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Exam Terms Flashcards

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1
Q

Protective Call

A

Short the stock - long the call

  • Used to protect a short position in the stock.
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2
Q

Chapter 7 Bankruptcy Obligations - ASICS

A

(A)limony
(S)tudent Loans
(I)ncome Taxes less than 3 years old
(C)hild Support
(S)ecured Debt

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3
Q

Correlation Coefficients

A

A measure of the strength of the relationship between the relative movements between two variables.

  • When greater than zero, it indicates the securities in the portfolio are moving in tandem.
  • When equal to zero the movement of one security in comparison to the other in the portfolio is not predictable.
  • When less than zero, the movement of one security as against the other is exactly opposite, indicating the most diversified situation.
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4
Q

Grantor Retained Annuity Trust (GRAT)

A

An irrevocable trust into which the grantor places assets and a right to a fixed payment of income ( at least annually) for a chosen period.

If the grantor survives the trust term, future appreciation of assets will pass to a non-charitable beneficiary, usually a family member, such as a grantors child, free of gift and estate taxes

If the grantor dies before the end of the term, this trust continues payments to the grantor’s estate and the property is subject to estate tax.

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5
Q

Investment Income

A

In general income that includes:
- Interest
- Dividends
- Capital gains
- Rental and Royalty Income
- Income from businesses involved in trading financial instruments or commodities
- businesses that are passive activities to the taxpayer.

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6
Q

Sale-Leaseback

A

A sale of business property to family members to provide them with an income stream from lease payments and remove the business property from the owner’s estate.

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7
Q

Money Purchase Pension Plan Features

A
  • Mandatory annual employer contributions. 100% employer funded.
  • Defines employer contributions - typically a percentage of employee’s compensation.
  • May invest no more than 10% in employer stock.
  • Typically, no in services withdrawals until age 62.
  • Subject to Qualified Joint Survivor Annuity
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8
Q

SS Early or Delayed Retirement Changes

A

Decreases
- 20% over first 36 months = 0.5556
- 10% over next 24 months. =0.4167

Increases
- 24% over 36 months = 0.66

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9
Q

Will Substitutes to Avoid Probate

A

Trust - Property that is contained within a trust

Law - Property that passes by operation of law

Contract - Property that is transferred to a named beneficiary.

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10
Q

529 ABLE Plans

A
  • Non-deductible contributions. Withdrawn earnings are excluded from income to the extent of qualified disability expenses (QDE).
  • Contributions are treated as completed gifts. 16K exclusion.
  • Beneficiary dies, and the account balance is included in the gross estate. Amounts paid from the account for QDE
  • State sets max limit, but the first 100K is exempt from the SSI 2,000 limit.
  • Not able to change the beneficiary
  • Must be diagnosed with a disability before 26, condition lasting at least 12 months, and receiving SSI or SSDI benefits.
  • Account balances of 100K or less are disregarded.
  • Using for nonqualified expenses will induce tax and penalties.
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11
Q

Functional Replacement

A

When replacement cost of a building is greater than the market value, such as is common with historic older structures, an insurer may provide coverage based on replacement cost with modern construction techniques.

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12
Q

2503(b) Trust

A

AKA, Qualifying Minor’s Trust or Mandatory Income Trust.

An irrevocable trust which requires distribution of income on an annual basis. Most often, distributed funds are placed into a custodial bank account until the child reaches legal age.

  • Income must be distributed not less frequently than annually.
  • Principal may be withheld from the beneficiary until death.
  • Actuarial value of income interest is available for annual exclusion

(b) trusts “bring beneficiaries bucks”

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13
Q

Long Hedge

A

Anyone who is short needs a long hedge.

  • Buying a futures contract establishes a long hedge.
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14
Q

Chose

A

Ownership rights evidenced by something tangible or intangible.
There are two types of choses:
- Choses in possession
- Choses in action

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15
Q

Estate Planning Process

A

1 - Gather Significant data from the client

2 - Establish and prioritize estate planning objectives

3 - Identify the factors that limit or affect the selection of estate planning techniques.

4 - Identify estate planning weaknesses before selecting a technique

5 - Select an appropriate estate planning technique

6 - Implement the estate planning technique

7 - Monitor the plan for revisions and modifications.

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16
Q

Charitable Remainder Unitrusts (CRUTs)

A

This trust provides payment of a periodic sum, usually expressed as a percentage of the assets of the trust, to a noncharitable beneficiary, with the remainder going to charity.

This trust is useful for a grantor that has a highly appreciated asset and is seeking diversification without triggering capital gains tax.

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17
Q

Medicare Part B

A

Medical (Non-Hospital)
- Optional but highly recommended requires premium. Most individuals pay a standard premium; higher-income individuals pay a higher premium.
- Annual deductible - after the deductible medicare pays 80%, and the individual pays 20%.

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18
Q

Installment Sale

A

Used to sell the business to a family member or a 3rd party and provide the seller with secured income.
- Promissory installment note is secured and does not require a set sale price.
- The buyer does not need a down payment and payment amounts can vary. Payments can be skipped or spread out over several years.
- At least one payment mus the made to the owner after the taxable year in which the sale occurs.
- Fixed Term
- Secured
- The PV of any outstanding installment payments is included in the seller’s gross estate.

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19
Q

Entity-Purchase Plan

A

Also known as a stock redemption plan, this is a method to completely transfer business interests back to the business using life insurance policies.

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20
Q

Qualified Domestic Relations Order (QDRO)

A

A judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to an alternate payee.

It must contain certain specific information, such as:
- The participant and each alternate payee’s name and last known mailing address.
- The amount or percentage of the participant’s benefits to be paid to each alternate payee.

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21
Q

Public Charity Maximum Annual Deductions

A
  • Cash Gifts | 60% of AGI
  • LTCG w/FMV Election | 30% of AGI
  • LTCG w Basis Election | 50% of AGI
  • Ordinary Income | 50% of AGI
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22
Q

Short Hedge

A

Anyone who is long needs a short hedge.

  • Selling a futures contract establishes a short hedge.
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23
Q

Donor-Advised Funds

A

Maintained by charities, community foundations, or mutual fund companies.
- Donors may contribute cash, stock, or other property to their individual fund accounts and select the charities they want to receive their grants.
- Donors are entitled to a charitable income tax deduction based on the type of property contributed, subject to AGI limitations.

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24
Q

Probate Fees

A

any expenses incurred by the estate as part of the probate process. Fees include:

  • Appraisal fees for probate assets
  • Court filing fees
  • Attorney’s Fees
  • Other administrative expenses.
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25
Q

Market Risk Premium

A

Part of the CAPM forumula. (Rm−Rf)
Also known as the equity risk premium (ERP).

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26
Q

Special Use Valuation

A

Applied to the real property valuation of farms and closely-held businesses to reduce the value included in the owner’s gross estate.

The maximum amount of the reduction in 2022 is 1,230,000

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27
Q

Initial Margin Requirement

A

The minimum percentage of the purchase price that must come from the investor’s own funds.

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28
Q

Excess Benefit Plan

A

Mirrors a qualified benefit formula but is not subject to funding or benefit amount limits, covered compensation limits, or an annual additions limit.

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29
Q

Ancillary Probate

A

A procedure that disposes of real estate of the decedent that is located in a state other than that of the decedent’s residence.

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30
Q

Gift-Leaseback

A

A gift of business property to family members to provide them with an income stream from lease payments and remove the business property from the owner’s estate.

