CFP Wrong Answers

Question 1

Calculating Gross Estate
re: Life Insurance

Answer 1

Look out for life insurance that is NOT on the balance sheet

Question 2

When to setup 2503b trust?

Answer 2

Not just for bad boy. Need to have enough money (not at first death) or if estate issue.

Question 3

Valuing tenants in common assets from balance sheet

Answer 3

Balance sheet is already showing the split value

Question 4

Dollar Weighted Return

Answer 4

is the IRR (CF0 to CFn), gold IRR

Question 5

CRD

Answer 5

FINRA Central Registration System number

Question 6

Other than LTC what other means provide nursing home coverage for longer than 100 days?

Answer 6

NOT Medicare supplemental - does not cover long term nursing care

only Medicaid

Question 7

Medicaid lookback

Answer 7

generally 5 years

Question 8

Is interest on a loan from a key person whole life policy deductible? (borrowing cash value from the business)

Answer 8

Yes, but limited to $50k on each policy

Question 9

3 year rule for life insurance transfer

Answer 9

Applies to all transfers even if not transfer for value

if a policy is transferred without consideration within three years of the original owner’s death, the proceeds from the policy are counted in the decedent’s estate for tax purposes. This means that if the insured dies within three years of transferring the policy, the full amount of the proceeds is included in their estate as if they had remained the owner.

Question 10

Use of company apartment - tax free or taxable benefit?

Answer 10

Personal use - taxable
Occasional use - tax free fringe benefit

Question 11

what type of employer group coverage is not tax deductible by the employer?

Answer 11

Code section 125 - cafeteria plan
FSA plan - funded solely by employee

Question 12

Joint Life payout

Answer 12

always wrong answer - this would rarely make sense, until death of 1st

A joint life insurance policy, also called survivorship insurance, covers two insureds, and pays the life insurance benefit after the death of both insureds.

Joint and Survivor - until 2nd spouse more useful

Question 13

Young man inherits $300k and has no other investments. How do you recommend he invest?

Answer 13

Asia fund
Gold fund
Growth and income
Growth
A: MORE INFORMATION NEEDED

don’t know anything about his cash flow
next best: Growth
if 55 yo: Growth and income

Question 14

Index funds

Answer 14

Think: Tax Efficient
little if any turnover
Stocks only sold when eliminated from index

Question 15

Global vs International

Answer 15

Global includes US
International is foreign only

Question 16

which type of entity most likely to purchase REITs?

Answer 16

SEP - yes bc can defer taxable income
2503c trust
UTMA
529

Question 17

Which investment provides max leverage and hedge against inflation?

Answer 17

Improved land - YES - hedge against inflation AND can be financed using bank loan.
Common stock - generally loses value in inflationary times.
Mortgage REIT - definitely no. highly leveraged but poor in times of inflation.
LP - unknown

Question 18

Margin Deposit

Answer 18

NOT the margin amount, but the amount down
Margin amount is the remainder

Question 19

Which bonds do not have reinvestment rate risk?

Answer 19

EEs and STRIPs because they are zero coupon
there is no coupon interest to be reinvested

normally YTM assumes investor reinvests all coupons from a bond at a rate equal to YTM

Question 20

Calculating YTM for zero coupon bond

Answer 20

Always use 2 P/YR even if zero coupon

Question 21

Systemic risk

Answer 21

Wrong answer!
Systematic

Question 22

Heterogenous pool

Answer 22

Wrong answer for insurance pooling
Should be homogenous

Question 23

Don’t recommend muni bonds in a retirement account

Answer 23

Muni bonds are good for high tax brackets
15% bracket better in a corporate bond
Muni bonds are not “tax free” because there are still cap gains

Question 24

Using Change in Bond Price formula

Answer 24

If they are asking for dollar value change make sure to multiply the % change by the $ value

Question 25

Sharpe / Alpha / Treynor questions

Answer 25

Look out for R vs R squared

Question 26

Stock splits

Answer 26

careful of difference between how many shares the owner has after split vs how many were ISSUED total after split minus what they had originally

Question 27

If an account is a joint account who is the client?

