Exam Tips and Other Notes Flashcards
Which college tax credits, account distributions and withdrawals cannot be combined (coordination rules)?
Cannot combine for same child, same expense:
- American Opportunity Credit (AOC)
- Lifetime Learning Credit (LLC)
- Coverdell withdrawal
- 529 (QTP) distribution
Which college funding strategies can be combined without restrictions?
Educational gifts, earnings, UGMA/UTMA/2503(c) funds, PLUS Loans
Fed Actions:
BEST and
Repo/Reverse Repo
BEST - Buy=Expansionary, Sell=Tighten
Repo - Repurchase or “Buy” - Expand
Reverse Repo - “Sell” - Tighten
Discount Rate vs Fed funds rate
The federal reserve sets the discount rate
Banks determine the fed fund rate for what they will lend to each other
Typically, discount rate is the better answer. If discount rate is not available, then choose fed funds rate.
Ch 7 Bankruptcy - Exempt property
- Homestead
- Limited amount of personal property and equity in a motor vehicle
- Wages due to head of family
- Pension and retirement plan rights (ERISA plans)
- Cash value of life insurance, proceeds of annuity contracts, disability benefits
Miscellaneous federal exemptions - civil service and railroad pensions, veterans benefits
Ch 7 Bankruptcy - Not Cancelable Debts
G-CATS
- Government loans
- Child support
- Alimony
- Taxes
- Student loans
Basically, government or ex-spouse
Implied Authority (Law of Agency, Insurance)
Is that which the public believes the individual holds and includes signage, rate books, etc.
Implied is actual authority that the agent has to carry out the principal’s business
Express Authority (Law of Agency, Insurance)
Written, explicit direction from principal to agent
Apparent Authority (Law of Agency, Insurance)
Arises out of negligence of the principal in allowing the agent to appear to have authority because of certain actions of the agent in the past. This typically affects terminated agents.
“A parent should supervise”
Paula Stone spent nearly a year and a half completing the CFP education courses, and finally passing the exam. Upon submittal of her paperwork, the CFP board found cause to suspend issuance of the CFP certification for two years. Will the board publish such a suspension?
Yes, suspensions are automatically published
Todd Hamm, CFP works for ABC Brokerage. ABC sells only commission base proprietary products. Todd is assigned a commission goal for the year and ABC’s bonus is paid on exceeding that goal. Without that bonus, the payout is less than Todd’s living expenses. A new investment product is being promoted by ABC to try to lock up a client’s total investment account by giving the client airline miles, low interest credit cards, and below market mortgage loans. What should Todd do?
Enter into agreements with all his clients disclosing compensation arrangements for the company’s proprietary products
On the test, what is the maximum home equity line amount available?
FMV minus debt (100% of your equity)
Tammy Jones, CFP, is meeting with a new client. What is the first step he should take?
A. Give the client his firms brochure.
B. Provide the client with written disclosure of all material information.
C. Ask the client for a written agreement as to his understanding of the planning process.
D. Review the client and objectives.
B. Provide the client with written disclosure of all material information.
Answer B is the first step. Answer D is the second step. The question does not indicate that Tommy is a Registered Investment Advisor, so A does not apply.
Why, Alan Alligator is a CFP professional, who operates his own financial planning firm. He has just been engaged by Mr. and Mrs. Thomas to provide financial pinning services. Which of the following items of information may provide to the Thomases either in writing or orally.
A. Material conflicts of interest.
B. The firms privacy policy.
C. Compensation to Alan and his firm.
D. Alan’s bankruptcy history, if any.
A. Material conflicts of interest.
The CFP board specifies it when a CFP professional is providing financial planning services, the material conflicts relating to the planner, and the firm may be provided either in writing or orally. The firm must provide in writing, how it will be compensated by the client, the terms of the engagement with the client and its Privacy Statement. It must also disclose in writing its services and any bankruptcy or disciplinary history relating to the firm or its principals.
Which of the following elements of the CFP® Code of Ethics is designed to dovetail with the steps in the financial
A. The seven Principles
В. The fifteen Duties
C. The Practice Standards
D. The fitness Standards
C. The Practice Standards
The practice standards, which are part of the CFP boards code of ethics are designed to address the responsibilities of the CFP professional as he performs each step of the financial planning process
Patsy Planner is proud of her success in passing the CFP® Exam. She has five years of experience in financial services but had declared bankruptcy five years after graduating from college fifteen years ago. Would she be considered to be a CFP® Professional at that point?
