CFP Flashcards
Noncancelable
Premium will remain the same
Guaranteed Renewable
Premiums may increase but policy will stay in force
Disability integrated with Social Security
SS has a 5 month waiting period. If they have SIS rider, that amount will be reduced by SS paid in month 5
Six ADLs (Activities of Daily Living)
Eating, Bathing, Dressing, toilet, transfer to bed, maintaining continence.
Medicare - Long Term Care Benefit
- 20 days paid by Medicare, next 80 are co-payment, anything else is patient cost
Dividend Options for Life Insurance
Cash
Reduction of Premiums
Accumulate with Interest (taxable)
Paid up Additions
One Year Term Insurance (5th dividend)
Nonforfeiture Options for Life Insurance
Cash
Reduced Paid Up insurance
Extended Term / Paid up term insurance
Can’t even pay
1035 Exchange
Annuity -> Life NO WAY!
Financial Planning Process
- Understanding the Clients Personal and Financial Circumstance
- identifying and selecting goal
- Analyzing current and potential course of action
- Develop recommendations
- Present recommendations
- Implement recommendations
- Monitor and update
Housing Expense Ratio (PITI)
< 28% gross income
Total Monthly Debt
< 36% gross income
Consumer Debt
< 20% net income
Real Rate of Return
= (1+ after tax return / 1+ inflation rate) -1 x 100
College Funding
Step 1 - cost in first year (solve for FV)
Step 2 - lump sum needed (solve for PV)
Step 3 - how much do you need to save
UTMA vs UGMA
UTMA can include real estate
Alimony
- cash payments if obligation (rent, tax)
- life insurance where payor is insured
COBRA
- 20+ employees
- 18 months if because of you
- 36 months for family
Compensatory vs Punitive Damages
- compensatory is tax free because it’s for physical injuries
- punitive is punishment so it’s taxable
(Except for wrongful death)
Monetary Policy
BEST
- buy is expansionary
- sell is tighten
Reverse Mortgage
- must be 62
- get funds distributed from house value
- proceeds tax free
Investment Advisor
“ABC” Test
Advice
Business
Compensation
Exceptions to Investment Advisor
- LATE (lawyer, accountant, teacher, engineer)
- bank
- limited to US gov securities
- family office
- only insurance companies are clients
Contracts Elements
- offer and acceptance
- consideration (something of value)
- legal capacity
- lawful purpose
Insurable Risks
- large number of homogeneous exposure units
- loss is definite and measurable
- loss must be accidental
- loss must not be catastrophic to insurance company
Parts of Insurance Contract
Declarations
Definitions
Insurance Agreements
Conditions
Exclusions
“DICE”
Homeowners Insurance
A - dwelling
B - other structures
C - personal property
D - loss of use
E - liability
F - medical
Property Loss Calculations
Replacement Cost * Coinsurance % = insurance required
(Insurance carried / required ) x loss - deductible = amt paid by insurance
Personal Auto Policy Parts
A - liability
B - medical
C - uninsured motorists
D - damage to your auto
Workers Comp
- medical benefits
- disability income
- rehab
Stock Redemption
- entity purchase
- no step up in basis
Cross Purchase
- stockholder owns
- step up in basis
Endorsement Method
- R = employer owns policy and pays premium
- employer retains cash value or premiums paid
- employees beneficiary gets balance of death benefit
Collateral Assignment Method
- employee is owner
- employee aSSigns the policy
- employer receives premiums paid
Annuity Taxation
Monthly payment * life expectancy in months = expected return
Investment (basis) / expected return = exclusion ratio
Bankers Acceptance
Finance imports and export transactions
Eurodollar
Deposit in any foreign bank that is denominated in dollars
Yankee Bonds
Dollar denominated bonds issued in the US by foreign banks and corporations
T-Bills
- 3,6,12 month maturities
- safest
- no coupon interest
- weekly auction
T-Notes
- 1-10 years
- RIP is risk
- not callable
- semiannual interest
- monthly auction
T-Bonds
- 10-30 years
- RIP is risk
- callable
- semiannual interest