Answer 27

BOTH owners husband cannot split account and take all the better stocks

Question 28

Terminate a difficult client

Answer 28

No, educate first

Question 29

Taxable bond interest vs accrued interest

Answer 29

buying a bond mid-year accrued interest is added to price of bond full amount of interest reported 1099-B then subtract accrued interest taxable interest is the difference If a bondholder sells a bond between interest payments, the purchaser of the bond must compensate the seller for the interest “earned” by the seller since the last interest payment. At time of sale, the amount of interest “accrued” from the last interest payment date to the “Regular Way” settlement date of the trade is calculated. The buyer pays this accrual to the seller in addition to the price quoted and broker commission. The buyer will be reimbursed for this amount when the issuer makes the next semiannual interest payment for the full interest period since the prior payment. For test purposes, all bond trades are assumed to be “with accrued” (or “plus accrued”).

Question 30

Which are not subject to phantom income tax? STRIPS CATS Original issue tax-exempt OID TIPS

Answer 30

Original issue tax exempt OID NOT TRUE FOR non tax exempt OID OID on tax exempt obligations is not taxable on sale or redemption, any gain is tax exempt tax exempt zeroes are not subject to phantom income CATS Certificate Of Accrual On Treasury Security (CATS) was a zero-coupon bond, privately issued, but backed by the U.S. Treasury, between 1982 and 1986.

Question 31

is this true? UITs offer a limited number of shares when issued

Answer 31

No- units not shares

Question 32

is this true? closed-end funds can trade at premium or discount to their NAVs?

Answer 32

yes

Question 33

REITS T/F distribute 90% of NII listed / traded on stock exchange issue redeemable shares. issuers make a market. must invest > 75% of assets in real estate to qualify for conduit treatment

Answer 33

T T F T REITS are not redeemable. they are negotiable and trade on exchanges.

Question 34

Cantankerous new client wants to be assured he won't lose any money

Answer 34

Educate him NOT don't take him on

Question 35

Deed of trust between issuer of bonds and trustee covers considerations such as:

Answer 35

Property pledged Working capital and current ratio Any provision for a sinking fund Call provisions

Question 36

Negotiable security

Answer 36

aka marketable - can be transferred Non-negotiable securities and products are those that cannot be transferred from one party to the next. An example of a non-negotiable instrument, also referred to as a non-marketable instrument, would be a government savings bond. Open end fund is not negotiable / not marketable

Question 37

Stock price went from $200 to $1200 but now dropped $100 in days. what do you suggest? Buy a collar Buy a straddle Buy a put Sell a call

Answer 37

Buy a put Long put provides significant downside protection while preserving potential upside

Question 38

What choice would entail the least expense and risk to investor who is bearish on a stock? Buy a call Buy a put Buy a straddle Sell the stock short

Answer 38

Buy a put only downside the premium (smaller cost) and that is the max risk selling short requires depositing margin requirements and more risk if the stock goes up (buy higher to close)

Question 39

of two stocks which is risker? Avg return of 8% and std dev of 10% Avg return of 4% and std dev of 6%

Answer 39

HAVE TO standardize with coefficient of variation RISK PER UNIT OF RETURN STD Dev / Mean Higher value means higher risk

Question 40

Beta vs market Stock with beta of .6 is x% as volatile as an average stock

Answer 40

Stock with beta of .6 is only 60% as volatile as an average stock and Market has a whole is beta of 1 so therefore: 40% less volatile than market as a whole Beta of 1.5 is 50% MORE volatile than average stock A stock with a beta of 2 is 100% more volatile than the average stock. Beta expresses volatility rather than variability and expresses only systematic risk.

Question 41

Workaround to calculating duration

Answer 41

When the bond pays a coupon, pick the next lower reasonable number under the years to maturity

Question 42

Time weighted return

Answer 42

Geometric mean

Question 43

Geometric mean shortcut

Answer 43

On formula sheet, bottom right Shortcut 1. add 1 to each return 2. multiply all #'s in step 1 3. Step 2 = FV 4. PV = -1 5. n = # of years of investment 6. solve for I

Question 44

Which index is price weighted? DJIA EAFE S&P 500 NASDAQ

Answer 44

DJIA

Question 45

Niles and Nora Nervous, a married couple, both age 45 do not want to run out of money during their retirement years. They want to live off the interest income only and leave the principal of their money to their children after they die. They believe they will need $100,000 per year in their post-retirement years. Presuming they can earn an after-tax rate of 10% on their investments and that inflation will average 5% in both their pre-and post retirement years, what lump-sum amount will they require at retirement given that they do not wish to spend down their principal after they stop working?

Answer 45

Whenever the question indicates that investors want to live off interest income only, i.e., not spend their principal, the calculation is simply the amount needed per year divided by the expected rate of return. If the problem indicates that the amount is needed at the beginning of the period, you will need to ADD THE ANNUAL AMOUNT required to the lump-sum calculated by dividing the annual amount by the rate of return. $100000 / 0.04762 THEN ADD another $100k!!

