CFP Deck 3 Flashcards
What is the primary purpose of a revocable living trust?
Probate Avoidance
Gifts of future interests do not qualify for:
annual gift exclusions.
What is a GRAT?
Grantor Retained Annuity Trust - special type of GRIT - grantor retains a right to receive fixed percentage of initial contribution
What is a GRIT?
Grantor Retained Income Trust - grantor receives income from trust, at death passes to beneficiaries
What is a GRUT?
Grantor Retained UniTrust - similar to GRAT, except income stream is a fixed percentage of annual trust asset value, not initial contribution
Who pays tax on grantor trusts?
The grantor pays income tax, no the trust of its beneficiaries.
What are the two trusts for minors?
2503(b) (pays income, lifetime) and 2503(c) (accumulates income, cut-off at age 21)
Why are 2503(b) and 2503(c) trusts created?
To classify transfers to trusts that benefit minors as eligible for annual exclusion.
What is a Crummey Trust?
Trust agreement that allows the beneficiary to withdraw contribution made by the grantor to the trust.
Annuity vs Unitrust interest.
Annuity = fixed percentage of initial contribution; UniTrust = fixed percentage of trust assets annual value
Term Life Insurance
Life insurance contract that state if the insured dies within the term of the contract, the insurance company will pay the stated death benefit
Universal Life Insurance
Term Insurance Policy with a cash accumulation account attached
Whole Life Insurance
Provides guarantees from the insurer that are not found in term insurance and universal life insurance contracts
To qualify the use of alternate estate valuation day:
(1) total FMV of estate must depreciate after death (2) total estate tax due must less than amount calculated at death date
Value of assets if using alternate valuation date:
(1) All assets FMV 6 months after death (2) Except: Assets distributed before 6 months - valued at date of distribution or sale; And wasting assets (annuities, patents, royalties, installment notes, lease income) must be valued at death
§6166 Deferral of Estate Tax
Election to pay estate taxes over 14 year period; first years of payments = interest, 10 payments thereafter that amortize the estate tax
Eligibility for §6166 Deferral of Estate Tax
(1) FMV of business interest > 35% of adjusted gross estate (2) closely held business (3) entity must have been actively engage in conduct of business or trade at time of death
§6166 Deferral of Estate Tax: Closely Held Business
Sole proprietorship, partnership/corporation 20% or more total capital/voting stock interested included in gross estate OR less tan 45 partners/shareholders
“Pourover” Provision
Provision in will to make sure that assets from an estate transfer to a previously established trust.
A Note Receivable is forgiven in a will, what happens?
The value of the note is include in the gross estate, the forgiveness of the note then reduces gross estate as a bequeath
Life Interest
Controlling Interest for life
When does a durable power of attorney terminate?
A Durable Power of Attorney will not terminate in the event of disability or incapacity. A Durable Power of Attorney will terminate only in the event of the grantor’s death or upon withdrawal.
What is the main argument that favors the use of a revocable intervivos trust?
Probate costs are avoided by the use of a revocable trust.
Define: Codicil, Devisee, and Legacy
A Codicil is a document used to alter a will. A Devisee is a gift of real property through a will. A Legacy is a gift of personal property through a will.
Which trust for minors request annual distributions?
Answer: 2503(b). The 2503(c) trust does not require annual distribution of income. It is the 2503(b) trust that has this requirement.
How to value inherited/gifted stock?
The value of a gift of securities is the average of the high and the low on the date of the gift assuming the date of the gift is a trade date.
Split Dollar Life Insurance
Can fund Stock redemption, contract premium generally divided between the employee and the employer, death benefit generally divided between the employee and the employer.
GSST Age Gap
37 1/2 years (two generations)
Elements of completed gift
Intent, delivery, acceptance and relinquishment are all requirements for a completed gift to occur.
This trust allows income accumulation
Both the GPOA Trust and Q-Tip Trust require distribution of income at least annually to the spouse. A TPP Trust holds tangible personalty. Only the Estate Trust permits income accumulation.
Sprinkling Provision
A sprinkling provision allows the trustee to make payments of income or corpus to beneficiaries based upon specific needs.
Discretionary Provision
A discretionary provision allows trustees to distribute corpus or income, or not, as they determine is most prudent.
Spendthrift Provision
A spendthrift provision prohibits a trust beneficiary from assigning interests in the trust corpus.
Qualified Disclaimer:
Must be written, irrevocable and received by the executor of the estate within 9 months. It must not direct the asset and can be for any interest partial or full.
Elements of QPRT
Can only hold one residence, owner retains tax advantages, generated income taxed to donor
Estate Freeze
In the case of an estate freeze, the property transferred would be appreciating in value and any future gain would occur in the transferee’s estate.