A. No, because she must complete the ethics declaration and satisfy the CFP Board’s fitness standards.
B. Yes, because she has completed the CFP® Exam successfully.
C. Yes, because she has not declared bankruptcy twice.
D. No, because she does not have ten years of experience in financial services.
A. No, because she must complete the ethics declaration and satisfy the CFP Board’s fitness standards.
Merely completing the CFP® Exam successfully does not entitle the successful candidate to use the CFP® Marks.
Patsy must complete the Application for CFP® Certification. In the certification application, she must agree to abide by CFP Board’s Terms and Conditions. The conditions require Patsy to agree to comply with, and to be bound by, CFP Board’s Code of Ethics and Standards of Conduct as they are currently presented and as modified in the future. The application further requires Patsy to sign the Ethics Declaration, which contains a series of questions that require her to disclose information that is relevant to the fitness standards that required of CFP® Professionals.
Patsy must further pass the CFP Board’s Background Check. The Board will review Patsy’s responses on the Ethics Declaration, any regulatory disclosures that are available, including regulatory databases such as FINRA’S BrokerCheck and the SEC’s Investment Adviser Public Database, and public records.
Ultimately the Board will review the results of the background check and determine whether Patsy’s conduct satisfies the fitness standards for candidates for CFP® certification.
What agency regulates brokerage companies?
FINRA - the SEC regulates brokerage companies through FINRA
Which of the following is true concerning a pro forma statement?
A. It illustrates the sources and amounts of gross income received by the client.
B. Illustrates the solvency ratio of the client.
C. Illustrate future financial statements are expected to show.
D. It illustrates what has occurred in the past.
C. Illustrate future financial statements are expected to show.
A pro forma statement projects the expected result of the next year or longer
Sandy has earned her Series 6 and all applicable state license. She may not sell which of the following investments?
A. Variable annuity.
B. Variable life insurance.
C. Mutual fund traded on a major exchange.
D. UIT (initial offering).
C. Mutual fund traded on a major exchange.
Mutual funds do not trade on stock, exchanges, but closed-end funds do. To sell closed-end funds, Sandy needs a Series 7 license. A Series 6 license allows a representative to sell an initial UIT offering.
College funding options
UGMA/UTMA: Subject to Kiddie Tax for children under age 24.
EE Education Bonds: Parents own bonds, so will not work in a UGMA/UTMA
Coverdell Education Savings Plan (ESA): Limited to $2,000/year contribution total
Section 529 Plan (QTP):
- Available in 2 types: College Saving or Prepaid Tuition
- $17,000 contribution per year per child times 5 years $85,000
American Opportunity Credit (AOC)
• $2,000 + 25% of next $2,000 of expenses (max $2,500 tax credit)
• MAGI Phase outs on tax sheet
• First four years of college only
Funding Strategies in College Years
”Wealthy”
Parent Loan Undergraduate Students
Wealthy parents are a PLUS
Poorish (less than $60k)
- Pell Grants
- Supplemental Education Opportunity Grant
- Subsidized Stafford Student Loans
Lifetime Learning Credit
• $2,000 max
• Any higher learning institution (undergrad, grad, continuing ed)
• MAGI Phase outs on tax sheet
Coverdell ESAs
- Eligible for grades K through 12 expenses as well as college
- Contribution limits are phased out for higher-income contributors.
- Assets not used for educational expenses cannot be reclaimed irrevocable gift).
- $2,000 per year total limit (not per donor), and no 5-year averaging is available.
- Contributions may not be made after the beneficiary is age 18.
- Account must be distributed upon the beneficiary reaching age 30.
Generally considered an asset of the parent (even if the parent is not the donor). - Student loan payments not allowed.
Dump Sheet Item #1 - Yield Ladder
DISCOUNT BOND
Y - Yield to Call
M - Yield to Maturity
C - Current Yield
A - —Nominal Yield Annual Coupon Rate
C - Current Yield
M - Yield to Maturity
Y - Yield to Call
PREMIUM BOND
Tax Treatment of TIPS
- The investor is taxed annually on the interest payment plus the appreciation in face value.
- The increase in face value is only nominal or “phantom” income that is not collectable until the bond is sold or matures. However, this income is taxable in the year it is accrued. TIPS interest is not subject to state and local taxes.
TIPS create partially Phantom Income
- interest is received now and is taxable now
- The increase in face value is phantom (but it increases the basis)
How many payments per year and bond calculations?