Question 46

If the question is how much can someone afford based on prescribed set of loan payments

Answer 46

Calculate PV But don’t forget to add down payment!

Question 47

If the question is how much can someone afford based on prescribed set of loan payments

Answer 47

Calculate PV But don’t forget to add down payment!

Question 48

How to reduce income tax exposure? High income, enrolled in HSA, made no claims for medex

Answer 48

NOT FSA because she will lose it if no expenses Buy a condo - interest deduction Switch from CDs to municipal bonds

Question 49

Recognized gain on sale of home

Answer 49

Don't forget to subtract the exemption of 250 / 500K from the realized gain

Question 50

Corporate AMT

Answer 50

eliminated!

Question 51

Bob owns a small apartment complex generating $22k of losses. If he has $172K of regular comp from his occupation what is his AGI?

Answer 51

A: $172 BUT, keep an eye out for active participation in which case losses up to $25K might be deductible (phased out between $100-150K) IF his comp was $90K, those losses would reduce his AGI to $68K.

Question 52

Donation of Ford auto Blue book value $2000 someone willing to take it for $500 how much is deduction?

Answer 52

$500 FMV doctrine of IRS states that value is the price a willing buyer would offer for the car

Question 53

Sam age 48 works as sales manager, salary $250K How much can he and his wife, age 51, contribute to IRAs and deduct in this year?

Answer 53

$15000 if no mention of employer plan, assume none if Neither spouse is active participant then AGI limits do not apply she is over 50

Question 54

First home purchase vs principal residence

Answer 54

For qualified plan LOAN, interest deductible if NON-KEY and PRIMARY residence Penalty waived for early IRA distributions for FIRST home up to $10K

Question 55

Amortization keystrokes

Answer 55

Solve for PMT then first month # (usually 1) INPUT final month # GOLD AMORT

Question 56

How much is it to pay a point on a mortgage loan?

Answer 56

1 point = 1%

Question 57

What is final cash flow on property sale if there is a mortgage?

Answer 57

Subtract the mortgage payback from sale amount

Question 58

NPV vs IRR

Answer 58

To calc IRR you just need cash flows For NPV you need cash flows AND and INTEREST Rate (I) that is their required rate of return

Question 59

Question: Mina’s brother, Ken, died on April 1, and Mina was the beneficiary of his life insurance policy of $100,000. She elected a settlement option of Life w/ 20 year certain and is to receive an annuity payment of $1,200 per month for 25 years, beginning May 1. Ken had a basis in the policy of $50,000. Rounded to the nearest dollar, what amount of the annuity must Mina include in this year's taxable gross income? A. $0 B. $4,000 C. $6,933 D. $10,400

Answer 59

Basis / Expected Payout = exclusion ratio 100K/ (1200 * 12 * 25) = .2778 tax free 1200 * .7222 = 866.64 tax free per month x 8 months = C How much will be taxable in 26th year? All of it

Question 60

Ten years ago Sam and Gloria Adams, married, bouthg a home in community prop state for $50k. Sam died four years ago when home was worth $300K. Gloria sold it four years after for $750K. What amount of capital gain must she recognize? a. 0 b. $200K c. $400k d. $450K

Answer 60

Full step up Realized gain $450K BUT 250K EXEMPTION! (section 121) answer: B If sold within 2 years of his death, exemption would have been $500K Widower can claim $500K exemption for 2 years following the spouses death

Question 61

Andrea age 65 has estate of $14m with $3.5m trad IRA. 2nd husband age 60. Three kids prior marriage in 30's and 40's. Wants to take care of spouse and preserve as much as possible for kids. Which is most tax efficient from income and estate tax perspective? A: IRA to children and QTIP trust for spouse B: IRA to spouse and marital QTIP and bypass for remaining C: IRA to bypass for kids and remainder to QTIP

Answer 61

B Husband not yet subject to RMDs IF kids get IRA they will have to take RMDs / income tax If IRA goes to bypass trust it would be subject to income tax as withdrawn AND estate tax

Question 62

What property requires appraisal for donation value?

Answer 62

Non cash property over $5k

Question 63

Before tax or after tax rate when calculating retirement savings?

