduction or a tax credit?

Answer 362

The foreign tax credit

Question 363

How much alimony is subject to recapture if not paid in the 3rd year?

Answer 363

The sum of the 1st & 2nd year alimony paid minus $37,500 is subject to recapture

Question 364

For how long can charitable deductions of LTCG property be carried forward for?

Answer 364

Five years after the gift

Do not forget to consider a carry forward to maximize the deduction

Question 365

What is a dependency exemption and how much can be claimed?

Answer 365

Income excludable from taxable income for each dependent

Nothing can be claimed as they are suspended with personal exemptions

Question 366

How do you calculate the benefit received when taking SS early?

Answer 366

The benefit x (1- (months early/180))

Question 367

When is the required rate or return the same as the IRR?

Answer 367

When NPV is zero

Question 368

What is the first step when meeting with a new client?

Answer 368

To provide a written disclosure of all information

Question 369

When can you reach out to the accountant or lawyer of a client?

Answer 369

Only with their permission

Question 370

Are suspensions from the CFP board public?

Answer 370

Yes. They are automatically published

Question 371

When can you sell firm proprietary products?

Answer 371

Only if you have disclosed all compensation agreements

Question 372

Does ordinary income assets (CDs or profit sharing plans) get a step up in community property states?

Answer 372

No

Question 373

How are gifts to a skip person taxed?

Answer 373

If the lifetime GST exclusion (and therefore gift exclusion) is used up,

1. Calculate the gift tax owed
2. Calculate the GST tax on the remaining gift amount (after subtracting the gift tax owed)

Question 374

What is the purpose of a Prenup?

Answer 374

To limit or remove the elective share a spouse could demand if they do not inherit a certain minimum percentage

QTIPs will not alone stop demands for elective share

Question 375

How much of community property assets are included in a probate estate?

Answer 375

50% of community property assets and 100% of other assets

Question 376

How much of community property assets are included in a gross estate?

Answer 376

50% of community property assets and 100% of other assets

Question 377

Which assets do not get a full step up in basis in community property states?

Answer 377

Ordinary income assets (like savings accounts)

Question 378

Is it necessary to split a gift of $36,000 from a JTWROS account?

Answer 378

No

Question 379

If you set up an irrevocable trust with one bene and you as the remainder bene, who is income taxable to?

Answer 379

You as being the remainder bene taints the irrev trust

Question 380

What is income in respect of a decedent (IRD)?

Answer 380

Income owed to a decedent when they die

Question 381

What retirement plans allow flexible contributions?

Answer 381

Keogh plans, SEP IRA plans, and profit sharing plans

Question 382

What does it mean for a retirement plan to be age weighted?

Answer 382

Older employees get bigger contributions

Better for owners where a company as a reasonably consistent cash flow outlook and they do not want to reduce their salary

Question 383

Should you use a SEP plan if the employer has part-time employees?

Answer 383

Not if they want to exclude part-time employees since part-time hours are counted in SEP participation requirements

Question 384

What are the four Fs of behavioral finance?

Answer 384

Fear, Faith, Framing, and FOMO

Question 385

What is loyalty bias?

Answer 385

The tendency for investors to hold onto investments due to loyalty toward a company, brand, or even a particular stock they have long-term familiarity with, rather than based on objective financial considerations

Question 386

What is a section 1035 exchange?

Answer 386

An exchange of life insurance policies

Question 387

What is generally considered compensation for pension contributions?

Answer 387

Salary and bonuses

Question 388

If a participant reaches age 73 and goes back to work later in the year, would they still have to take an RMD from their 401k?

Answer 388

Yes

Question 389

What happens if a grantor dies in the retained-interest term of a QPRT?

Answer 389

The FMV of property on date of death is brought back into the gross estate

Question 390

What is the cutoff for policies to be grandfathered in from being a MEC?

Answer 390

1988

Question 391

Does a $10k distribution made to an IRA owner for their primary residence get hit with a 10% penalty?

Answer 391

Yes, it must be for the purchase of a first home specifically

Question 392

Will an estate continue to pay alimony if a decedent owed it before they died?

Answer 392

Not unless it is specifically mentioned

Question 393

Who pays GST tax on a taxable termination?

Answer 393

The trustee

Question 394

What is the allowable deduction for LT appreciated property gifted to a 50% organization?

Answer 394

Up to 30% of AGI

Question 395

Can a 401k without matching contributions be integrated with social security?