- quarterly auctions
Bonds Risk
Default risk
Reinvestment risk
Interest rate risk
Purchasing power risk
“DRIP”
American Depositary Receipts
Buy foreign shares in the US
- dividends paid in US dollars but declared in foreign currency
Systematic Risk
Purchasing power risk
Reinvestment risk
Interest rate risk
Market risk
Exchange rate risk
“PRIME”
Unsystematic Risk
Business risk
Financial risk
Total risk
- standard deviation
- combo of unsystematic and systematic risk
Systematic risk
Known as beta
Covariance
Measures the extent to which 2 stocks are related to one another
Correlation Coefficient
Ranges from +1 to -1
+1 = perfect correlation (risky)
-1 = opposite (risk is eliminated)
Coefficient of Variation
Measure of relative variability used to compare investments
= standard deviation / return
Higher the coefficient variation = riskier
Standard Deviation
Measures variability
Non diversified portfolio
Measure of total risk
Beta
Measures volatility
Diversified portfolio
Measures systematic risk
Current Yield
= annual interest in dollars / current bond price
Muni Bonds vs Treasuries Taxation
Muni’s - no fed taxes, but yes to state taxes (if resident state may be no state taxes)
Treasuries - yes to fed taxes, no state taxes
Duration
High interest = low duration
YTM and Duration are positively correlated
Duration to manage bonds
UPS
- if interest rates are going UP, Shorten duration
FALLEN
- if interest rates are Falling, Lengthen duration
Bond Price Volatility
- small coupon, longer maturity and lower interest rate = bigger price fluctuation
Current Market Price formula
= earnings x P/E Ratio
return on equity
= EPS / common equity
Dividend payout ratio
= common dividends paid / EPS
Market Risk Premium
- from required rate of return formula
- (risk of market - risk free rate)
Stock Risk Premium
- from required rate of return formula
- (risk of market - risk free rate)Beta
Fundamental Analysis
- consider current and past company records
- F FOR FORMULAS
Technical Analysis
- used charts or computer programs
Benchmarks
Dow Jones = price weighted
SP500 = float like a butterfly, sting like a bee = Floating
Russell 2000 = small cap = cap weighted
Wilshire 5000 = Volkswagen = value
Value Line = value is equal = equal weighted
NASDAQ - capitalization bc capital letters
EAFE
Ex-Dividend Date for Common Stock
- must purchase stock before ex-dividend date
- watch for weekends and holidays
Alpha
Portfolio managers contribution
R^2
If > 60 then Alpha first or Treynor
If < 60 then Sharpe
Stock Option Collar
Selling a call and buying a put
- own the stock and want to hedge against a decline
Maintenance Margin Requirement
= (1 - initial margin) / (1 - maintenance margin) x purchase price of stock
Option Straddle
Buying a put and buying a call
- don’t know how the stock is going to move
Debts not cancelled by bankruptcy
- student loans
- gov loans
- child support
- taxes
- alimony
Assets subject to probate
- single owned assets
- property held tenancy in common
- assets where beneficiary is “estate of the insured”
- community property (50% to each spouse)
Gross Estate
All probate assets + non probate assets
- gift taxes paid within 3 years of death
- general powers of appointment mom
Fully Deductible Gifts
- to spouse
- qualified charities
- education institutions
- political parties
What form for gift tax return
709
Present interest gifts
- 2503(c)
- direct gift
- crummey
- 529
- UGMA/ UTMA
Crummey trust
Able to take out the lessor of $18,000 or value of gift transferred that year
Bypass trust (B)
- pass using $13,610,000 exemption
- assets pass to trust beneficiary
Marital Trust (A)
Surviving spouse has control over property
Assets pass by marital deduction
Marital Trust (A)
Surviving spouse has control over property
Assets pass by marital deduction
Assets pass to second spouses beneficiary
QTIP (C)
Current income trust
Assets pass to trust beneficiary
2nd marriage
LAME
QTIP (C)
Current income trust
Assets pass to trust beneficiary
2nd marriage
LAME
QDOT