What are the non-tax characteristics of a reverse or (reversionary) gift?
The gift, must be completed one year before death, is given with the intention that the donee receive it back with a step-up in basis.
A gift tax (form 709) must be filed if:
amount gifted to person is above $14,000, gift is split or a retained interest is held. Gifts to charities have unlimited transfers requiring NO gift tax filing.
Tax inclusive
Tax inclusive items are gift, inheritance and income that will be taxed, while tax exclusive items will avoid such taxation.
Community Property - Moving to Common Law State
Community property retains its character when a couple moves to a common law state. One-half of community property is subject to probate.
Reversionary interest
A reversionary interest is one that reverts back to the donor after some time or event.
Crummey Powers allow:
Crummey Powers allow for distribution of newly contributed funds to the trust corpus on a lapsing basis. Crummey powers transmute a future interest to a current gift.
What is a mutual will?
A mutual will is also referred to as a sweetheart will where both spouses leave all assets to each other.
In terrorem clause:
“No-Contest” clause
Pure Life Insurance:
Pure life stops when the first recipient dies.
One Year Term Insurance
One year term insurance is a dividend option.
Reduced Paid-up:
Non-forteiture provision in life insurance
Life Income Certain Period
Death proceeds to a spouse, with continued payments to children or other beneficiaries for a specific period of time after the death of the spousal beneficiary.
Residual benefits
cover partial disability
Collateral assignment is
a temporary transfer of some or all of the ownership rights whereby such rights revert to the assignor upon satisfaction of agreed-upon conditions.
Role of Adjuster
Assist in preparing the proof-of-loss statement and determine whether there was a covered loss covered
Comprehensive Personal Liability (CPL) policy
Provides coverage for legal liability stemming from business activities of the insured by use of a simple extension of coverage amendment
Modified Endowment Contract (MEC)
Once a contract is a MEC, it remains so even after a 1035 Exchange for a different policy. Any withdrawals are made on a LIFO basis.
Leasehold interest coverage
Covers favorable terms in a lease agreement should a fire render a building uninhabitable.
Extra Expense Insurance
Covers any extra expenses incurred to continued operation.
Business Interruption
Covers indemnity for businesses during the period where they are rebuilding and restoring after covered losses have forced a halt of business as usual.
Contingent Business Interruption
Covers expenses caused by the occurrence of a loss to a covered peril which the insured does not own.
Aleatory contract
One party pays more than the other party, The insurance contract is an agreement affected by chance occurring when the involved parties pay an unequal number of dollars.
Group Model HMO
Arrangement that is sometimes known as the network model.
Staff Model HMO
Corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO.
IPA Model HMO
Type of HMO organization that is made up of physicians who have their own office locations. Most flexible.
Settlement options
Fixed period payments, fixed amount installments, accumulated at interest
Modified no-fault coverage:
Where injured parties do not give up the right to sue, but simply refrain from such action until either a dollar threshold or a verbal threshold are reached.
Direct recognition programs
Any amount of cash that is removed from the policy is reflected in a decrease in the amount of dividends and interest paid on that policy.
On homeowner policy forms where other structures are covered, the coverage is usually what percent of the dwelling?
10%
Viatication
The selling of a life insurance policy by a terminally ill person, so that person can receive a benefit from the policy while still alive and the purchaser of the policy can receive a payment when the seller dies. Becomes an important issue if the insured were suffering from a terminal illness.
Dynamic risk
Core of risk resides in the change in the environment caused by the changing human condition.
Pure risk
A category of risk in which loss is the only possible outcome; there is no beneficial result. Pure risk is related to events that are beyond the risk-taker’s control and, therefore, a person cannot consciously take on pure risk. This is the opposite of speculative risk
Speculative risk
A category of risk that, when undertaken, results in an uncertain degree of gain or loss. All speculative risks are made as conscious choices and are not just a result of uncontrollable circumstances. Speculative risk is the opposite of pure risk.
Static Risk
Situation not significantly affected by the business environment and which remains constant over time, such as real property
The National Association of Insurance Commissioners (NAIC) is involved in the process of regulating the insurance industry by
NAIC works to see that information is adequately communicated as circumstances arise, sees that recommendations of action serve as the basis for decision-making by setting precedents for states to draw from voluntarily, and provided recognition though accreditation of state insurance offices.
Commonly used approaches to calculate an appropriate amount of insurance for a client include:
needs approach, multiple of earnings approach, income replacement method, human life approach
The person who commits the tort will not benefit or be relieved of obligation and responsibility just because the victim has insurance. This best describes:
Collateral source rule
The survival of a tort action
means that even in the event of death of the victim or the tortfeasor, the tort will remain actionable.
Negligence per se regards
a violation of a legal standard.
What would appear on the declaration section of a policy?