Answer 395

No

Question 396

Do owners of an S Corp receive tax free disability benefits?

Answer 396

Yes, they fall under health insurance premium rules

Question 397

How much does the insured have to pay to buy an endorsement method split dollar life policy from an employer?

Answer 397

The higher of cash value or premium paid

Question 398

Is the lifetime learning credit subject to drug related felony restrictions?

Answer 398

No

Question 399

Are GRATs added back to estates if the grantor dies before the term ends?

Answer 399

Yes

Question 400

What is the least important obligation when beginning the first step in the financial planning process?

Answer 400

Disclosing the exact amount of compensation receivable

Question 401

Can standard deviation be negative?

Answer 401

No

Question 402

Can you consider the salary from a related employer if they do not offer a retirement plan when determining contribution limits?

Answer 402

No

Question 403

What is the limit on deductible contributions for plans of related employers?

Answer 403

The lesser of 25% of compensation or $69,000

Question 404

Can you contribute to a Coverdell ESA if the beneficiary is older than 18?

Answer 404

No

Question 405

Can family members be trustees of special needs trusts?

Answer 405

They can be a co-trustee but there should also be an independent trustee

Question 406

Can an annuity payout be fully taxable?

Answer 406

At a certain point basis will already be fully recovered.

An annuity that has been paying out for 20 years is most likely fully taxable now

Question 407

Why should a parent/transferer for a 2503(c) not be the trustee?

Answer 407

Because they would taint the trust for estate and income tax purposes

Question 408

How do you calculate the change in a bond’s price?

Answer 408

Duration times the interest rate move will give you the amount a bond’s price will change

Question 409

What happens to basis in a bargain sale to charity?

Answer 409

If the charitable deduction is greater than basis, basis is decreased by the difference

Question 410

How many American Opportunity Credits can be claimed in a year?

Answer 410

As many as there are eligible students

Question 411

What does it mean if NPV is $0?

Answer 411

The IRR of cash flow is the exact same as the required return

Question 412

What are treated as income-first distributions under a MEC?

Answer 412

Anytime when policy dividends are used like cash (cash dividends, dividends used to pay off premiums, etc)

Question 413

What should you do when officers of a pension plan are concerned about personal liability?

Answer 413

Hire an investment advisor to shift some of that liability

Question 414

How long do federal advisors have to update their ADV forms at the beginning of the new year?

Answer 414

90 days

Question 415

Are gifts to irrev trusts added back to their gross estate?

Answer 415

No, it is removed but any taxable gifts are added back to their taxable estate

Question 416

Does the size of an insurance company matter?

Answer 416

Not really. It does not necessarily indicate financial strength

Question 417

How are ESOP distributions taxed?

Answer 417

Basis is ordinary income at exercise

Net unrealized appreciation is LTCG at time of sale

Anything after exercise uses capital gains rules

Question 418

How are K-1 earnings of an S-Corp taxed if the client is an active participant?

Answer 418

They are still treated as investment income

Question 419

Does the 3-year throwback rule apply for the sale of a life insurance policy?

Answer 419

No

Question 420

What happens to the death benefit when a life insurance policy is transferred for value?

Answer 420

The death benefit in excess of taxable basis is subject to federal income tax

Question 421

What happens if a client ends substantially equal payments early after they are age 60?

Answer 421

Only the payments received before age 59.5 will be subject to the 10% penalty

Question 422

When do gift taxes paid affect the basis of gifted property?

Answer 422

Only if the property has appreciated

Question 423

Do corporate annual reports include profitability projections?

Answer 423

No, they could be misleading for shareholders

Question 424

When are qualified plan distributions subject to the participant’s creditors?

Answer 424

Once distributions begin to be paid out. The anti-alienation provision only applies during the accumulation period

Question 425

Are trusts at a bank FDIC insured?

Answer 425

Yes

Question 426

Can an HSA pay for qualified LTC premiums?

Answer 426

Yes but they are limited to age-based limitations

Question 427

How is life insurance surrender gain above basis taxed?

Answer 427

Always as ordinary income even if you are a corporation

Question 428

What is a major difficulty when dealing with estimated unequal cash flows from a potential investment?

Answer 428

What discount rate to use

Question 429

What is the difference between a red herring and a prospectus?

Answer 429

A red herring omits the selling price and size of issue. Still has to be approved by the SEC

Question 430

What is the charitable contribution limit for a sole-proprietorship, partnership, or S Corp?