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31
Q

Section 401(k) Plan Features

A
  • “Cash Or Deferred Arrangement (CODA)” provision added to an underlying profit-sharing plan (most common), stock bonus plan or ESOP.
  • Participant can make annual elective deferrals up to the lesser of 1) 100% of compensation 2) 20,500. Age 50+ can make additional catch-up contribution of $6,500 per year. (Catch-up Contributions are not included in the annual additions limit.
  • Employer is not required to contribute annually but usually makes some type of matching contribution (employer could also or alternatively make a separate profit sharing contribution)
  • Plans often offer participant loans and hardship withdrawals.

As a profit sharing plan employer contribution can be 100% stock.

  • Participant must be given a minimum of 3 diversification alternatives for elective deferrals.
  • If employee participates in multiple 401(k) plans at different jobs the elective deferrals are aggregated in applying the annual maximum.
  • Employee contributions are subject to ADP testing. employer contributions are subject to ACP testing.
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32
Q

General Power of Attorney

A

Grants the agent authority to make broad array of decisions, including financial, legal, or business matters. Lapses at disability or incapacitation

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33
Q

Money Purchase Pension Plan

A

A Money purchase pension plan is a defined contribution plan. The plan document defines the contribution, the employer is required to make each year on behalf of each eligible employee.

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34
Q

401(k) RMDs

A
  • First RMD by later of April 1 following year attainment of age 72. Deferral of RMDs until actual retirement is not available to greater than 5% of owners of the sponsor company. Deferral until actual retirement applies only to the current employer’s plan.
  • Deadline after the first RMD is 12/31 of the current year.
  • RMD = Combined FMV as of 12/31 / age factor.
  • Each account RMD must be calculated and distributed separately for multiple accounts.
  • More than the RMD may be distributed in any year.
  • Multiple withdrawals to satisfy RMD is allowed if the deadline is met.
  • 50% penalty tax on undistributed amount.
  • The deferral of RMDs
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35
Q

Traditional Profit-Sharing Plan Features

A
  • Flexible year-to-year employer contributions; no requirement for contribution every year; contributions must be “substantial and recurring” - 3 of last 5 years; 100% employer funded.
  • Yearly profit is not required for employer contributions to be made; it can be made from retained earnings or cash flow. Typically allows in-service hardship withdrawals and loans to participants.
  • May invest 100% in employer stock.
  • Typically not subject to Qualified Joint Survivor Annuity (QJSA)
  • Age-weighted traditional profit-sharing plans can skew higher plan contributions to older participants.
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36
Q

Housing Cost Ratio

A

AKA Front-End Ratio or Mortgage Debt Service Ratio

Formula = PITI / Gross Household Income
Pass = 28% or less

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37
Q

Standard Deviation of a Population

A

Identifies the deviation of a single security over a series of periods of return.

Hint - formula is solving for σr

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38
Q

Life with Period Certain Annuity

A

A life with period certain annuity provides payments for life, but if the annuitant dies before a specified period, usually 10 - 20 years, the beneficiary will continue to receive payments until the period is over.

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39
Q

Charitable Remainder Annuity Trust (CRAT)

A

A trust designed to permit payment of a fixed amount annually to a noncharitable beneficiary, with the remainder going to charity.

This trust retains any income above the guaranteed payments which can lead toa larger transfer to the qualifying charity and a greater reduction to the estate upon the grantor’s death.

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40
Q

Salary Continuation Plan

A

Refers to a type of non-elective non qualified deferred compensation plan that provides a specified deferred payable in the future. It generally uses a defined benefit type formula to calculate the benefit amount.

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41
Q

Human Life Value

A

A formula based on the person’s income earning ability.

This is the present value of income lost as a result of the person’s death. This is still the most popular method of measuring the economic value of human life in situations like wrongful death lawsuits.

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42
Q

Funded ILIT

A

Transfer a life insurance policy and income-producing property into the ILIT.
- Trust income will pay for the policy premiums.
- Beneficiaries are NOT given Crummey power
- The grantor is taxed on trust income due to grantor trust rules.

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43
Q

Bypass Trust

A

A spousal trust that avoids “over qualifying” the decedent spouse’s estate for the marital deduction by utilizing the decedent’s lifetime exemption amount (12.06MM in 2022). Allows the surviving spouse to obtain income as needed. Trust assets are not included in the surviving spouse’s estate at death.

AKA: Credit Shelter Trust, Family Trust, or B-Trust

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44
Q

Annual Renewable Life Insurance

A
  • 10, 20, 30-year term.
  • First to Die
  • Second-to-die
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45
Q

Decreasing Term Life Insurance

A
  • Typically Associated with loans
  • Level premiums over term.
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46
Q

Defined Contribution Pension Plans

A

Money Purchase Pension Plan
Target Benefit Pension Plan

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47
Q

Defined Benefit

A

2 types of DB plans

  • Cash Balance Pension Plan
  • Traditional Defined Benefit Pension Plan

Defined Benefit plans are the only qualified plans that GUARANTEE the final benefit.

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48
Q

Probate

A

The process of filing, validating, and executing a will by a court.

These costs can vary by jurisdiction and as a function of the size of the estate. Such costs commonly range from 2% - 5% of the gross estate and can be higher.

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49
Q

Simple Trust Features

A
  • Required to distribute all of the accounting income to the beneficiaries in the year earned.
  • May NOT have a charitable beneficiary.
  • Cannot distribute principal during the tax year.
  • Have a personal exemption of $300
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50
Q

Current Yield

A

A bond’s annual coupon divided by its current market price.

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51
Q

Covered Put

A

Short the stock - short a put

  • Writer uses the stock put to cover their short stock position.
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52
Q

Stock Premium

A

Part of the CAPM forumula.
(Rm−Rf)βi

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53
Q

Traditional Defined Benefit Pension Plan

A
  • Only qualified plan that guarantees a specific monthly pension.
  • Older, high-earning participants can have substantial funding on their behalf.
  • Common pension Formula is a percentage of pay times the number of years of service.
  • No individual accounts
  • Accruing a benefit of any amount is “active participation for IRA deduction purposes.
  • If the participant is married, the pension must be joint and survivor unless the spouse waives (notarized)
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54
Q

Qualified Terminable Interest Property Trust

A

These trusts could be subject to the marital deduction in the decedent’s estate if the executor qualified the terminable interest property “QTIP” for the marital deduction.
- Provide the beneficiary spouse with income for life.
- Receive an estate tax marital deduction
- Give trust corpus to children from a previous marriage.

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55
Q

Charitable Remainder Annuity Trusts (CRAT)

A

A trust set up to permit payment of a fixed amount annually to a noncharitable beneficiary with the remainder going to charity.

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56
Q

Defined Benefit Plan Common Features

A
  • Only plans that guarantee the final benefit.
  • Maximum annual pension is 245,000 (2022)
  • Maximum compensation considered in benefit formula 305,000 (2022)
  • Only qualified plans insured by PBGC
  • Must vest at least as generously as a 5-year cliff or 3-7 year graded (Cash Balance Plan may use only 3-year cliff)
  • Must have joint and survivor payout unless waived.
  • No participant-directed accounts; sponsors bear the investment risk.
  • No predetermined maximum deductible employer contribution
  • Annual actuarial work required.
  • Must also satisfy the 50/40 rule.
  • 100% employer funded; mandatory annual employer contributions.
  • Funding limit is “Whatever it takes” to provide guaranteed benefits; no predetermined annual limits.
  • No participant-directed accounts; the sponsor bears the investment risk.
  • No predetermined maximum deductible employer contribution
  • Annual actuarial work required to determine needed funding each year.
  • DC Plans are the most administratively expensive.
  • Can favor older participants.
  • Only DB plans are covered by PBGC insurance.
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57
Q

Expected Rate of Return

A

The rate an investor should expect is based on the price paid for a security.

r = (D1 / P) + g

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58
Q

Charitable Gift Annuities

A

A donor transfers cash or other property to a charity and the charity pays the donor or other donees an annuity payment each year for life.
- Gift tax charitable deduction is the present value of the charity’s remainder interest.
- Gift annuity payments to a spouse: a marital deduction is available if the spouse receives all annuity payments and has general POA over payments after the donor’s death.
- Gift annuity payments to others: gift tax is the present value of the annuity payments.