Answer 63

If both rates are available, use after tax

Question 64

Bond YTM / YTC How to enter PV

Answer 64

NEGATIVE 1000

Question 65

Which type of risk is most relevant to client investing in Fortune 100 stock as part of diversified portfolio? Financial Company specific Interest rate Systematic

Answer 65

Systematic Major risk to the stock will be relationship to the market itself Financial is internal leverage which is diversifiable Company risk is minimized in diversified portfolio Interest rate risk not a focus for equity investor

Question 66

Plan selection business has 40 employees and projected to grow significantly in 5 years but will be reporting net losses Profit sharing plan 401k selection Defined benefit Non qual deferred comp

Answer 66

401k gives EE's option of tax deferred savings independent of company performance Profit sharing - No b/c expecting losses Contributions not mandatory but must be recurring and substantial Non qual deferred comp is for HCE's and execs DB - requires stable cash flow

Question 67

Taxation on withdrawals from traditional IRA's post 59 1/2

Answer 67

Income tax only, never capital gain Deductible contributions fully income taxed Non-deductible contributions tax free - but income taxed on earnings

Question 68

Taxation of annuity payout of death benefit

Answer 68

Basis / Expected payout (monthly $ * 12 * # years) = exclusion amount Basis = not the decedent's basis but the amount of death benefit

Question 69

Max contribution to Keogh

Answer 69

Assume it is self-employed and therefore .1859 * net schedule C income If it is schedule C income AFTER one half SE tax adjustment then 20%

Question 70

Pay attention to NSO vs ISO!

Answer 70

NSO income taxable at exercise, rest is cap gain at sale ISO all capital gain at sale

Question 71

Section 409a

Answer 71

Relates to Non Qualified Deferred Comp plans

Question 72

Non qual deferred comp plan: A: Allows employer to deduct contributions B: May have DB or DC structure C: Required under 409a to allow employee contributions D: Provides add'l savings contributions for rank and file employees

Answer 72

B

Question 73

Most important indicator of stock's marketability? Price per share # Shares authorized US exchange on which it is listed # Shares traded

Answer 73

Shares outstanding and shares traded, not shares authorized

Question 74

Valuation of preferred stock

Answer 74

Price = Dividend / Required rate of return The no-growth situation is the same as the valuation process for preferred stock because a preferred stock dividend is fixed into perpetuity. Can solve for dividend by using dividend rate * par value

Question 75

She made the following gifts: $50k to her son for medical $25K to university for granddaughters tuition $30K from inherited IRA to charity What is gross reportable amount on gift tax return?

Answer 75

$80K $50k to son needs to be reported though only $32 is taxable (GROSS amount) $30K to charity is reportable on gift tax return bc of gift to the son

Question 76

Client bought 1000 shares at $9 / share. Currently selling at $39. Thinks it will continue going up but wants to protect profits. Most effective strategy: Place order to sell 770 shares Short sell 1000 shares and write ten $40 calls at $3 Short sell 1000 shares and buy ten $45 calls at $1 Buy ten $40 puts at $2

Answer 76

D: option to sell at $40 exercise if price goes down if price goes up, sell shares at market price and let option expire unexercised

Question 77

Reg A offering

Answer 77

Small offering Does not require SEC "registration" per se but a different form

Question 78

Rule 144 restricted stock

Answer 78

Does not require SEC "registration" per se for resale of restricted stock though initial issuance may

Question 79

Which is a consequence of a 401k plan becoming top heavy? A: all employee contributions reduced B: More restrictive vesting schedules required C: ER required to make min contributions for non key EE's D: ADP testing must be performed

Answer 79

C B is true only for DB plans

Question 80

Which triggers GSTT? A: Client age 90 gives $10k to great grandchild age 17 B: Client age 60 no children gives $100k to niece age 10 C: Client age 65 pays state university $30k for paper carrier D: Client age 65 gives child age 22 of business partner $100k graduation present

Answer 80

D more than 37 1/2 years younger A: present interest gift qualifies for annual exclusion B: since client has no lineal issue, transfer to son or daughter of sibling is an exception, regardless of fact that child is more than 37 1/2 years younger

Question 81

Losses on Sale of rental property

Answer 81

When rental property is disposed of, current year loss AND passive loss carryforward is deductible AGI limit does not apply

Question 82

When must CFP act as fiduciary? Financial Advice Financial Planning Tax Advice Investment Advice

Answer 82

Financial Advice

Question 83

Client wants to sell all stocks, fearful of downturn. CFP recommends against. Execute as requested Execute as requested and document in the file