Allows you to pass assets to non-US spouse
CRAT (5%)
- no additions
- fixed payments
- any charity
- 10% ending value
CRUT (5%)
- additions allowed
- variable payments
- any charity
- 10% ending value
Pooled Income
- additions allowed
- variable payments
- specific charity
Charitable Gift annuity
- no additions
- fixed lifetime income
- specific charity
- deduction based on gift less annuity
Charitable Lead Trust
- L = leaves
Private Foundations
- 5% distributed for charity
- individual
- study , music, award
Intrafamily Transfers
PIGS need income
Private annuity
Installment sale (small estates)
Grantor retained annuity trust
Self cancelling installment not (for large estates)
GST tax
- direct skip then transferor pays GST
- taxable termination then trustee pays GST
- taxable distribution then transferee pays GST
SS Taxation
MAGI
50% single = $25k MFJ = $32k
85% single = $34k MFJ = $44k
Keogh Contributions
15% = 12.12%
25% = 18.59%
Annual Report - who is it written for
Shareholders
Preferred Stock
Stated dividend rate
Duration is infinite
Typically purchased by corporations bc 50% dividend deduction
Unit Investment Trust
Unmanaged portfolio
Don’t buy new securities
Daily Limit for Futures Contract
Max permissible price increase or decrease
Futures Long vs Short
Long position = own the product = short hedge
Short position = selling the product = long hedge
Collectibles tax rate
28%
Rise in value during inflationary periods
Private Placement (Reg D)
1-2-3
$1,000,000 net worth (excluding home)
$200,000 single income
$300,000 MFJ income
Liquidity Defintion
Speed + stability of price
Marketability Definition
Speed of transaction
Adjustments for AGI
- IRA contribution
- Keogh or SEP
- 1/2 SE tax .07065
- alimony paid
- SE health insurance
Adjustments for AGI
- IRA contribution
- Keogh or SEP
- 1/2 SE tax .07065
- alimony paid
- SE health insurance
Investment interest deduction
- limited to taxpayers net investment income
- need income that is taxed at ordinary rates (stcg, non-qual dividends, interest)
Casualty Theft and Losses
Lesser of basis or FMV
subtract insurance coverage
Subtract $100
Subtract 10% of AGI
- must be federally declared
How many exemptions can you claim?
0
Kiddie Tax
- first $1,300 is standard deduction
- next $1,300 is taxed at 10%
- anything over at parents marginal
- if they have earned income standard deduction = earned income + $450
Self Employment Tax
Net earnings * .1413
Self Employment Income Examples
- net schedule C
- k-1 income
- board of directors
- part time earnings
FICA taxes
6.2% up to $168,000 then 1.45% on the rest
Dependent Care Expense Credit
- $3,000 for 1 kid
- $6,000 for 2+ kids
Use 20% of allowable expenses to determine credit amount
Until age 13
Child Tax Credit
$2,000 / child under age 17
Up to $1,700 is refundable
Section 1244
Allows $100,000 ordinary loss if business fails
MACRS
5 years- computer, auto, truck
7 years - office equipment
MACRS
5 years- computer, auto, truck
7 years - office equipment
179 deduction
Election to expense up to 1,220,000 of qualifying property in the year of acquisition
Cannot create a loss
Tangible personal property
Keys to Boot
- boot received = recognized gain
- boot paid = add to basis
- basis carry’s over from last property
Like Kind Exchanges
- FMV if property received
- adjusted basis of property given up
- boot
Renting vacation home
Personal use cannot exceed the longer of 14 days or 10% of rental use
Charitable donations
FMV = 3 letters = 30% of AGI
Basis = 5 letters = 50% of AGI
Ordinary income property is limited to basis
Roth Conversion
Assets must be held for 5 years to avoid 10% penalty
Withdrawal of Earnings from Roth
59 1/2 AND 5 years for no tax
QBI
20% deduction for pass through entities
- if service related there is a phase out
QBI
20% deduction for pass through entities
- if service related there is a phase out
Qualified Charitable Distribution
Age 70 1/2
Up to $105,000
Alimony Recapture
- $15k decrease from year to year
- $37,500 is constant