The insured’s name
Where would exclusions to coverage appear on policy?
Policy Exclusion Section
Where would what the insurers agrees to do appear on policy?
Insuring Agreement
Where would the perils against which the insurer will provide coverage appear on a policy?
Coverage Section
Inland marine insurance covers: Imports, Floaters, Domestic Shipments.
Imports, Floaters, Domestic Shipments.
The hull of a ship is covered under:
Ocean marine insurance
How many ADL must an insured be unable to perform to be considered chronically ill.
2 of 6. There are six basic ADLs: eating, bathing, dressing, toileting, transferring (walking) and continence.
Whole life participating dividend options:
Cash, accumulate at interest, reduce premiums, paid-up insurance, one-year term (5th). CRAP-O
Define: Indemnify
Indemnify. To compensate for loss or damage; to provide security for financial reimbursement to an individual in case of a specified loss incurred by the person.
Define: Probation Period
The probation period, when included in a Disability Income policy, is the time the insured must wait after the issue of the policy before specified conditions will be covered.
Coinsurance Calculation:
Amount Carried (face value) ÷ Coinsurance % x Loss - Deductible
HO-1 coverage
Home owners insurance - almost non-existent basic coverage.
HO-3 coverage
Homeowners Form known as Special Form and provides open peril coverage on both dwelling and appurtenant structures. HO-15 is an endorsement to HO-3 coverage.
HO-6 coverage
Condominium owners coverage
HO-4 coverage
Renters Insurance
The stake or interest in a matter, person, property, or other business concern that might be damaged if the peril insured against occurs.
Insurable Interest
The right of a party to collect from third parties who are responsible for having caused the loss.
vicarious liability
The right of the insured to bring tort action against the tortfeasor.
The right to bring suit.
The right of the insured to be made whole after a loss occurs.
Principle of Indemnity
Non-forfeiture rights (or provisions)
arrange an orderly legal structure to assure monies paid on an insurance policy are not simply absorbed by the company without recourse in the event that an insured decides to terminate coverage. Two other such provisions include “reduced paid-up” and “extended term.”
Modified no-fault coverage
Modified no-fault coverage is the plan where injured parties do not give up the right to sue, but simply refrain from such action until either a dollar threshold or a verbal threshold are reached.
Casual loss formula
Lessor of Decline in FMV or Basis - Insurance payment - $100 - 10% of AGI Floor
Totten trusts
Totten trusts are used to avoid probate, not to lower the value of the gross estate.
A policy which must cover all eligible dependents if the employer pays the entire premium cost best describes:
Dependents’ group life insurance
The 83b election must be made -
within 30 days after the date the stock was initially transferred at grant.
Purpose of HIPAA
Protect worker’s ability to obtain health insurance when changing jobs, being laid off, or retiring
Employee deferral to 401(K) Limit in 2013
$17,500
Total limit of additions to employee’s 401(k) account in 2013.
The $51,000 is the total limit for an under 50 employee from all sources including employee deferral, employer match, forfeitures, and profit sharing contributions by the employer.
Simple IRAs - 20% withholding?
Simple IRAs do not require the 20% withholding because they are not qualified plans.
Inflation adjusted return formula
[(1+Return)/(1+Inflation)] - 1
Deductibility of Medical Insurance Premiums
Your health insurance premiums may be deductible on your tax return if they provide for reimbursement for doctor/dentist fees, hospitalization, surgical fees and other medical and dental expenses. Schedule A (itemized deductions.)
The five dependency tests are:
) Gross Income Test, 2) Support Test, 3) Member of Household or Family Member Test, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.
Bottom-up equity managers include:
Value Managers and Technicians
UGMA
Uniform Gifts to Minors
UGMA Account
The donor can appoint him/herself or another person to be custodian. The custodian, who has a fiduciary duty to manage the minor’s assets wisely, can use the funds to buy securities on behalf of the minor. Access to the gift must be given to the minor when he or she reaches the age of majority, either 18 or 21 (sometimes even 25), depending on UGMA state law. Should a donor acting as the custodian die before the custodial property is transferred to the minor, the entire custodial property is included in the donor’s taxable estate.
General Business Credit
The business credit carryforwards to the current year; the amount of the current year business credit; and the business credit carrybacks to the current year. (Future, Present, Past)
52-53 week
A 52-53 week year ends on a specified day of the week (such as Friday) that occurs in the last week of the last month of the tax year.
Community Property Basis at Death
Upon the death of either spouse in a community property state, both halves of community property are stepped to the fair market value regardless of who inherits the decendant’s half.
Roth distributions are tax free if
they are made after 5 years and because of 1) Death, 2) Disability, 3) 59.5 years of age, or 4) First time home purchase.