Answer 83

Document the decision to protect CFP and the firm

Question 84

Client brings statements of elderly parents in, wants t be more aggressive. Next step: Obtain parent's consent to review statements Administer risk tolerance questionnaire Discuss the client's parents objectives Prepare asset allocation analysis

Answer 84

Obtain consent

Question 85

Living Will

Answer 85

Does not direct gifting Focused on medical decisions

Question 86

Section 199A

Answer 86

QBI

Question 87

QBI deduction limits

Answer 87

If exceeding income thresholds: Lesser 20% of business income OR 50% of w2 wages

Question 88

You are reviewing a client’s student loans and discussing various “income driven repayment” options. Which of the following is NOT an option? A. Income Based Repayment (IBR) B. Income Contingent repayment (ICR) C. Pay as you earn repayment (PAYE) D. Pay on your normal schedule over time (PONSOT) E. Revised pay as you earn repayment (REPAYE)

Answer 88

D All the other answers are income driven repayment option. Answer “D” is simply utilizing the normal schedule of payments. The forgiven debt is tax free. The amount of discretionary income utilized is usually 10%-15% depending on when the loans were taken out. The recent Biden administration’s loan forgiveness executive order will not be tested.

Question 89

An employer can self-fund certain benefits under a 501(c)(9) voluntary employees' beneficiary association (VEBA). Which of the following may be funded? I. Death benefits II. Medical benefits III. Unemployment benefits IV. Retirement benefits V. Deferred compensation benefits

Answer 89

I, II, III Retirement and deferred compensation benefits may not be funded through the vehicle. Does include funding of other insurance like medical after retirement

Question 90

Baker, Inc. provides a qualified retirement plan (employer funded). The plan falls under numerous ERISA rules. The plan lost 50% due to poor investment decisions in the previous year. What recourse can the employees take?

Answer 90

E. Sue the plan officials for losses to the plan Errant plan officials can be held personally liable for losses to the plan as well as other factors. ERISA prohibits monetary punitive damages for claims.

Question 91

Coverdell Education Saving Plans permit tax free withdrawals for which of the following qualified education expenses (including elementary and secondary education expenses) tax- free? I. Academic tutoring II. Special needs services III. Books IV. Room and board V. Uniforms as required

Answer 91

all of the above

Question 92

Mr. Sims purchased a $500,000 life policy in 1987 paying a single premium of $50,000. The contract cash value has grown to $110,000. He has decided to surrender the contract this year. Which of the following is true?

Answer 92

A. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at ordinary income tax rates. The policy is not a MEC; therefore, the cash value in excess of basis ($50,000) will be subject to tax at ordinary income tax rates, but not the 10% penalty. 2023-36 years in 1987. The policy was acquired before MEC rules took effect in 1988.

Question 93

28. An U.S. investor owns German bonds. What will make the bonds increase in value?

Answer 93

D. A decline in U.S. interest rates If a U.S. investor owns securities denominated in a foreign currency, that individual would profit if the dollar declined (devalued) or the value of the foreign currency rose (revalued). An increase in European interest rates would decrease the value of German bonds. If U.S. interest rates decline, the value of the dollar will decline.

Question 94

Alimony after death

Answer 94

Zero. payments cease.

Question 95

How to much to pay for my life insurance policy from my employer's split dollar arrangement?

Answer 95

Higher of cash value or premiums paid no interest

Question 96

Which of the following risks is not presented in an investment in zero-coupon bonds ?

Answer 96

Reinvestment rate risk. One advantage of a zero-coupon is the elimination of reinvestment rate risk because there is no coupon to be reinvested. The zero coupon bond is generally subject to market risk, interest rate risk, and, if the zero is not a Treasury security, defafult risk.

Question 97

1031 vs 1035

Answer 97

1031: property 1035: life insurance

Question 98

68. Mrs. Weathly donated $2,000,000 of appreciated blue chip stocks (basis $1,000,000) to a public charity six years ago when her AGI was $600,000. Her AGI has remained constant over the six years. Now in the seventh year, what amount of the remaining charitable contribution she can use against her $1,000,000 AGI?

Answer 98

Zero. No charitable income tax deduction carryforward is available in the seventh year following a charitable gift. Carryover can be used for five years after initial.

Question 99

Sharpe or Treynor when we don't know R2? Diversified funds

Answer 99

When the portfolio is diversified the Treynor ratio is a more reliable expression of risk-adjusted return than is the Sharpe ratio. If sector fund, not diversified, use sharpe

Question 100

Dolores Delmar established a special needs trust for her developmentally disabled child. Which of the following is true? A. Dolores should serve as the trustee of the trust. B. The trustee can reposition the assets in the trust. C. A family member may serve as be trustee of the trust. D. Investment income cannot be used to buy life insurance on Dolores.