Answer 430

It is limited to the cost of the donated item

Question 431

How do you calculate the amount of taxable gift for a GRAT?

Answer 431

It is the gift - retained interest

Question 432

What is the limit for a charitable deduction of art created by the taxpayer?

Answer 432

It is limited to basis

Question 433

Is a death benefit paid by a company (not group life) taxable?

Answer 433

It is no longer a fringe benefit and is a taxable death benefit

Question 434

As an owner of a rental house, what expenditures must be depreciated rather than deducted?

Answer 434

Improvements are depreciated

Expenses are deducted

Question 435

Should you assume someone is over age 59.5?

Answer 435

No unless the question specifically says so

Question 436

What is a section 1244?

Answer 436

It allows for a $50k single ($100k JTWROS) loss if the stock was for a closely held and/or small corporation

Question 437

Do QDROs apply to IRAs?

Answer 437

No, only qualified plans get an exception to the 10% penalty

Question 438

How are life settlements taxed?

Answer 438

Basis is premiums paid minus cost of insurance

Difference between basis and cash value is ordinary income

Difference between sale price and cash value is an LTCG

Question 439

Will immunizing a bond portfolio aim to reduce market losses?

Answer 439

That is one of the goals

Question 440

How is passive rental income taxed?

Answer 440

As ordinary income

Question 441

When will an HO policy cover content?

Answer 441

Only in the case of theft

Question 442

Are not-for-profits charities?

Answer 442

No

They are not considered as 50% organizations

Question 443

Are libraries considered 50% organizations?

Answer 443

Yes

Question 444

Are FSA contributions subject to FICA?

Answer 444

No

Question 445

If you do freelance work but your income is less than the standard deduction, do you have to file a tax return?

Answer 445

Yes, you must file a schedule C as you have to pay self-employment tax

Question 446

Is K-1 income from an S Corp considered conduit income?

Answer 446

Yes

Question 447

What is the advantage between taking excessive income as a stockholder from a Corporation and an S Corp is the corporation is profitable?

Answer 447

Taking limited income from an S Corp will reduce FICA and FUTA because the remainder will be unearned income (not subject to unlimited medicare taxes)

Question 448

Do HO-6 policies have any coverage A?

Answer 448

Yes, they may have a payment for loss assessment and provide a small amount of coverage on a named peril basis

Question 449

Does medicare part A cover home health services that are part of a treatment plan?

Answer 449

Yes

Question 450

How does medicare pay for blood?

Answer 450

The patient must pay the hospital cost for the first 3 units of blood

Question 451

Do margin requirements have any impact on the economy?

Answer 451

No. The Fed does not use it as a tool

Question 452

Would a surviving spouse with a 17-year old receive SS benefits?

Answer 452

No, the child has to be under the age of 16

Question 453

Is a Section 179 election a depreciation method?

Answer 453

No. It is an election to expenses tangible personal property

Question 454

Can a taxpayer get a section 121 joint exemption if they bought the house and got married after?

Answer 454

No. The home would have to be owned by the couple for the joint exemption

Question 455

Do QTIPs have HEMS?

Answer 455

No, they have a right to all income

Question 456

How must a widow file their taxes in the year the decedent passed?

Answer 456

They must file a joint return

Question 457

What vaccinations are covered by Medicare B?

Answer 457

One annual flu shot and a pneumonia shot

Question 458

What is an APL for insurance?

Answer 458

An automatic premium loan

Question 459

How do reinstatement provisions work?

Answer 459

You can reinstate an insurance policy in the case of lapse but you must provide proof of insurability

Question 460

When is alimony paid in excess?

Answer 460

When alimony paid in the second year is higher than the third year by more than $15k

Question 461

What are forms 706 and 709 for?

Answer 461

709 is for reporting gifts. 706 is for estate tax

Question 462

What is NPV?

Answer 462

A calculation that discounts unequal cash flows at a required rate of return less the initial cost of an investment

Question 463

Can a rental apartment building defer income taxes?

Answer 463

Yes, depreciation can offset rental income

Question 464

When could a CFP commingle client funds?

Answer 464

with other client’s money in a common investment fund

Question 465

When are the proceeds from EE bonds (US Savings Bonds) tax free?

Answer 465

Only when AGI is below a given threshold and proceeds are used for tuition and fees

Question 466

Will the IRS waive excise tax from failing to take RMDs?