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59
Q

Qualified Disability Expenses

A

Any expenses incurred at a time when the designated beneficiary is an eligible individual. The expenses must relate to blindness or disability, including expenses for maintaining or improving health, independence, or quality of life.

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60
Q

Kiddie Tax Standard Deduction

A

The standard deduction for an indivudal who can be claimed as a dependent on another persons return is limited to the larger of

  • $1,150 or
  • The individual’s earned income plus $400, but not more than the regular standard deduction.
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61
Q

Charitable Lead Trust (CLT)

A

Pays an income stream to a qualified charity for a period of years, usually not exceeding 20. At the expiration of the lead period, the remainder interest passes to one or more noncharitable beneficiaries.

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62
Q

Family Limited Partnerships (FLPs)

A

A passthrough entity established under state law works as a partnership consisting entirely of family members. The FLP allows senior family members to transfer property to junior family members at significantly reduced transfer costs to lower the value of their estates and keep the property in the family.

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63
Q

Naked Call Writing

A

Does not own the underlying stock - short the call

  • Writer bears UNLIMITED risk
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64
Q

Illiquid Assets

A

Assets not available to meet income or other monetary needs because they are not easily liquidated. They include the family house, automobiles, and personal possessions, such as clothing, jewelry, and household goods. These assets are usually passed intact to heirs or kept for personal use.

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65
Q

Margin

A

The process of pledging securities in your brokerage account for a loan from your brokerage firm.

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66
Q

Consumer Debt Ratio

A

Formula = Monthy Consumer Debt (Non-housing) / (Monthly Net Household Income

Pass is <= 20%

Note: Consumer Debts (Non-housing) include:
- Auto Loans
- Student Loans
- Credit Cards
- Unsecured Debts

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67
Q

FICO Score Categories

A

Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
New credit (10%)
Credit mix (10%)

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68
Q

Target Benefit Pension Plan

A

A target benefit pension plan is a defined contribution pension plan. The plan has features resembling both a defined benefit pension and a money purchase pension.

An Actuary determines the needed funding level to hopefully reach the benefit target (like a defined benefit plan) then contributions are made annually by the employer like a money purchase plan.

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69
Q

Ascertainable Standard

A

Added to trusts to give the trustee guidance as far as when and how they need to make distributions to the beneficiaries. A trustee can make distributions to a beneficiary for health, education, maintenance, support (HEMS)

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70
Q

Dollar-Weighted Return

A

The method that helps in situations when deposits or withdrawals occur sometime between the beginning and end of the period.

Also known as internal rate of return.

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71
Q

Private Annuity

A

A seller receives a fixed annuity income stream for life and removes the business/property from their gross estate.
Payments from the sale are structured as an annuity and are unsecured.

  • Duration: Life of Seller
  • Unsecured
  • If PMTs over joint lives, PV of remaining PMTs included in decedents estate.

Single Life Annuity | Remaining payments are not included in the seller’s estate

Joint and Survivor Annuity | Payments continue for two lives. The PV of the survivor’s future annuity payments is included in the seller’s estate, but a marital deduction is available to offset the tax.

NOTE: If the buyer dies before the seller, the buyer’s estate must make payments to the seller for life. If the seller outlives their calculated life expectancy, the buyer must continue to pay the seller.

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72
Q

Pooled Income Funds

A

A donor gifts property to a charity and receives an annual pro-rata share of income from the charity’s commingled funds, for life.
- Additional gifts can be made to the fund to increase the donor’s income stream.
- The charity manages the fund which CANNOT INVEST IN TAX_EXEMPT SECURITIES and receives the remainder when the donor’s income interest ends.
- Donor takes an income tax deduction for the present value of the charity’s remainder interest.
- The donor pays income taxes on the income received from the fund.

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73
Q

Equipment Obligation Bonds

A

Bonds that are backed by specific pieces of equipment, which could be sold to service the bond.

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74
Q

Current Yield

A

The annual income paid divided by the current market price of the bond.

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75
Q

Traditional Profit-Sharing Plan

A

A qualified defined contribution plan featuring a flexible employer contribution provision.

The employer’s contribution to the plan each year can be either purely discretionary or nothing. Otherwise, employer contributions can be based on a formula, usually related to the annual profits.

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76
Q

Protective Put

A

Long the stock - Long the put

  • This is the very essence of portfolio insurance.
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77
Q

Structured Settlement

A

A method of compensating injury victims which is voluntarily agreed upon between an injury victim and the defendant.

  • Temporary or permanent disability
  • Guardianship for minors or incapacitated individuals
  • Worker’s compensation
  • Wrongful death where the surviving family members need monthly or annual income.
  • Severe injuries resulting in need for long-term medical care, living expenses and support of family.
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78
Q

Wait and See

A

A method to transfer business interests that offers flexibility to both the partners and business as they purchase business interests upon Death, Disability or Retirement

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79
Q

Fair Market Value

A

The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

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80
Q

Imputed Interest Exceptions

A
  • Loans between individuals for 10K or less, except when funds are used to purchase the income-producing property.
  • Corporate loans and compensation-related loans for 10K or less.
  • Debt subject to original issue discount provisions.
  • Sales of property for 3K or less.
  • When all payments are due within six months.
  • Net Investment Income of $1,000 or less.
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81
Q

SIMPLE IRA Features

A
  • Salary Reduction plan with little administrative paperwork.
  • Any employer with 100 or fewer employees that do not currently maintain another retirement plan is eligible.
  • No annual filing requirement for the employer. Bank handles paperwork.
  • Employee salary reduction contributions and employer contributions.
  • Max contributions: EE = 14,000 | 50+ 3,000 catch up : ER = Either match 100% for first 3% or contribute flat 2%.
  • Employer must make matching contributions or contribution 2% of eligible employee compensation.
  • Must be offered to all employees who have compensation at least $5,000 in any two prior years and are reasonably expected to earn at least 5K in the coming year.
  • Withdrawals are permitted anytime, subject to federal income taxes and a 10% early withdrawal penalty tax. Withdrawals within two years of enrollment are subject to a 25% penalty. Cannot take loans.
  • Contributions are immediately 100% vested.
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82
Q

Will

A
  • A legal document that does not override named beneficiary designations in insurance and annuities.
  • Only transfers assets that the testator separately owned at death. In addition only executors of the estate may only be appointed within this document.
  • The validity of a will is determined through the probate process.
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83
Q

Grantor Retained Unitrusts (GRUT)

A

An irrevocable trust into which the grantor places assets and a right to payment of income for a chosen period. The grantor retains the right to payment of a fixed percentage of the trust property (determined annually) for a number of years.

Trust assets are valued annually and the resulting amount determines the income stream in a given year.

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84
Q

Estate Trust

A

Qualifies property for a marital deduction in the decedent’s estate. Used If the beneficiary spouse has substantial wealth and does not need the trust income or corpus.