Answer 100

B: In general, trustees may reposition trust assets. If Dolores serves trustee, that she is controlling the beneficial enjoyment of the trust’s assets will taint the trust for income and estate taxes. A family member can be a co-trustee with an independent trustee. Life insurance can be purchased. However, using income from the trust to pay the premiums will taint the trust for income tax purposes. Life insurance on the grantor of a special needs trust that is held within that trust is a typical occurrence.

Question 101

Twenty-five years ago, Mr. Montain purchased an annuity for $600,000. He annuitized the contract 20 years ago when it was worth $800,000. The contract factored a 20-year single life expectancy paying him $5,000 per month. How much of the monthly payment will be included in Mr. Montain's gross income this year (21st year)?

Answer 101

$5000 After 20 years, Mr. Montain’s entire payment is taxable. He has already recovered his basis in full.

Question 102

Which of the following income items are generally not included in gross income? A. Awards B. Back pay C. Bargain purchases of goods from the employer to the extent that the discount exceeds the employers gross profit percentage D. Death benefits paid by the employer E. Incentive stock options

Answer 102

ISOs create AMT income, rather than gross income for Form 1040 purposes. Employer-provided death benefits are not life insurance benefits. The employer will pay and deduct the expense. The other items would be included in a taxpayer’s gross income. Death benefits from employer are NOT life insurance

Question 103

Mark Thomas hired you to be his financial planner. Mark maintains 2503(c) trust for his 2-year-old daughter, June. Mark named himself as trustee because he wants discretion over the distribution income and principal. The trust instrument includes the provision that any undistributed income and principal will be distributed to June when she turns age 21. After reviewing the trust agreement what is the most serious concern that you would share with Mark?

Answer 103

A. Mark should consult with an attorney and have the trust amended to remove himself as trustee. If Mark continues as trustee of the trust into which he has transferred his own the 2503(c) is a tainted trust for both estate and income tax purposes. The notion of minimizing income and subsequent tax is important, but the trustee situation is more worrisome. The trust document needs to be amended or voided. This is a 2503(c) trust.

Question 104

Terry owns a vacant lot next to the church he attends. He permits worshipers to park on the lot while they attend church services. The church wants to expand and wants to purchase Terry's land. A certified appraiser reported that the land has an FMV of $1,000,000. Terry is willing to sell the land for $750,000 to the church and claim a $250,000 charitable income-tax deduction. If the basis of the land is $200,000, how much gain will Terry be required to report on the sale of the land?

Answer 104

$750,000 proceeds x $200,000 basis = $150,000 $1,000,000 FMV The $750,000 in sales proceeds less $150,000 adjusted basis equals $600,000 However, under a bargain sale to charity the basis is adjusted because the difference between the FMV of the property ($250,000) represents a charitable gift rather than a sale.

Question 105

Which bias is: Sell profitable securities positions and hold securities with a current loss.

Answer 105

Loss aversion

Question 106

Which bias is: Wait for the price of a given security to return to a set price before selling.

Answer 106

Anchoring

Question 107

Which of the following are amounts received by the owner of a life insurance policy that would be treated as income-first distributions under a MEC contract? I. Cash dividends II. Interest accrued on a policy loan (added to the loan balance) III. Dividends retained by the insurer to purchase “paid-up” additions IV. Dividends retained by the insurer as principal or interest to pay off a policy loan

Answer 107

I, II, IV When policy dividends from modified endowment contracts (MECs) are used like cash, they are distributed under FIFO rules such as those applicable to annuity distributions. Cash distributions and dividends used to pay off policy loans are considered to be income first distributions. The interest accruing from a policy loan on a MEC is treated the same way for federal tax purposes. Dividends used to buy paid up (permanent) additions are not treated as income-first distributions. The loan interest was not distributed. It was added to the outstandting loan balance.

Question 108

SEC registered advisers with AUM at least $100 million – are required to file annual updates to their ADV within _____ days of the end of their fiscal year.

Answer 108

90 Federal covered advisers must update their ADV forms no later than 90 days following the close of their fiscal year. Smaller advisers that have registered with states securities regulators will comply with state specific deadlines for annual updates to their ADVs or equivalents.

Question 109

MEC taxation

Answer 109

Distributions beyond basis AND Loans taxed during life

Question 110

Life insurance policy to spouse/children/trust - is it a transfer for value?