Two
REIT Types and Definitions
Equity REITs invest mainly in operating rental properties (for growth). The net income from the property (rents less operating expenses) should exceed the REIT’s borrowing costs, producing income for the shareholders.
Mortgage REITs invest mainly in mortgages and construction loans. The interest earned on the mortgages and construction loans should exceed the REIT’s borrowing costs.
Mortgage REITs are highly leveraged. They make their income from the “spread” between the lending rate and borrowing rate. Inflation is bad for mortgage REITs.
REIT Tax Rules to Achieve Conduit Status
75/15/90/20
75% income must come from real estate investments
- 15% can come from securities, like GNMAs
If min 90% of net investment income or more, it only pays tax on the undistributed portion.
If fails to distribute 90%, then all the net investment income is taxable to the REIT as an entity
Qualified Business Income (QBI/199A) deduction of up to 20% of that income.
- Because REITs generally operate as pass-through arrangements
Taxability of Covered Call (Lapse/Exercise)
Lapse - Premium received is short-term gain.
Exercise - Premium received is added to the sale price (becomes long-term gain if underlying security was held more than 12 months; otherwise, short-term gain).
Funding strategies in graduate degree years
- Fulbright scholarship
- Stafford loan
- 529 distribution or Coverdell withdrawal (same coordination rules as above above apply)
Tax Equivalent Yield shortcut
Interest
TEY = ——————————————
1 - (the taxes you don’t pay)
Tax Form Schedules
Schedule A - “Allowances” - Itemized Deductions
Schedule B - “Bank” - Ordinary Divs and Taxable Interest
Schedule C - “Career” - Business Income
Schedule D - “Gains=delightful, Losses=dreadful” - Cap Gains/Losses
Schedule E - “Real Estate”
Gross Income
Inclusions - Wages, Salaries, Tips
Inclusions pay for a TRIP TO CUBA
T - Taxable interest
R - Real estate
I - IRA distributions
P - Pensions/Punitive Damages
T - Taxable SS
O - Ordinary Divs
C - Capital Gains/Losses
U - Unemployment Inclme
B - Business Income/Loss
A - Alimony pre-2019
Gross Income
Exclusions
IMG CWC
Inheritance
Muni Bond Interest
Gifts
Child Support
Workers comp
Compensatory Damages
Adjustments FOR/TO AGI
“Above the Line”
SMASH KITE
S - Self-employed health insurance
M - Moving Expenses (active military)
A - Alimony Paid (pre-2019)
S - Student Loan Interest (up to $2500)
H - HSA Contributions
K - Keogh or SEP Contributions
I - IRA Contributions
T - Tax - 1/2 of SE Tax (0.07065%)
E - Early Withdrawal Penalties
Deductions FROM AGI
“Below the line”
Med
Fed
Chair
MINT
SALT
C - Charitable Giving
U - Unreimbursed medical, dental, LTC (> 7.5% AGI)
T - Tax (SALT up to $10k)
I - Interest Paid (mortgage, margin)
G - Government Declared Disaster (Federal)
Dump Sheet Item #2 - Financial Planning Process
Uber Is A Drunk Person’s Immediate Motor vehicle
U - Understand the client’s personal and financial circumstances
I - Identify and select goals
A - Analyze clients current course of action and potential alternatives
D - Develop the financial planning recommendations
P - Present the financial planning recommendations
I - Implement the financial planning recommendations
M - Monitor progress and update
Dump Sheet #3 - Checkpoint Times
Q1 - 90 minutes (100 if a case)
Q2 - Do not submit until you are fully rested (lunch clock will start)
Q3 - 90 minutes (100 if a case)
Duration vs Yields
Duration is inversely related to yields (like Bond prices are inversely related to yields)
- Yields go up, duration goes down
- Yields go down, duration goes up
Duration of Zero Coupon Bond
Duration = Maturity
No reinvestment risk
Capital Market Line
Applies only to portfolios, not single securities
Risk is based on Standard Deviation (variability)
Capital market line improves on efficient frontier because it includes the risk free rate and leverage
Intersection of CML and Axis - the Risk Free rate or Rf. 100% T Bills (0 standard deviation)
Point A - (bottom left, between Rf and tangent) - combination of risk free and risky assets
Point B - (middle) Tangent of the CML, the optimal risky portfolio, the Markowitz Efficient Frontier