Answer 466

Yes if the missed distribution is reasonable and appropriate steps are being taken.

You should file an amended return (1040X) when doing so

Question 467

Does PITI decrease as a mortgage is paid down?

Answer 467

No as the payments do not decrease. PITI would only decrease when the mortgage is paid off this way

Question 467

When are Roth IRA distributions penalty free?

Answer 467

Contributions are always distributed first and are tax free

Earnings are tax free if held for 5-years and they are withdrawn for a reason

Question 468

What bond feature is useful when rates are expected to decline?

Answer 468

Call protection as it prevents the issuer from buying the bond back. Provides some safety from reinvestment risk

Question 469

What bond feature is useful when rates are expected to rise?

Answer 469

A put provision as you could force the issuer to redeem the bond and reinvest at higher rates

Question 470

Do sole proprietors have to pay the self-employment tax?

Answer 470

Yes and it is an above the line deduction

Question 471

Would someone in the 22% bracket rather have a tax deduction or a tax credit?

Answer 471

22% is considered a low bracket. Credits are much better

Question 472

If you transfer a life insurance policy to an ILIT, is it subject to the three year add back rule?

Answer 472

Yes. It would be better to have the trust purchase the policy to avoid the add back rule

Question 473

Where should a client begin the complaint process with a B/D?

Answer 473

They should begin with the compliance officer at the B/D and move onto next FINRA if necessary

Question 474

What license can earn you commissions on ETF sales?

Answer 474

Series 7 for anything that is not accompanied by a prospectus

Question 475

Can you reach out to a client’s doctor when concerned for their mental health?

Answer 475

Yes, a doctor is required to maintain confidentiality

Question 476

Can owners of service business claim a deduction for qualified business income (QBI)?

Answer 476

No, they are ineligible

Question 477

How many dependency exemptions can a family claim?

Answer 477

None. The 2017 TCJA repealed the exemption

Question 478

How much of a deduction is for qualified business income?

Answer 478

20% of income generated through a pass-through business up to AGI of $483,900

Anything above that is limited to the lesser of 50% of W-2 wages or 20% of QBI

Can be claimed below-the-line even when claiming a standard deduction (Sec 199A)

Question 479

When does the child tax credit phase out?

Answer 479

When joint income exceeds $400k

Question 480

How many hours must a CFP complete for CE Ethics credits?

Answer 480

2 hours every 2 years

Question 481

Will a CFP/BD be a fiduciary when agreeing with the stock choice of an unsolicited order?

Answer 481

Yes, the CFP is in a way advising the client as whether to buy the stock

Question 482

What are the income phaseouts for the retirement savings contribution credit?

Answer 482

$38,250 single & $76,000 MFJ

Question 483

How do you calculate actual cash value?

Answer 483

It is the current replacement value less any depreciation

Question 484

What scholarship benefits are tax free?

Answer 484

Books, tuition, and equipment for required courses

Question 485

Do QDRO’s have any impact on IRAs?

Answer 485

No, they are only for qualified plans

IRAs can still be part of the divorce settlement

Question 486

Who must the qualifying heir be under a 2032(a) special use valuation?

Answer 486

They must be a lineal descendent (family member)

Question 487

Do TIPS have a principal adjustment for deflation?

Answer 487

Yes

Question 488

Can you defer the interest and inflation adjustment until redemption for TIPS?

Answer 488

No, the principal adjustments are treated as phantom income

Question 489

If salespeople are independent contractors, how does their participation affect a qualified plan?

Answer 489

It can cause a plan to be disqualified by not counting their commissions

Question 490

When will a QDRO be valid?

Answer 490

Best practice is when the plan administrator has approved it and that it has entered court and signed by the judge

Question 491

What are the years of service requirements for a SEP?

Answer 491

3 out of 5 years. If a company has a lot of part time employees, but they only stay for a few months, a SEP can still make sense

Question 492

When assigning a whole life policy to a non-qualified person, what is the policy’s value for transfer tax purposes?

Answer 492

The interpolated terminal reserve plus unearned premium

Question 493

Can EE bonds be used for high school (Secondary Ed)?

Answer 493

No

Question 494

What can a widow do if their deceased spouse bequeathed all his property to someone else in a community property state?

Answer 494

They have a right to elect against the will (not called the 50% rule)

Question 495

When must a SEP IRA be established?