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85
Q

Cash Balance Pension Plan

A
  • “Hypothetical” participant accounts for record-keeping; not participant-directed.
  • The guaranteed benefit is a guaranteed cash balance at plan’s normal retirement age based on the plan design.
  • Each year participant accrues a plan contribution based on a “pay credit” (percentage of compensation) plus an interest rate credit.
  • Provides uniform benefit accrual for all employees.
  • Participant can convert guaranteed cash balance into a lifetime pension.
  • Considered easier for participants to understand than a traditional defined benefit pension plan.
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86
Q

AMT Planning

A

If a taxpayer is subject to AMT int he current year.
- Accelerate income into the AMT year.
- Defer tax deductions until a regular tax year.

Do this until AMT liability equals regular tax liability.

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87
Q

Systematic Risk

A

Systematic Risk CANNOT be eliminated through diversification. Quantified by the Beta statistic.

PRIME

(P)urchasing Power Risk

(R)einvestment Risk

(I)nterest Rate Risk

(M)arket Risk

(E)xchange Rate Risk

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88
Q

PITI

A

Mortgage payments are made up of four costs.
(P)rincipal
(I)nterest
(T)axes
(I)nsurance

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89
Q

Nominal Yield

A

The stated or coupon yield of a bond.

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90
Q

Charitable Lead Unitrust (CLUT)

A

A type of CLT that provides payment of a periodic sum, usually a percentage of the trust assets (revalued annually) to a qualified charity, with the remainder going to a noncharitable beneficiary. This creates annual payments that go ‘up and down’ based on the annual valuation.

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91
Q

Hypothecation

A

An agreement signed by an investor when opening a margin account. This agreement grants the brokerage firm the right to pledge the investors securities as collateral for bank loans, provided that securities are purchased using a margin account.

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92
Q

Irrevocable Trusts Features

A
  • May NOT be revoked once created.
  • Transfer of assets is generally considered a completed gift (subject to gift taxes)
  • Assets in the trust are generally not subject to estate tax at the time of the grantor’s death.
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93
Q

Features of Target Benefit Pension Plan

A
  • Requires mandatory annual employer contributions - 100% employer funded.
  • In the plan design an actuary determines contributions based on participant age at plan entry to reach target benefit.
  • A Plan that can skew higher plan contributions to older participants.
  • Actuary is used only in the initial year, contributions are not adjusted each year. Final benefit amount is not guaranteed. It is a target.
  • May invest no more than 10% in employer stock.
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94
Q

Straddle

A

Long a put and a call on the same underling stock with the same expiration date and strike price.

  • Used to capitalize on a volatility regardless of the direction.
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95
Q

Average Indexed Monthly Earnings (AIME)

A
  • Based on 35 best years of Social Security Earnings
  • Adjusts (indexes) each year’s earnings to present-day dollars.
  • Calculates average monthly earnings in current dollars.
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96
Q

Financial Planning Process

A

(U)kulele’s (I)n (A) (D)ive-bar (P)laying (I)ron (M)aiden

Understanding the client’s personal and financial circumstances.

  • Obtain Quant and Qual info
  • Analyze info
  • Address incomplete information

Identifying and Selecting Goals

  • Identify potential goals
  • Help the clients select and prioritize goals.

Analyzing the Client’s Current Course of Action and Potential Alternative Courses of Action

  • Analyze the client’s current course of action
  • Analyze potential alternative courses of action.

Developing Financial Planning Recommendations

Must consider:

  • Assumptions and estimates used to develop recommendations.
  • Basis for making the recommendation
  • Timing and priority of the recommendation
  • Whether the recommendation is independent or must be implemented with another recommendation.

Presenting the Financial Planning Recommendations

must:

  • Present to the clients the selected recommendations and information that was required to consider when developing the recommendations.

Implementing the Financial Planning Recommendations

  • Address implementation responsibilities.
  • Indentiy, analyze, and select actions, products, and services
  • Recommend one or more actions, products and services
  • Select and implement actions, products or services.

Monitoring Progress and Updating

  • Establish monitoring and updating responsibilities.
  • Monitor the client’s process
  • Obtain current quant and qual info
  • Update goals, recommendations, or implementation.
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97
Q

Private Foundation Maximum Annual Deduction

A
  • Cash Gifts | 30% of AGI
  • LTCG w/FMV Election | 20% of AGI
  • LTCG w Basis Election | 30% of AGI
  • Ordinary Income | 30% of AGI
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98
Q

Term Life Insurance

A
  • Lowest Premium At Issue
  • No Cash Value
  • May be Participating (Dividends)
  • May be renewable
  • May be convertible to permanent.
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99
Q

Reciprocal Will

A

Each person’s will designates that all property be distributed to the other person.

100
Q

Strategic Asset Allocation

A

The asset mix that is intended to accomplish investment objectives over the long run.

101
Q

Irrevocable Life Insurance Trust (ILIT)

A

This trust can provide the decedent’s estate with liquidity for payment of all death taxes with existing life insurance to with insurance the trust intends to purchase, without subjecting the proceeds themselves to depletion by estate taxes.

102
Q

Total Debt Ratio

A

AKA Back End Ratio or Debt Repayment Ratio

Formula = (PITI + Monthly Consumer Debt) / Monthly Household Gross Income

Pass = 36% or less

103
Q

Dollar-Weighted Return (DWRR)

A

Appropriate for a specific client with their own particular cash flows.
- This does account for when and at what price level investments are made and when withdrawals occur.
- Impacted by the timing of cashflows

104
Q

TIme-Weighted Return (TWRR)

A

The global standard for fund performance.
- Based solely on the appreciation or depreciation of the portfolio from period-to period.

105
Q

Tax Treatment of ER provided LTC Insurance

A
  • Employer contributions to an employee’s LTC premium are excluded from the employee’s taxable income.
  • Employers can deduct the premiums paid for LTC coverage for employees as an ordinary and necessary business expense.
  • Long term care coverage cannot be offered
106
Q

Standard Deviation of a Two Asset Portfolio

A

Provides the weighted standard deviation for two-stock portfolio.

107
Q

Coeffcient of Variation

A

Standard deviation divided by return.

108
Q

American Opportunity Tax Credit (AOTC)

A
  • Up to $2,500 per eligible student.
  • 40% refundable up to $1,000
  • MAGI Limits $180K MFJ and 90K S/HH
  • MFS not allowed
  • Cannot claim a benefit is someone else can claim you as dependent.
  • Cannot be nonresident alien unless resident alien for tax purposes.
  • Available for the first 4 years of post-secondary education.
  • 4 tax years per eligible student.
  • Must be pursuing a degree or recognized credential.
  • Must be enrolled at least half-time for one academic period.
  • No felony drug convictions
  • Qualified Expenses: Tuition, required enrollment fees, and materials needed for the course of study.
109
Q

Medicare Part A

A

Hospital
- Most participants pay no premium.
- Must be age 65 or older and paid into Medicare for at least 10 years.
- Flat per hospitalization deductible for days 1-60; co-pay for days 61-90; over 90 days uses lifetime reserve days up to 90 additional days and requires even higher co-pay.
- Costs beyond 190 days are paid by individuals.

110
Q

Nonqualified deferred compensation

A

Plans that are used to provide retirement benefits to top executives that exceed limits available through qualified plans. These plans are often referred to as top-hat plans, excess benefit plans, or supplemental executive retirement plans (SERP).

111
Q

Long Position

A

Anyone who owns something is said to be long.

112
Q

Unfunded ILIT

A

Includes only the grantor’s life insurance policy.
- The grantor must transfer money into the trust each year so the trustee can pay the life insurance premiums.
- The beneficiaries are given crummey powers

113
Q

Investment Income

A

In general income that includes:
- Interest
- Dividends
- Capital gains
- Rental and Royalty Income
- Income from businesses involved in trading financial instruments or commodities
- businesses that are passive activities to the taxpayer.