Answer 110

YES if a Sale No if a GIFT

Question 111

Millie Tilley has the following income. How much of it would be treated as earned income for federal income tax purposes? I. $50,000 in wages from Plant Parenthood, an S corporation. Millie works for Plant Parenthood as a landscaper. II. $5,000 in dividends from stock held in Millie's investment account (non-qualified) III. K-1 income of $10,000 from an S corporation in which Millie owns 20% of the equity and is an active participant in the business IV. Proceeds from the sale of an oil painting inherited from her great aunt that generated a $5,000 long-term capital gain

Answer 111

$50K Only Millie's salary would be classified as earned income. The other answers indicate investment income which is, by nature, unearned. Note: K-1 from an S corporation represents a distribution of profits and thus, is treated as investment income. Although Millie is an active participant in the S Corporation's activity, this is true.

Question 112

Wash sale

Answer 112

No loss deduction is allowed for any loss or other disposition of stock or securities if within a period beginning 30 days before and ending 30 days after the sale the taxpayer acquires substantially identical stock or securities. Remember only 28/29 days in February!

Question 113

Mrs. Adams, widow, has a HO-3 policy with a HO-15 endorsement. She owns the following property: * Her wedding ring recently appraised for $2,000 * Her late husband's gold coins currently valued at $2,000 * Her fur coat valued at $3,000 For which of the above properties, if any, should Mrs. Adams add an endorsement to her properties and for what amount? I. The ring for $2,000 II. The gold coins for $2,000 III. The fur coat for $3,000 IV. The HO-15 rider will likely cover the property because it has more generous personal property limits than policies without this endorsement.

Answer 113

IV Because a HO-15 endorsement provides increased limits on property and higher sublimits on jewelry and furs, the items shown would be covered without additional endorsement. For example, under a HO 15 endorsement coverage for collectible coins carries a $5,000 limit.

Question 114

Mark Spout created an irrevocable trust for the benefit of his dependent children. Mark named the local bank as trustee of the trust and authorized it to invest in stocks, bonds, and negotiable certificates of deposit. Included in the investment authority is the right to use trust income to purchase insurance on Mark's life. All funds are currently invested in high-yielding bonds paying 7% semiannual interest on a par value of $100,000. Twenty-five percent of the bond investment income is being used to pay the premium on a policy on Mark's life. Which taxpayer must pay tax on the income of the trust and why?

Answer 114

Mark because of the grantor rules If any portion of the trust income is, or may be, used to purchase insurance on the life of the grantor or grantor's spouse, then the trust is a grantor trust. The trust is/was also used to benefit his dependent children (support). 25% is to purchase insurance and the remainder is used for support.

Question 115

A corporation purchased a whole life insurance policy for the life of a key employee. The corporation was both the owner and beneficiary under the contract. The corporation did not deduct the premium but instead listed the premiums paid as an asset on its financial statement. The corporation borrowed from the insurance company and various banks using the policy as collateral for the loans. Today, the corporation surrendered the policy for a gain. How will the gain be treated for income tax purposes?

Answer 115

Life insurance surrender gain above basis is always taxed as ordinary income.

Question 116

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

Answer 116

A red herring omits the selling price and the size of the issue. The SEC has to approve a red herring. A red herring stock is a preliminary prospectus, or first prospectus, that a company files with the Securities and Exchange Commission (SEC) before offering securities for sale, such as stocks or bonds, as part of a public offering. The term "red herring" refers to the document's cover page, which has a red disclaimer stating that the information is incomplete and subject to change until the registration statement becomes effective.

Question 117

Mr. Smart is shorting calls (at-the-money calls). What is his greatest risk? What is shorting calls?

Answer 117

The upside risk is unlimited. Naked call writing is also called shorting calls. The maximum profit is the premium income. Since the upside potential of a stock’s price is unlimited, the potential loss to the writer is unlimited. A shorter defined is someone who believes that the price of the underlying stock will drop or at worse will not rise (a flat market). Mr. Smart will be able to keep the premium income. (reference Live Review Investments page 21)

Question 118

Larry is disabled due to a job-related injury. He is being paid benefits under workers compensation, Social Security, and his private disability plan (employer paid). Which of the disability benefits could be taxable? I. Workers compensation disability benefits II. Social Security disability benefits III. Private disability plan benefits

Answer 118

II and III

Question 119

What investment should you not recommend for someone worried about losing principal?

