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CFP Wrong Answers Flashcards

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1
Q

Calculating Gross Estate
re: Life Insurance

A

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

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2
Q

When to setup 2503b trust?

A

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

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3
Q

Valuing tenants in common assets from balance sheet

A

Balance sheet is already showing the split value

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4
Q

Dollar Weighted Return

A

is the IRR (CF0 to CFn), gold IRR

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5
Q

CRD

A

FINRA Central Registration System number

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6
Q

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

A

NOT Medicare supplemental - does not cover long term nursing care

only Medicaid

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7
Q

Medicaid lookback

A

generally 5 years

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8
Q

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

A

Yes, but limited to $50k on each policy

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9
Q

3 year rule for life insurance transfer

A

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.

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10
Q

Use of company apartment - tax free or taxable benefit?

A

Personal use - taxable
Occasional use - tax free fringe benefit

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11
Q

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

A

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

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12
Q

Joint Life payout

A

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

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13
Q

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

A

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

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14
Q

Index funds

A

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

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15
Q

Global vs International

A

Global includes US
International is foreign only

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16
Q

which type of entity most likely to purchase REITs?

A

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

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17
Q

Which investment provides max leverage and hedge against inflation?

A

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

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18
Q

Margin Deposit

A

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

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19
Q

Which bonds do not have reinvestment rate risk?

A

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

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20
Q

Calculating YTM for zero coupon bond

A

Always use 2 P/YR even if zero coupon

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21
Q

Systemic risk

A

Wrong answer!
Systematic

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22
Q

Heterogenous pool

A

Wrong answer for insurance pooling
Should be homogenous

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23
Q

Don’t recommend muni bonds in a retirement account

A

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

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24
Q

Using Change in Bond Price formula

A

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

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25
Q

Sharpe / Alpha / Treynor questions

A

Look out for R vs R squared

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26
Q

Stock splits

A

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

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27
Q

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

A

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

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28
Q

Terminate a difficult client

A

No, educate first

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29
Q

Taxable bond interest vs accrued interest

A

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”).

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30
Q

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

A

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.

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31
Q

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

A

No- units not shares

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32
Q

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

A

yes

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33
Q

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

A

T
T
F
T

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

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34
Q

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

A

Educate him
NOT don’t take him on

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35
Q

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

A

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

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36
Q

Negotiable security

A

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

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37
Q

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

A

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

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38
Q

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

A

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)

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39
Q

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

A

HAVE TO standardize with coefficient of variation
RISK PER UNIT OF RETURN

STD Dev / Mean

Higher value means higher risk

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40
Q

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

A

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.

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41
Q

Workaround to calculating duration

A

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

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42
Q

Time weighted return

A

Geometric mean

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43
Q

Geometric mean shortcut

A

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

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44
Q

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

A

DJIA

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45
Q

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?

A

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!!

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46
Q

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

A

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

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47
Q

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

A

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

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48
Q

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

A

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

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49
Q

Recognized gain on sale of home

A

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

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50
Q

Corporate AMT

A

eliminated!

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51
Q

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

A

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.

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52
Q

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

A

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

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53
Q

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?

A

$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

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54
Q

First home purchase vs principal residence

A

For qualified plan LOAN, interest deductible if NON-KEY and PRIMARY residence

Penalty waived for early IRA distributions for FIRST home up to $10K

55
Q

Amortization keystrokes

A

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

56
Q

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

A

1 point = 1%

57
Q

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

A

Subtract the mortgage payback from sale amount

58
Q

NPV vs IRR

A

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

59
Q

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

A

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

60
Q

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

A

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

61
Q

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

A

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

62
Q

What property requires appraisal for donation value?

A

Non cash property over $5k

63
Q

Before tax or after tax rate when calculating retirement savings?

A

If both rates are available, use after tax

64
Q

Bond YTM / YTC
How to enter PV

A

NEGATIVE 1000

65
Q

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

A

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

66
Q

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

A

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

67
Q

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

A

Income tax only, never capital gain

Deductible contributions fully income taxed
Non-deductible contributions tax free - but income taxed on earnings

68
Q

Taxation of annuity payout of death benefit

A

Basis / Expected payout (monthly $ * 12 * # years) = exclusion amount

Basis = not the decedent’s basis but the amount of death benefit

69
Q

Max contribution to Keogh

A

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%

70
Q

Pay attention to NSO vs ISO!