114
Q

Short Position

A

Anyone who has to buy something is said to be short

115
Q

Section 1035 Exchange

A

used primarily to defer current taxation in the exchange of life insurance and annuity contracts.

116
Q

Cross-Purchase Plan

A

A method to completely transfer business interests among partners/owners using life insurance policies.

117
Q

Defined Contribution Profit Sharing Plans

A

Traditional Profit Sharing
Section 401(k) Plan
Stock Bonus Plan
ESOP

118
Q

Covariance

A

Measures how one security behaves as a direct result of another.

COVij = (ρij)(σi)(σj)

119
Q

Duration

A

Identifies the length of time the discounted cash flow of a bond remains outstanding.

D = ((1 + y) / y) − {(1 + y) + t(c − y) / c [ (1 + y)t − 1 ] + y

120
Q

EMT Anomalies

A

There are anomalies to the Efficient Market Theory that cannot be explained away.

  • Low P/E Effect
  • Small Firm Effect
  • Neglected Firm Effect
  • January Effect
  • Value Line Phenomenon
121
Q

Community Property

A
  • Money earned by either spouse, post marriage
  • Property purchased by either spouse, post marriage
  • Commingled separately owned assets and community property assets
122
Q

Variable Annuity

A

These contracts provide a variety of separate subaccounts which allow assets to be invested in securities such as stocks, bonds, and money market accounts.

123
Q

Qualified Charitable Distribution (QCD)

A

A nontaxable distribution from a traditional IRA directly to an eligible charitable organization.
- Taxpayers who make a QCD must be at least 07.5 years old on the day of the distribution.
- QCD may only be executed using a direct transfer to an eligible charity.
- QCD can be used to satisfy RMD for the year of distribution
- The maximum annual exclusion for QCDs is 100,00 to one or more charities.

124
Q

Letters Testamentary

A

Letters of authority given by the probate court to act on behalf of the estate as a fiduciary.

125
Q

Private Foundation

A

A separate legal entity, either a not for profit corporation or a tax exempt trust.
- Most are funded and controlled by family members. High set up and maintenance fees.
- Family members who make gifts to the foundation may take an income tax deduction limited to 30% for cash and 20% for the LTCG property.
- The foundation must distribute a minimum of 5% of the assets to public charities every year.

126
Q

Estate Equalization

A

An estate planning technique under which an estate is divided into two parts and taxed at a lower rate rather than remaining as a whole and taxed at a higher rate. This division may be necessary because of the progressive nature of the federal estate tax.

127
Q

Constant Growth Dividend Discount Model (DDM)

A

Calculates the value of a dividend-paying security (with constant dividend growth) in dollar terms

V = D1 / (r-g)

128
Q

Beta Coefficient

A
  • Fractional interests held in tenancy in common property
  • Community Property
  • Property passing from a will into a Testamentary Trust
  • Property transferred by a Pour-over will into a trust.
  • Homestead and exempt property allowances.
129
Q

Waiver of Premium Option

A

Exempts an insured from paying premiums while they are totally disabled. Despite Non-payment, the disabled insured maintains all policy rights.

130
Q

Profitability Ratios

A

Gross Profit Margin = Gross Profit / Sales
Operating Profit Margin = Operating Revenue / Revenue
Return on Assets (ROA) = Net Income / Assets
Return on Equity (ROE) = Income/ Equity

131
Q

Yield Curve

A

Plots the rates of fixed income securities from short term to long term maturities

132
Q

Special Power of Attorney

A

The agent only acts on behalf of the principal for a specific matter. Once the task or action is completed or a period has passed, the authority expires.

133
Q

Treynor Ratio

A

Measures the risk adjusted rate performance of a portfolio manager. Used if R squared is greater than 0.7

134
Q

Medicare Plans

A

Part A: (A)dmittance (Hospital)
Part B: (B)e preventative/(B)efore Medical Issues
Part C: (C) Care Plans (Advantage)
Part D: (D)rugs

135
Q

2503(c) Trust

A

This trust enables a grantor to make a gift to a minor in trust and still obtain the annual gift tax exclusion.

  • No requirement for current income distributions.
  • Principal must be distributed (along with accumulated income) no later than upon beneficiary attaining age 21.
  • Entire gift to the trust eligible for Annual exclusion

(c) trusts a(cc)emulate and can (c)ease (c)current (c)ash

136
Q

Medicare Part C

A

Medicare Advantage
- Alternative to A&B. Typical vastly lower premiums than Medicare A and B combined with a Medicare Supplement (Medigap) Insurance policy.
- Some plans have zero premiums. Uses the “Gatekeeper” concept. Must use a network provider.

137
Q

Standard Deviation of a Sample

A

Identifies the deviation of a single security over a series of periods of returns.

Hint - formula is solving for Sr

138
Q

Homeowners Policies

A

HO-2: Too Broad
HO-3: Special 3
HO-4: RENT (4 letter word)
HO-5: High five a person with property
HO-6: CONDOS (6 letter word)
HO-8: Aged 8 or 8ncient
HO-15: 3x5=15. HO3+ HO5 = HO15

139
Q

Durable Power of Attorney

A

The agent can act immediately on behalf of the principal. The agent’s power of attorney does not lapse even if the principal becomes incapacitated or disabled.

140
Q

Net Unrealized Appreciation (NUA)

A
  • Applies only to employer stock held in a qualified plan
  • Must be executed as part of a qualified lump sum distribution which is 100% of EE account within 1 year.
  • ER contribution basis is taxed as ordinary income in the year of distribution.
  • NUA at the time of lump-sum distribution is tax-deferred and taxed as LTCG.
  • Subsequent appreciation is STCG/LTCG based on the holding period after lump-sum distribution
  • No step-up in basis at death for the NUA portion remaining.
141
Q

Futures Contract

A

An agreement to buy or sell a specific amount of a commodity , a currency, or a financial instrument at a particular price on a stipulated future date.

142
Q

Simplified Employee Pension (SEP) Features

A
  • Easy to set up and maintain
  • Any employer with one or more employees is eligible.
  • No annual filing requirement for the employer. Plan may be established and funded up to the due date of the employer’s tax return, including extensions.
  • Employer contributions only.
  • Up to 25% of covered compensation but no more than 61,000 can be contributed.
  • Employer can decide whether to make contributions year-to-year or
  • Must be offered to all employees who are at least 21 years old, employed by the employer for 3 of the last 5 years, and had the compensation of $650 for 2022.
  • Withdrawals are permitted anytime subject to federal income taxes, and early withdrawals are subject to an additional tax. Participants cannot take loans from their SEP-IRAs
  • Contributions are immediately 100% vested.
143
Q

Property Not Classified as Capital Assets - ACID

A

(A)ccounts or notes receivable acquired in the ordinary course of a trade or business
(C)opyrights; a literary, musical, or artistic composition; a letter, memo, or similar property created by the taxpayer.
(I)nventory or property held primarily for sale to customers.
(D)epreciable property used in trade or business.

144
Q

Yield to Worst

A

The lower of Yield to Maturity (YTM) and Yield to Call (YTC) and the appropriate yield to make an investment decision on.

145
Q

Spread

A

Involves purchasing and selling the same type of contract.

  • Benefit from stability (minimum moves in the underlying stock’s price).
146
Q

Primary Insurance Amount (PIA)

A

The monthly retirement benefit at full retirement age. It breaks at the bend points of 1,024 and 6,172.

147
Q

Section 403(b) Plans TSA

A

A tax-advantaged salary reduction retirement plan often used by 501(c)(3) organizations.

148
Q

Life Annuity

A

A series of monthly payments to the participant for life, with no further payments after the participants death.