Answer 495

By the due date of the business tax return, including extensions

Question 496

How do you calculate FV with multiple periods per year on your calculator?

Answer 496

I/Y = annual rate
PV = negative present value
PMT = negative payment if contributing
N = years x periods per year

Question 497

How much should you fund a QDT with?

Answer 497

You should fund one with whatever is over the estate exemption you have

Question 498

If IRD is included in the gross estate, can the attributable estate tax be deducted by the recipient of the income?

Answer 498

Yes

Question 499

If your client dies owning a life insurance policy where someone else is insured, what is included in their gross estate?

Answer 499

The interpolated terminal reserve plus the unearned premium

Question 500

Which dividend option would not produce any income tax liability for a MEC?

Answer 500

When the dividends are used to buy paid-up additions

Question 501

Is providing retirement planning services a fringe benefit for companies?

Answer 501

Yes, but only if it is provided for every employee

Question 502

How many securities would make a diversified portfolio?

Answer 502

10-15 at the bare minimum

Question 503

What amount of home equity loan is the limit for deducting interest?

Answer 503

$750,000

Question 504

What is the limit for a 179 deduction?

Answer 504

The profit of the company. It cannot create a loss

Question 505

When can a greater than 10% shareholder be granted ISOs?

Answer 505

The exercise must be at least 110% of the FMV at the grant date and options must vest in 5 years

Question 506

Can warrants be attached to preferred stock?

Answer 506

Yes and it adds long-term value

Question 507

Do charitable lead trusts (CLAT/CLUT) have a required minimum distribution?

Answer 507

No, they are not subject to the 5% distribution rule

Question 508

What is the greatest risk associated with investing in bonds?

Answer 508

Price volatility

Question 509

If a Canadian citizen owns US property and then dies, can the US levy federal estate tax on them?

Answer 509

Only on the specific properties owned in the US

Question 510

Is COBRA based on full and part time employees?

Answer 510

No, it only worries about full time employees

Question 511

How much of a life insurance policy is included in a decedent’s gross estate if they owned it on themselves?

Answer 511

the amount of the death benefit, even if they establish a beneficiary

Question 512

Are warrant’s risky if the price of the underlying remains flat?

Answer 512

Yes, but not as much as options due to the longer time frame

Question 513

Can you directly roll a 403(b)/401(k) into a Roth IRA?

Answer 513

Yes

Question 514

What is the best way to reduce overall portfolio risk?

Answer 514

Diversification. Contribute extra money to the smallest held stock that is different

Question 515

When can a corporation that issues ISOs receive a tax deduction?

Answer 515

Only if the ISO is disqualified. The excess of FMV over exercise price is treated as compensation and the corporation gets a corresponding deduction

Question 516

Which trust is most effective to reduce GSTT after the death of the grantor?

Answer 516

A reverse QTIP election. A dynasty trust would be good but is implemented before death

Question 517

Does the CFP board consider whether the CFP is a practicing planner?

Answer 517

No, they are subject to the board as a CFP

Question 518

How should you attack ranking questions in terms of importance for planning?

Answer 518

Consider the most and least important reasons to modify the plan.

A second child does not mean it is the most important as they have already planned around parenting before

Question 519

Can 403(b)s offer participant loans?

Answer 519

Yes and they are subject to qualified loan rules

Question 520

When is a participant fully vested in a DB plan?

Answer 520

At normal retirement age. The participant would get the account balance fully attributable to him even if the plan was terminated

Question 521

When a client is afraid of losing principal, are long-term or short-term bonds more appropriate?

Answer 521

Short-term bonds due to the lower duration

Question 522

What should you consider about IRA deductibility when calculating AGI?

Answer 522

If someone is above the phaseout of deductibility

Question 523

Where do you go first regarding a complaint of a CFP’s planning recommendations?

Answer 523

The board

Question 524

What is the spread between interest rates and the inflation rate?

Answer 524

The real rate of return

Question 525

Are Coverdell contributions deductible?

Answer 525

No

Question 526

Do you have to drop clients if they are going to get a divorce?

Answer 526

Not until after the divorce, and even after that you could represent both of them with separate contracts

Question 527

Is the AVD an answer if there is no indication of a decline in value?

Answer 527

No

Question 528

If the insured of a MEC dies with a policy loan outstanding, how much will the beneficiary receive?