A

NSO income taxable at exercise, rest is cap gain at sale

ISO all capital gain at sale

71
Q

Section 409a

A

Relates to Non Qualified Deferred Comp plans

72
Q

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

A

B

73
Q

Most important indicator of stock’s marketability?

Price per share
# Shares authorized
US exchange on which it is listed
# Shares traded

A

Shares outstanding and shares traded, not shares authorized

74
Q

Valuation of preferred stock

A

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

75
Q

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?

A

$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

76
Q

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

A

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

77
Q

Reg A offering

A

Small offering

Does not require SEC “registration” per se but a different form

78
Q

Rule 144 restricted stock

A

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

79
Q

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

A

C

B is true only for DB plans

80
Q

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

A

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

81
Q

Losses on Sale of rental property

A

When rental property is disposed of, current year loss AND passive loss carryforward is deductible

AGI limit does not apply

82
Q

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

A

Financial Advice

83
Q

Client wants to sell all stocks, fearful of downturn. CFP recommends against.

Execute as requested
Execute as requested and document in the file

A

Document the decision to protect CFP and the firm

84
Q

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

A

Obtain consent

85
Q

Living Will

A

Does not direct gifting
Focused on medical decisions

86
Q

Section 199A

A

QBI

87
Q

QBI deduction limits

A

If exceeding income thresholds:

Lesser 20% of business income
OR
50% of w2 wages

88
Q

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)

A

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.

89
Q

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

A

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

90
Q

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?

A

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.

91
Q

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

A

all of the above

92
Q

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?

A

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.

93
Q
  1. An U.S. investor owns German bonds. What will make the bonds increase in value?
A

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.

94
Q

Alimony after death

A

Zero. payments cease.

95
Q

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

A

Higher of cash value or premiums paid
no interest

96
Q

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

A

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.

97
Q

1031 vs 1035

A

1031: property
1035: life insurance

98
Q
  1. 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?
A

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.

99
Q

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

A

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

100
Q

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.

A

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.

101
Q

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)?

A

$5000

After 20 years, Mr. Montain’s entire payment is taxable. He has already recovered his basis in full.
102
Q

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

A

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

103
Q

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?

A

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.

104
Q

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?

A

$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.

105
Q

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

A

Loss aversion

106
Q

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

A

Anchoring

107
Q

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

A

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.

108
Q

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.

A

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.

109
Q

MEC taxation

A

Distributions beyond basis AND Loans taxed during life

110
Q

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

A

YES if a Sale
No if a GIFT

111
Q

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

A

$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.

112
Q

Wash sale

A

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!

113
Q

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.

A

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.

114
Q

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?

A

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.

115
Q

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?

A

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

116
Q

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

A

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.

117
Q

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

What is shorting calls?

A

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)

118
Q

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

A

II and III

119
Q

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

A

Long term bonds
significant principal risk if interest rates rise

120
Q

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.

  1. If he took a policy loan of $26,000 from the policy, what would be the tax ramification?
A

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.

121
Q

Anchoring
Other definition besides just anchoring to specific price

A

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.

122
Q

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

A

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

123
Q

Which college savings are considered a gift?

EE
UGMA/UTMA
Coverdell ESA
529

A

EE is not a gift bc it is in parents names

all others considered a gift

124
Q

Which assets count towards parent vs child for financial aid?

A

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

125
Q

Survivorship life

A

Second to die

126
Q

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

A

NOT COST of split dollar

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

127
Q

Are BOE insurance premiums deductible?

A

The corporation cannot deduct the premium, but it can exclude the benefits from its gross income.

Yes if sole prop/ self employed

128
Q

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

A

Beta

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

129
Q

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

A

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.

130
Q

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

A

$200K
MEC = LIFO!!!

131
Q

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

A

Guaranteed payments are treated as earned income subject to SE tax

Flow through from S corp is unearned income

132
Q

BOE vs BOP
Business Overhead Expense vs Business Owners Policy

A

BOP covers property, contents, liability
premium is deductible

BOE is for business continuity
not deductible for Corp/Scorp
Deductible for self employed sole prop

133
Q

When are disability benefits taxable?

Individual plan
ER 162 bonus plan
Group plan
Partnership / S corp

A

Only group plan

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

CFP (7 decks)

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