For an unmarried participant, a defined benefit plan’s automatic form of benefit is usually a life annuity.

149
Q

Nuncupative will

A

An oral will

150
Q

A-B Trust

A

An arrangement designed to give the surviving spouse full use of the family’s economic wealth while at the same time minimizing, to the extent possible, the total federal estate tax payable at the deaths of both spouses.

151
Q

Charitable Remainder Trusts

A

The grantor receives a charitable income tax deduction for the present value of the charity’s remainder interest.

152
Q

Defined Contribution

A

A type of qualified plan in which the sponsor defines the contribution formula rather than guaranteeing the final benefit.

  • DC Pension requires mandatory employer contributions.
  • DC Profit sharing plans promise “substantial and recurring” employer contributions. Annual contributions are not mandatory.
  • DC Plans tend to favor younger participants with more years to accumulate higher account balances.
153
Q

Level Term Life Insurance

A
  • Death benefit remains level over the guaranteed term.
  • Premiums INcrease upon expiration of initial guaranteed term.
154
Q

Universal Life Insurance

A
  • Option A - death benefit remails level.
  • Option B - Death benefit is face amount plus cash.

Can be in the form of:
- Fixed Universal Life
- Variable Universal Life
- Indexed Universal Life

155
Q

Covered Call Writing

A

Long the underlying stock - short the call.
- Only considered covered if you own enough shares to cover all contracts sold.
- Used to generate income for the portfolio.

Provides the investor with income from the sale of the calls until the stock is eventually called away.

156
Q

Intrinsic Value for Put Options

A

POEM
(P)ut (O)ption = (E)xercise Price - (M)arket Value

157
Q

Tactical Asset Allocation

A

The portion of the portfolio designed to profit from temporary market disequilibrium.

158
Q

Beta

A

Provides risk as a measure of volatility relative to that of the market.

βi=(COVim) / (σ2m) = (Pim)(σi) / (σm)

159
Q

Whole Life Insurance

A
  • Guaranteed death benefit
  • Guaranteed premiums

Can be in the form of
- Variable Whole Life
- Second-To-Die
- Graded Premium Whole Life
- Modified Whole Life
- Limited Pay Whole Life
- Guaranteed Issue Whole Life

Variable policies - Cash value “sub-accounts” give policy owners investment choices.

160
Q

Holographic Will

A

A handwritten will

161
Q

Jensen’s Performance Index (Alpha)

A

Measures the performance of a portfolio manager relative to the performance of the market.
Measures the risk adjusted return.

αp = Rp − [Rf + (Rm − Rf)βp]

162
Q

Defined Contribution Plan Common Features

A
  • Participant Directed accounts
  • Combined EE/ER contributions subject to annual additions limit to $61,000
  • Maximum elective deferral 20,500
  • Maximum compensation considered in benefit formula 305,000 (2022)
  • Participant bears investment risk.
  • No guaranteed final benefit amount.
  • Vesting must be at least as generous as 3-year cliff, or 2-6 year graded.
  • Maximum deductible employer contribution is 25% of covered payroll.
163
Q

Stock Option

A

Used to both speculate on and hedge individual stock positions.
- All contracts cover 100 shares of the underlying stock.
- Value is created when there is a difference between market price and exercise price.
- For a call favorable difference is when MP > EP
- For a put favorable difference is when MP < EP

164
Q

Income Yield

A

One of two components in the holding period return calculation.

D / Pb

D = Dividend
Pb - Beginning Price

165
Q

Non-durable power of attorney

A

The power of attorney remains active until incapacitation. Also used if a principal needs the agent to complete a specific task on their behalf.

166
Q

Self-Canceling Installment Note (SCIN)

A

Partially or fully cancels the installment note before the note matures.
- The seller can cancel the installment note in the will. The unpaid balance of the note is not included in the seller’s gross estate
- The seller can cancel the entire note at once, which is subject to capital gains and gift taxes.
- A seller can cancel the note in increments of 16K per year per buyer to avoid or reduce taxable gifts.
- Fixed Term
- Secured
- Transferred property removed from gross estate.

167
Q

A- Trust

A

A marital trust that provides the surviving spouse with a general power of appointment, access to income, and the ability to invade the trust corpus during life.

AKA Marital Trust or Power of Appointment Trust

The ‘A’ in Power of Appointment Trust or A-Trust stands for ‘Above ground.’ That is where the general power of appointment and estate taxes reside (i.e., with the surviving spouse).

168
Q

Permanent Life Insurance

A
  • Higher premium than term insurance at issue.
  • Builds cash value
  • Cash Value accessible be loans or withdrawals.
  • May be participating (dividends)
169
Q

Charitable Lead Annuity Trust (CLAT)

A

Designed to provide annual payment of a fixed amount to a qualified charity, with the remainder going to a non-charitable beneficiary.
This is a CLT

170
Q

Charitable Lead Unitrust (CLUT)

A

A type of CLT that provides payment of a periodic sum, usually a percentage of the trust assets, to a qualified charity, with the remainder going to a noncharitable beneficiary. This creates annual payments that go “up and down” based on the annual valuation.

171
Q

Change of Bond Price

A

State the change of price that will occur in a bond as interest rates change.

172
Q

FATCA FOrm 8938 Threshold Requirements

A
  • Residents, Joint - 100K last day | 150K any day
  • Residents, Unmarried - 50K last day | 75K any day
  • NonResidents, Joint - 400K last day | 600K any day
  • NonResidents, Unmarried - 200K last day | 300K any day
173
Q

Personal Liability Umbrella Policy (PLUP)

A

Provides additional liability coverage above and beyond the underlying limits of one’s homeowners and automobile liability coverage. Policies are commonly 1M+.
- They do not pay until the underlying policy is exhausted.
- Covers the same bodily injury and property damage exposures as the underlying policies but also extends coverage for personal liability.
- Covers the cost of defense

174
Q

Crummey Powers

A

The right to:
- withdraw some or all of a grantor’s contribution to an irrevocable trust each year.
- Turn a future interest gift into a present interest gift, thus qualifying for the annual gift exclusion amount.

175
Q

Supplemental Executive Retirement Plan (SERP)

A

Promises to pay an executive additional compensation of a specified amount for a specified period contingent on the executive remaining with the company for a specified period and attaining specific goals, typically related to production or sales growth.

176
Q

Excess Benefit Plan

A

This plan makes up the difference between the qualified plan benefits top executives are allowed under IRC §415 and the benefit permitted for rank and file employees. In other words, highly compensated employees receive the difference between the amounts payable under their qualified plan and the amount they would have received if there were no benefit limitations under IRC §415

177
Q

Risk Averse

A

The investor will choose a portfolio with a smaller standard deviation. Risk-averse investors are willing to forego some expected terminal wealth (accept lower expected returns) in exchange for less risk.

178
Q

Reinvestment Rate Risk

A

The risk that the coupon payments are reinvested at something less than the promised YTM on the bond.

179
Q

Grant

A

Employer awards executive with option to purchase a specified number of shares of the employer’s stock at a specified price.

There is typically no tax consequence.

180
Q

AMT Formula

A

Regular taxable income
Add: tax preference items
Add: standard deduction (if TP does not itemize)
Add/Subtract: AMT adjustments and tax preference items.
——————————

AMTI (Alternative Minimum Taxable Income)
Less: Exemption Amount (phased out at higher incomes)
——————————

AMT base
Times: AMT tax rate(s)
——————————

Gross AMT tax
Less: AMT foreign tax credit
——————————

Tentative minimum tax (TMT)
Less: Regular tax liability
——————————
AMT* (If tentative minimum tax exceeds the regular tax, the difference is the AMT)

181
Q

Grantor Trust Features

A
  • A revocable trust in which all income will be taxed to the grantor.
  • Any trust that allows the grantor, the grantor’s spouse, or even a third party without a beneficial interest in the trust, any rights or powers as specified in the grantor trust rules, will be taxed as a grantor trust.
182
Q

Mutual Will

A

A will made in agreement with another person to dispose of certain property interests.