Point C - (top right) 100% risky assets leveraged with margin
Markowitz Model (Efficient Frontier)
Efficient Frontier
On the curve - Highest Return per risk assumed
Inefficient (attainable)
Inside the curve. Attainable but not on the efficient frontier
Not Feasible (unattainable)
Outside the curve. Low risk and high return are unlikely over time
Indifference Curves
Each investor has one
- Low Risk investors have STEEP curves
- High Risk have SHALLOW curves
- The point where the indifference curves meets the efficient frontier is the optimal portfolio for that investor
Security Market Line
Risk vs Return of an asset (for a stock or portfolio)
Risk is based on Beta (volatility)
Does not matter if diversified or not
Formula is same as required rate of return - AKA the CAPM (capital asset pricing model):
- r = rf + (Erf - rf) B
Expected return must exceed required return to recommend buying
Anomalies to EMH
- P/E effect
- Small-firm effect
- January effect
- Neglected-firm effect
- Value line
Fundamental Analysis
Can include research of such factors as interest rates, gross domestic product, inflation, unemployment and inventories
Can also include analysis of balance sheets, income statements, and past company performance
Ratio Analysis
Comparing ratios of a company to determine future price movements
Two ways to do this:
- Compare individual ratios for a firm over a period of time or established norms for firm
- Compare the individual firms ratios to an industry average
Technical analysis (active)
“active” means timing and selection
Most analysis applies to short or inter term
Technical analysis is not concerned about the financial position of the company
MID BAM
Technical approaches:
- Dow Theory
- Barrons confidence index
- Mutual fund cash position
- Advance/decline line
- Moving Average (200 day)
- Investment advisor opinions
When to use Alpha, Treynor, Sharpe
RATS
R2 over 60
Alpha (Jensen)
Treynor
———————
Sharpe (R2 under 60)
Mixed R2 - “Grab something Sharpe”
Ex-Dividend Date
Much purchase before this day to receive a dividend
Monday - Purchase Stock
Tuesday - Ex-Dividend Date
Wednesday - Date of Record
Can you buy options on margin?
No
Margin Maintenance Formula
1 - Initial Margin purchase——————————— X price of
1 - Maintenance Margin stock
What does Active Participant mean?
- Qualified Plan, both DB plans and DC plans.
- exam will most likely say, they are an “active participant” in a plan.
457’s don’t count as “plans”
- so if both spouses participate in 457s, then it’s as if they are NOT plan participants at all
- deduct their IRA contributions without regard to their AGI (i.e. they could make a $1,000,0000,000/yr and they could deduct their IRA contribution)
Roth RMD Rules
Roth IRAs do not require withdrawals until after the death of the owner.
Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023.
However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.
What indexes are value-weighted
S&P 500, Russell 2000, EAFE, Nasdaq
What indexes are NOT value weighted?
Dow Jones - price weighted
Wilshire 5000 - cap weighted
Value Line - Equal weighted
Quick Calculation of Duration
- Use the given information (I, N, FV, Coupon) to calculate current value of the bond (not the stated value in the question).
Write that down at PV1
- Decrease given interest-rate by one. Recalculate the present value.
Write that down as PV2
- Calculate
(PV2 - PV1)
—————- = Duration Estimate
PV1
The question asks which stock is riskier
Do not pick the highest beta.
It is looking for the return for unit of risk.
Divide average return over beta and pick the highest one.
What is a Yankee bond?
A dollar denominated bond issued in the US by foreign banks and corporations
What is a bankers acceptance?
They are used to provide financial backing for import/export transactions.
With maturity inot exceeding 270 days, they are money market securities.
Which of the following corporate reports are required to be filed with the SEC?
- Corporate Annual Report
- 10Q
- 10K
- Form 1120
Form 10-K which must contain certain required financial information is submitted to the SEC as is the 10-Q that provides quarterly reporting.
The Annual Report is sent to stockholders.
Form 1120 is the corporate federal tax return.