Long Hedge
A long hedge means that the investor owns (buys) the futures contract to insure a certain price of a commodity that he or she does not yet own. Hedging is taking an opposite futures position than the investor’s inherent underlying position.
SIMPLE IRA Distribution Rule
Simple IRAs do not require the 20% withholding because they are not qualified plans. Therefore, the entire account balance would have been distributed to him.
Who sets the margin requirements?
The Federal Reserve sets margin requirements for all security transactions
Define: Alpha
The difference between a security’s realized return and its risk-adjusted expected return.
Annual Exclusion:
The annual exclusion applies only to lifetime gifts and not to bequests.
Filing Requirements: Self Employed vs. Employee
The rule is that a taxpayer must file if he has greater than or equal to $400 of net earnings from self-employment. If the taxpayer does not have self-employment income there is no requirements to filing unless your income exceeds the standard deduction and personal exemption for that year.
Which/what tax credits is/are refundable?
Earned Income Credit
Close-end funds.
Close-end funds are traded on the secondary markets but are not passively managed.
Deductibility of International Business Airfare
Prorata airfare unless (then you can deduct all):
< 7 days business
<25% on personal
Taxability of athletic care facilities
Access to athletic facilities can be provided on a discriminatory basis without causing inclusion in the employee’s gross income
The classifications of income are
Active, passive and portfolio. Earned income is a subset of active income while unearned income may be either a passive or portfolio income.
Estimated Income Tax Payment
100% prior year, 90% current year. Greater than $150,000, 90% of current year tax or 110% of prior year tax.
Time weighted return:
We are only concerned about the initial security’s cashflow. Disregard additional purchases. Focus on first and the cashflows it creates. Buy stock, dividend, sell.
Qualified dividend treatment
If the individual meets the requisite holding period, which is more than 60 days in the 121 days surrounding the ex-dividend date, dividend qualifies for preferential tax treatment. If sold sooner ordinary income tax rate is used.
private annuity
Title to the property is conveyed to the individual responsible for making annuity payments at the time of the transaction. Each payment received by the annuitant is divided into gain, interest income, and a non-taxable recovery of basis.
A stock redemption plan
is a stock purchase by a corporation, so the cost basis of the surviving shareholders are not affected, thus they do not receive a step up in basis. Proceeds of a policy owned by a surviving shareholder are not includible in the decedent’s gross estate. Premiums are not tax deductible.
Tax Preparer Penalty
The preparer penalty for willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the preparer for the return.
ADP Schedule
NHC-HC: 0-2% - x2; 2-8% - +2%; > 8% x 1.25
revaluation is synonymous with?
Appreciation (currency) - opposite of depreciation
The five elements of the Dependency Exemption Test are:
Gross income, support, member of household or family, citizenship or residence, and joint return.
Employer-paid group term life plan
Employer deducts all costs, employee is taxed on coverage over $50,000 (IRS rate cost - actual cost = amount taxed)
Safe Harbor Rule Includes which employees:
Non-excludable (NE) employees (don’t think it is just covered) NENHC Employees/ NE Employees ≥ 70% - PASS!
Ratio Percentage Test includes which employees:
Covered (C) Employees (% of CNHC / % CHC ≥ 70%)
Top Down Managers:
Group Rotation & Market Timers
Bottom Up Managers:
Technicians & Value Managers
§125 Cafeteria Plan: Maximum total of benefits accruing to key employees
25%
What is the early withdrawal penalty for a SIMPLE IRA plan during the 2-year period beginning on the date the employee first participated in the SIMPLE plan?
25%
The brochure rule (hint: 48 and 5)
The brochure rule requires that a planner or advisor provide the client with all of the information as required at the meeting if they are given a five day time period to change their mind or 48 hours prior to the meeting.
Close-end funds are traded -
on the secondary markets but are not passively managed.
A collateral assignment is a -
- temporary transfer of some or all of the ownership rights whereby such rights revert to the assignor upon satisfaction of agreed-upon conditions.
An absolute assignment is -
- an irrevocable transfer of all ownership rights which can be accomplished through a sale or gift.
Modern “asset allocation” is based upon the portfolio theory model developed by Markowitz:
The risk, return and covariance of assets are important input variables in creating portfolios.
Dying Intestate:
If the decendent dies without a valid will or a will that only covers part of his assets, he is said to have died intestate.
The alpha of a security may be calculated using:
Jensen - tell us the difference between a fund’s realized return and its risk-adjusted expected return using CAPM.
Under the safe-harbor leasing rules the plan must provide -
- a 10%, non-integrated money purchase plan with immediate vesting. No more than 20% of the employer’s non-highly compensated employees may be leased to qualify for the safe harbor rules.
Casualty Loss:
Lesser of the decline in FMV or adjusted taxable basis less 10% of AGI and $100