183
Q

Lifetime Learning Credit (LLC)

A
  • Up to $2,000 per return.
  • Non-refundable
  • MAGI Limits $180K MFJ and 90K S/HH
  • MFS not allowed
  • Cannot claim a benefit if someone else can claim you as a dependent.
  • Cannot be nonresident alien unless resident alien for tax purposes
  • Available for all post-secondary education years and courses to acquire or improve job skills.
  • Available for an unlimited number of years.
  • Student does not need to be pursuing a degree or other credential.
  • Available for one or more courses.
  • Drug conviction does not matter
  • Qualified Expenses: Tuition and fees are required for enrollment or attendance only.
184
Q

Net Investment Income Tax

A

Tax applies to the lesser of
- Net Investment Income or
The excess of MAGI over 250K MFJ or (220K Single)

185
Q

Qualified Terminable Interest Property Trusts (QTIP)

A

Provides beneficiary spouse with income for life qualifies the trust property for the marital deduction and gives trust corpus to children from a previous marriage.

186
Q

Collar (Zero-Cost Collar)

A

Long the stock - long the put - short the call

  • The post is used to protect against a stock price decrease and the call premium is used to offset the cost of the put.
187
Q

Charitable Lead Annuity Trust (CLAT)

A

A Type of CLT that is designed to provide an annual payment of a fixed amount to a qualified charity with the reminder going to a non-charitable beneficiary.

This is the best choice when interest rates are lower since smaller annuity payments to a charity result in a greater value of the trust corpus for the remaindermen.

188
Q

Complex Trusts Features

A
  • Are NOT required to make distributions
  • May have a charitable beneficiary
  • May distribute principal during the tax year.
  • Have a personal exemption of $100
189
Q

IRA RMDs

A
  • Deadline for first RMD is April 1, the following year of attainment of age 72.
  • Deadline for RMDs after the first is 12/31 of the current year.
  • RMD = FMV of combined accounts as of 12/31 of previous year / age factor
  • May distribute RMD for combined value from one or more IRAs.
  • More than the RMD may be distributed in any year.
  • Multiple withdrawals to satisfy RMD is allowed if the deadline is met.
  • 50% penalty tax on undistributed amount.
190
Q

Charitable Lead Trusts

A

Grantor receives a charitable income tax deduction for the present value of the charity’s income interest.

191
Q

Unsystematic Risk

A

Risk that can be eliminated through diversifying the portfolio. Also referred to firm specific risk.

Business Risk

Financial Risk

Default or Credit Risk

Regulation Risk

Sovereignty Risk

192
Q

Subrogation

A

If a person must pay a debt for which another is liable, such payment should give the person a right to collect the debt from the liable party. In insurance, it gives the insurer the right to collect from a third party after paying its insured’s claim.

193
Q

Spot Price

A

What the current market value of the item is in today’s market.
The futures contract allows both speculation and hedging on the spot price at some point in the future.

194
Q

Capital Asset Pricing Model (CAPM)

A

Used to determine a theoretically appropriate required rate of return of an asset.

Ri = Rf + (Rm - Rf)βi

195
Q

Charitable Lead Trust

A

Pays an income stream to a qualified charity for a period of years, usually not exceeding 20. At the expiration of the lead period, the remainder interest passes to one or more noncharitable beneficiaries.

196
Q

Qualified Personal Resident Trust (QPRTs)

A

An irrevocable trust that holds a person’s residence, allowing couples or individuals to liove in the house rent-free for a specified period. At the end of the term, the home will pass gift tax free to the trust beneficiaries.

197
Q

Disclaimer Trust

A

An estate planning technique in which a married couple incorporates an irrevocable trust in their planning, funded only if the surviving spouse chooses to “disclaim” or refuse to accept the outright distribution of specific assets following the deceased spouse’s death.

198
Q

Springing Power of Attorney

A

Does not become operative until the principal becomes legally incapacitated. However the principals state of incapacitation must be confirmed.

199
Q

Order of §1035 Exchanges - LEAQ

A

(L)ife Insurance
(E)ndowment
(A)nnuity
(Q)ualified LTCI

For 1035 Exchanges, Fix your LEAQs or its all downhill from here.

200
Q

Terminable Interest Property (TIP)

A

An interest in property that may terminate on the happening or failure of some event or contingency. A marital deduction is not available for TIP; however, exceptions are available to this rule.

201
Q

Intrinsic Value for Call Options

A

COME
(C)all (O)ption = (M)arket Value - (E)xercise Price

202
Q

Credit Life Insurance

A

Often sold in conjunction with a major purchase. It is typically much more expensive than traditional term life insurance. The premium does not increase each year., and the benefit decreases each year to coincide with the outstanding loan balance.

203
Q

Modified Endowment Contract (MEC)

A

A Cash value life insurance policy is considered a MEC if it fails the 7-pay test and changes the tax treatment cash distributed while the insured is alive.

7 Pay Test is applied:
- At the inception of the policy and again if the policy experiences a material change.

  • Death Benefit is Tax-free
  • LIFO (gains first) order of cash value distributions
  • Taxable distributions are ordinary income.
  • 10% penalty for distributions prior to 59.5
204
Q

Expected Family Contribution Formula

A

Income
- Parent 22% - 47%
- Student 50%

Assets
- Parents 5.64%
- Student 20%

205
Q

Qualifying US Savings Bonds

A
  • Tax-deferred for federal; tax-free for the state; certain post-1989 Series EE and I bonds may be redeemed federal tax-free for qualified higher education expenses
  • No federal gift treatment. The parent must own qualifying bonds.
  • Max Investment
    |Series EE :10K/yr/owner
    |Series I: 10Kdigital; 5K paper/yr/owner
  • Qualified Expenses are tuition and fees only
  • Not able to Change beneficiary
  • Bond purchaser must be at least 24 years old.
  • Interset exclusion phases out for incomes between 128,650-158,650 joint or 85,800-100,800 single
  • Counted as an asset of the bond owner for federal financial aid.
  • Interst-earning bond backed by full faith and credit of US government.
  • No penalty; interest on redeemed bonds included in federal income.
206
Q

UGMA/UTMA Accounts

A
  • Earnings and gains taxed to a minor; Kiddie Tax Rules.
  • Transfers are treated as a completed gift. Apply 16K annual exclusion.
  • Value removed from the donor’s gross estate unless the donor remains as custodian.
  • No limit on maximum investment.
  • Funds can be used for any purpose, including college expenses, without limitations.
  • Not able to change the beneficiary.
  • Custodianship terminates when the minor reaches the age established under state law (18/21)
  • No income restrictions
  • Counted as a student’s asset for financial aid.
  • Investments | as permitted under state laws.
  • Nonqualifying expenses | Funds must be used for the benefit of the minor.
207
Q

Cash Surrender Value

A

The insurance company pays the cash value to the policy owner as a lump sum and the contract ends.

208
Q

Extended-Term Option

A

The policy owner uses the cash value from their policy to place the policy on extended-term insurance. The cash value serves as a single premium to pay for term life insurance for as long as the cash value will support the stated death benefit at the insured’s current age. This option has no residual cash value. The insurance company may allow reinstatement of the permanent policy if the extended term has not expired.