Answer 119

Long term bonds significant principal risk if interest rates rise

Question 120

Tim Taylor, age 52, purchased a $250,000 universal life policy (Option A) four years ago. He paid a single premium of $50,000. The policy has a current cash value of $56,000. His wife, Gloria, is the primary beneficiary and his revocable trust is the contingent beneficiary. 2. If he took a policy loan of $26,000 from the policy, what would be the tax ramification?

Answer 120

This single-premium life insurance policy is a modified endowment contract (MEC). A MEC is subject to LIFO distribution on the taxable portion ($56,000 - 50,000 = $6,000). The $20,000 is a return of basis (total premiums he paid). Basis is not taxable nor is basis subject to a 10% penalty.

Question 121

Anchoring Other definition besides just anchoring to specific price

Answer 121

While most think of anchoring as the belief that a particular price for a security is “right,” an investor can be anchored to a “guru’ like Warren Buffet, Elon Musk, or in Ron’s case, Jim Cramer.

Question 122

Which of the following education savings vehicles would not offer tax-free distributions for room and board while Jessica is attending college? Coverdell EE 529 UTMA

Answer 122

EE Relative to tax-free distribution of redemption proceeds from EE Bonds for higher educational purposes, the costs of books or room and board are not qualified expenses. Qualified educational expenses include tuition and fees (such as lab fees and other required course expenses). Expenses paid for any course required as part of a degree or certificate-granting program. Expenses paid for sports, games, or hobbies qualify but only if they are part of a degree or certificate program. The UTMA is tricky as you pay taxes as you earn income, so it is after tax money (i.e. tax free distributions). ALSO - 529 PREPAID TUITION plans do not include room & board

Question 123

Which college savings are considered a gift? EE UGMA/UTMA Coverdell ESA 529

Answer 123

EE is not a gift bc it is in parents names all others considered a gift

Question 124

Which assets count towards parent vs child for financial aid?

Answer 124

Child asset - EE bonds (even though owned by parents), UGMA/UTMA 529 generally not counted as child's asset Coverdell ESA considered asset of parent

Question 125

Survivorship life

Answer 125

Second to die

Question 126

Clarke, Inc. is concerned about how John's death will affect the company. John is a key employee. Which of the following factors should be considered when quantifying the amount of life insurance Clarke should have on John? The loss of earnings caused by John’s death The cost of finding a replacement for John The cost of funding a split-dollar policy on John Whether there is someone in the organization who can easily step into John’s position

Answer 126

NOT COST of split dollar Split-dollar is an employee-benefit-type policy application of life insurance, not a key person policy.

Question 127

Are BOE insurance premiums deductible?

Answer 127

The corporation cannot deduct the premium, but it can exclude the benefits from its gross income. Yes if sole prop/ self employed

Question 128

Input variables needed to create portfolios under the Markowitz model do not include which of the following? A. Covariance B. Correlation coefficient C. Standard deviation D. Return E. Beta

Answer 128

Beta The Markowitz Model uses standard deviation as a risk measurement (covariance, correlation coefficient, and return). It does not factor Beta.

Question 129

Which investment listed below could provide both leverage and a reasonable hedge against inflation? A. Equity mutual fund B. Equity REIT C. Mortgage REIT D. Blind pool

Answer 129

Equity REITs can be leveraged. Equity REITs own the properties. Historically, real property increases in value in inflationary times. An equity mutual fund or a mortgage REIT is a poor hedge against inflation. In a truly inflationary time (1981), stock did poorly. There is not enough information about the blind pool to make the judgement as to whether to invest in the limited partnership.

Question 130

Client has a MEC. Taken out a policy loan of $300K. Basis is $400K. Policy cash value is $600K. What is taxable income?

Answer 130

$200K MEC = LIFO!!!

Question 131

When calculating SE tax, in addition to sole prop / schedule C income and individual may need to include some or all of the income from which of the following? Flow through income from S corp Guaranteed payments from partnership Interest/dividends Rents and royalties

Answer 131

Guaranteed payments are treated as earned income subject to SE tax Flow through from S corp is unearned income

Question 132

BOE vs BOP Business Overhead Expense vs Business Owners Policy

Answer 132

BOP covers property, contents, liability premium is deductible BOE is for business continuity not deductible for Corp/Scorp Deductible for self employed sole prop

Question 133

When are disability benefits taxable? Individual plan ER 162 bonus plan Group plan Partnership / S corp

Answer 133

Only group plan 162 and S corp - premiums are passed to employee / partner as income, so benefits are tax free employers can still deduct