Answer 528

The death benefit minus the loan balance. Cash value has no effect

Question 529

What is the basis of an ISO if exercise causes AMT to be paid?

Answer 529

Basis is the grant price plus AMT paid per share (AMT can increase basis)

Question 530

Is earth movement an excluded peril in HO policies?

Answer 530

Yes

Question 531

What return on a client’s investment’s is most meaningful?

Answer 531

IRR as it expresses return considering all cash flows

Question 532

Can you contribute to the max of a 457 and a 403b if they are both offered by the same employer?

Answer 532

No, both plans are subject to section 415 deferral limits

Question 533

When can a 457 allow for a catch up contribution?

Answer 533

Only if it is provided by a governmental employer?

Question 534

Can an S Corp offer an NQDC?

Answer 534

No due to its conduit taxation

Question 535

What is a disadvantage of NQDCs in Secular Trusts?

Answer 535

if can create undesirable phantom income

Question 536

When are lump-sum settlements from divorces not subject to federal gift tax rules?

Answer 536

Only when they are paid within a 3-year period after the divorce

Question 537

Will a 2032A increase estate liquidity?

Answer 537

Indirectly as a lower gross estate leads to lower taxes

Question 538

Is Muni Bond interest subject to the kiddie tax?

Answer 538

No

Question 539

Are ESOPs subject to the 10% penalty rule?

Answer 539

Yes if the distribution is taken before age 55

Question 540

When could a beneficiary elect NUA tax treatment on a deceased employee’s securities from an ESOP?

Answer 540

Only if they take a lump sum distribution of the employee’s balance.

NUA tax treatment is lost on a rollover to an IRA (it would be treated as ordinary income)

Question 541

If a client adds someone’s name to their brokerage account (non-spousal), is it deemed a taxable gift?

Answer 541

No, not until the added person withdraws funds from the account

Question 542

If a client re-titles their home to JTWROS with their domestic partner (non-spousal), is there a taxable gift?

Answer 542

Yes as the partner would have rights under the deed

Question 543

If a domestic partner moves in (non-spousal), will their property be covered under the existing homeowner’s policy?

Answer 543

No, the partner would need a renter’s policy

Question 544

What is the AGI limit for IRA deductibility if covered by a retirement plan at work?

Answer 544

$77k Single & $123k Joint

Question 545

What are the first two things to think of when working with a self-employed client on taxes?

Answer 545

1. 1/2 of self employed taxes are deductible (above the line)
2. Premiums paid on health insurance are deductible (above the line)

Question 546

Can you get an extension to pay taxes later?

Answer 546

No. You can only extend your filing to Oct 15th

You must pay by Apr 15th

Question 547

What is an option B Universal Life policy?

Answer 547

Option B means that the death benefit increases by the cash value

Question 548

What is an option A Universal Life policy?

Answer 548

Option A means that only the original death benefit is paid out

Question 549

Will early withdrawals from an ESOP (before age 55) cause a 10% penalty?

Answer 549

Yes, but only on the basis at distribution and then the NUA at sale

Anything above value at distribution is a capital gain with no penalty

Question 550

If alimony payable decreases when a child turns a certain age, is it deductible?

Answer 550

No. It would be ruled as child support. Only alimony that continues throughout would be deductible

Question 551

Should you limit the scope of engagement if the question only mentions a specific goal (like retirement planning)?

Answer 551

Yes

Question 552

Should you worry about products to be selected when in the analysis step of financial planning?

Answer 552

No, that comes later

Question 553

Can individuals under the age of 65 be eligible for Medicare?

Answer 553

Yes, if they have been collecting SS disability benefits for at least 24 months

Question 554

When should you sign up for Medicare?

Answer 554

You should apply three months before your 65th birthday so that benefits start when they turn 65

Question 555

Are Medicare B Premiums the same for everyone?

Answer 555

No, they are higher for people with more AGI

Question 556

If you are self-employed, can you claim a deduction for Medicare insurance premiums?

Answer 556

Yes, just like any other medical coverage premium

Question 557

How does Medicare A pay for hospital stays?

Answer 557

Medicare pays all but a flat deductible for the first 60 days. Anything after that the patient has a copayment

Question 558

Can the death benefit of group life insurance be included in the gross estate?

Answer 558

Yes, if the employee has the right to name the bene (incident of ownership)

Question 559

How are life settlements taxed?

Answer 559

The gain is taxed as a capital gain