209
Q

Reduced Paid-Up Insurance

A

The policy’s cash value is used to buy a paid-up policy of the same type as the lapsed policy. The new policy will have a reduced death benefit but will retain a cash value that will grow throughout the life of the policy at a reduced rate.

210
Q

Chapter 7 Bankruptcy

A

A liquidation type of bankruptcy procedure. It eliminates a consumer’s debt by having the trustee sell some of the debtor’s personal property to repay their creditors. Most debts are discharged after 115 days from the date of filing, but you still have to pay:

  • Child support
  • Alimony
  • Income taxes less than three years past due
  • Student loans and
  • Secured Debt
211
Q

Chapter 13 Bankruptcy

A

The wage-earner plan. It allows debtors to keep their personal assets, but they are obligated to repay their debt in full over a period.

  • Must have no more than 419,275 unsecured debt
  • No more than 1,257,850 in secured debts.
212
Q

Chapter 11 Bankruptcy

A

Intended for business but also accommodates those who exceed chapter 13 debt limitations or lack regular income.

213
Q

Annuity Payout Exclusion Ratio

A

Investment in Contract / Annual Payment X Life Expectancy

214
Q

Annuity Withdrawals

A
  • Pre 59.5 there is a 10% penalty.
    Exceptions:
  • Over age 59.5
  • Owner disabled
  • Owner dies
  • Immediate NQ annuity
  • Substantially equal periodic payments.
    Later of 5 years
    Owner reaches age 59.5
215
Q

GSTT Taxable Distribution

A

Any distribution of income or corpus from a trust to a skip person that is NOT otherwise subject to estate or gift tax.

216
Q

GSTT Direct Skips

A

A transfer subject to an estate or gift tax made to a skip person.

Related persons - Skip persons determined by family tree
Non-related persons: - Skip person was born between 37.5 and 62.5 after the transferror.

217
Q

GSTT Taxable Termination

A

Th termination by death, the lapse of time, release of power, or otherwise of an interest in the property held in a trust resulting in skip persons holding all the interests in the trust.

218
Q

Qualified Domestic Trust (QDOT)

A

For spousal transfers to non-citizens spouses, and transfers at death, the QDOT ensures the assets will not leave the US without being taxed.

The property then qualified for the 12.06M marital deduction.

219
Q

Special Needs Trust

A

This trust preserves eligibility for government benefits and pay for extra services that are not covered by public assistance programs.
Cover extra services:
- Medical expenses not covered by Medicaid.
- Supplemental attendant and custodial care.
- Additional therapies.
- Respite care for family caregivers.
Pay for:
- Telephones
- Computers and internet access
- Cable TV
- Basic household furnishings
- Travel and a companion

220
Q

Monetary Policy

A

Policy controlled by the Federal Reserve Bank controls the money supply, influences lending rates, and may slow down or stimulate the economy.

Three tools
- Discount Rate
- Reserve Requirement
- Open Market Activities

221
Q

CFP Board Counsel

A

Has the authority to investigate and file a complaint against a respondent for alleged violation of the Code of Ethics and Standards of Conduct

222
Q

Disciplinary and Ethics Committee (DEC)

A

Composed of CFP professionals and members of the public, the DEC has the authority to issue a final order that finds facts, determines whether a violation has occurred, and, where appropriate, imposes discipline in the form of a sanction.

223
Q

Hearing Panel

A

Conduct the hearing and consist of at least three persons. Most of the hearing panel must be CFP, professionals, and a majority must be DEC members. A DEC member must serve as chair of the hearing panel.

224
Q

Current Ratio Formula

A

Current Assets ÷ Current Liabilities

225
Q

Quick Ratio Formula

A

[Current Assets - Inventories] ÷ Current Liabilities

226
Q

Working Capital Formula

A

Current Assets - Current Liabilities

227
Q

Inventory Turnover Formula

A

Cost of Goods Sold ÷ Average Inventory

228
Q

Days to Sell Inventory Formula

A

365 ÷ Inventory Turnover

229
Q

Accts Receivable Turnover Formula

A

Sales (credit) ÷ Avg. Accts Rec.

230
Q

Receivable Collection Period Formula

A

365 ÷ A/R Turnover

231
Q

Gross Profit Margin Formula

A

Gross Profit ÷ Sales

232
Q

Operating Profit Margin Formula

A

Operating Income ÷ Revenue

233
Q

Return on Assets (ROA) Formula

A

Net Income ÷ Total Assets

234
Q

Return on Equity (ROE) Formula

A

Net Income ÷ Equity

235
Q

Debt to Equity Formula

A

Total Long Term Debt ÷ Equity

236
Q

Times Interest Earned Formula

A

EBIT ÷ Interest Expense

237
Q

Debt Ratio Formula

A

Total Debt ÷ Total Assets

238
Q

Downward Sloping Yield Curves

A

Inverted or Negative.
The rates of short-term paper are higher than the rates of longer term paper.

  • The short end of the curve is very sensitive to Fed policy
  • The longer end of the curve is a market rate and is predictive of anticipated economic conditions.
239
Q

Downward Sloping Yield Curves

A

Inverted or Negative.
The rates of short-term paper are higher than the rates of longer term paper.

  • The short end of the curve is very sensitive to Fed policy
  • The longer end of the curve is a market rate and is predictive of anticipated economic conditions.
240
Q

Upward Sloping Yield Curves

A

Normal or Positive
The rates of short-term paper are lower than the rates on longer-term paper.

  • The short end of the curve is very sensitive to Fed policy
  • The longer end of the curve is a market rate and is predictive of anticipated economic conditions.
241
Q

Flat Yield Curve

A

Rates of short-term and longer-term paper are similar.

  • The short end of the curve is very sensitive to Fed policy
  • The longer end of the curve is a market rate and is predictive of anticipated economic conditions.
242
Q

Conduct Deemed Unacceptable

A

This conduct will always bar an individual from becoming certified
- Felony conviction for theft, embezzlement or other financially-based comes.
- Felony conviction for tax fraud or other tax-related crimes.
- Revocation of a financial professional license unless administrative in nature.
- Felony conviction for any degree of murder or rape.
- Felony conviction for any other violent crime within the last five years.

243
Q

Conduct Deemed Presumptive Bar

A

The following conduct is presumed to be unacceptable.
- Two or more personal business bankruptcies.
- Revocation or suspension of a non-financial professional license unless administrative in nature.
- Suspension of a financial professional license unless administrative in nature.
- Felony conviction for non-violent crimes within the last five years.
- Felony conviction for violent crimes other than murder or rape that occurred more than five years ago. conviction

244
Q

Other Adverse Conduct

A

Other Conduct that may reflect adversely upon the individuals, integrity or fitness, the profession, or the CFP certification marks:
- Customer complaints
- Arbitrations and other civil proceedings.
- Felony convictions for non-violent crimes that occurred more than five years ago.
- Misdemeanor convictions
- Employer investigations and terminations.

245
Q

Fee-Only Compensation

A

May represent Firm’s compensation method as “fee-only” only if
- No sales-related compensation
- Related parties receive no sales-related compensation in connection with professional services provided to the clients.

246
Q

Fee-Based

A

CFP Board uses the term “fee and commission” to describe those who receive both fees and sales related compensation.
- May not use the term in a manner that suggests the Firm or professional is fee only.
- Must clearly state that either that the professional earns fees and commissions, or that the professional is not fee-only.

247
Q

Sales-Related Compensation

A

More than a de minimis economic benefit, including any bonus or portion of compensation resulting from a Client purchasing or selling Financial Assets, from a Client holding Financial Assets for purposes other than receiving Financial Advice, or from the referral of a Client to any person or entity other than the Professional’s Firm.

CFP EXAM (1 decks)

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