Buy-Sell Agreement
Stock Redemption (Entity Purchase)
For the purposes of this example, assume the following:
- The business, HF, Inc. has two equal owners, Howie and Frank
- Basis is $1,000 each
- The current FMV of HF, Inc. is $1,000,000
- Two $500,000 life insurance policies on the two owners’ lives
Method
The corporation agrees to purchase the stockholder’s interest for $500,000 using life insurance
Practicality
Practical with multiple owners
Life insurance owner and beneficiary
The corporation is the owner and beneficiary of the policies on lives of each shareholder
Life premiums
Nondeductible
Result when Howie dies
- $500,000 income tax free to corporation, company buy stock
- Frank’s basis is $1,000
- Frank now owns 100%
Rights of creditors
Life insurance can be attached
Result if Frank sells the company for $1,000,000
Gain is $999,000 ($1,000,000 less basis of $1,000)
Buy-Sell Agreement
Cross-Purchase (Stockholder Purchase)
Method
One stockholder agrees to purchase a deceased stockholder’s interest for $500,000 using life insurance
Practicality
Cumbersome with multiple owners
Life insurance owner and beneficiary
Life insurance generally is required by each shareholder on the lives of the other shareholders
Life premiums
Nondeductible
Result when Howie dies
- $500,000 income tax-free to Frank, he buys stock
- Frank gets step-up in basis on shares purchased of $500,000
- Frank now owns 100%
Rights of creditors
Life insurance cannot be attached
Result if Frank sells the company for $1,000,000
Gain is $499,000 ($1,000,000 less basis of $1,000 plus shares purchased of $500,000)
Income Tax Calculation
[Gross Income]
Less adjustments (above the line) for AGI
[Adjusted Gross Income - AGI]
Less deductions (below the line) from AGI
[Taxable Income]
Multiplied by appropriate tax rates
[Taxable Calculation]
Less credits plus other taxes
[Tax Liability]
Less quarterly payments and withholding
[Net Tax Due or Refund]
Partnership Loss Rules
Publicly Traded Partnership
- Income: Comes out of Partnership and Taxable as Portfolio income
- Loss: Stays in partnership. NO NETTING
Nonpublic Partnership
- Losses can be taken up to income against OTHER NONPUBLIC PARTNERSHIPS
2503(b) trust (bad boy)
Gift of a future interest
- interest distributions only
- must use applicable credit to fund
- income payout may be subject to kiddie tax
- IRS considers the income to be a gift of present interest (qualifying for the annual exclusion) and the remainder interest (corpus) to be a gift of a future interest (no annual exclusion).
UGMA
Gift of a present interest
Subject to kiddie tax rules
- must be funded with cash-type assets (i.e., EEs, securities, mutual funds)
- normally distributed at age 18
- can be included in custodian’s estate
- cannot be testamentary
The gift property is transferred in the name of one adult acting “as custodian for (minor’s name) under the (state name) Uniform Gifts to Minors Act. Commonly permissible gift property under UGMA includes securities, cash, life insurance, and annuities. In most UGMA states, real property cannot be held in a UGMA account (only 2 UGMA states remain).
UTMA
Gift of a present interest
Subject to kiddie tax rules
- can be funded with any type of asset including real estate
- normally distributed at age 21
- can be included in custodian’s estate
- can be testamentary
The major difference between UGMA and UTMA rules is the types of property interests that may be held. UTMA allows any property interest to be transferred, including real estate, partnership interests, patents, royalty interests, and intellectual property.
The UTMA allows custodian gifts at death by permitting a fiduciary (executor or trustee) to establish a custodianship if authorized in a governing will or trust.
2503 (c) trust (children)
Gift of a present interest
Trust rate (37% ≥ $13K+)
- can be funded with any type of asset
- normally distributed at age 21
- costs to set up and maintain (legal and accounting)
- can be included in grantor/ trustee’s estate
Section 529 college savings plan
Gift of a present interest
- invested in specific funds
- flexible distributions
- lump sum gift up to $85,000
- Donor can retain control.
- K-12 - $10K per year
- $10K toward student loans/person
Inherited IRA RMDs (owner dies before BRD)
Spouse only beneficiary
- Roll over IRA assets to his/her
IRA and take distributions based on his/her own required beginning date
- Keep the assets in the owner’s IRA and take distributions (starting when owner would have reached 73) based on the spouse’s life expectancy
Non-spouse individuals [child(ren), grandchildren)
other individuals, qualified trust]
- Take distributions within 10 years (stretch eliminated)
Inherited IRA RMDs (owner dies after BRD)
Spouse only beneficiary
- Roll over IRA assets to his/her
IRA and take distributions based on his/her own required beginning date
- Keep the assets in the owner’s IRA and take distributions based on the longer of:
1. Spouse’s single life expectancy
2. No beneficiaries (see below)
Non-spouse individuals [child(ren), grandchildren)
other individuals, qualified trust]
- Take distributions within 10 years (stretch eliminated)
Split-dollar Plan - EndoRsement Method
EndoRsement method
- EmployeR is the owner.
- Employee is not a shareholder.
Death or policy surrender
- Employer retains cash value of the policy (or premiums paid if greater).
- Employee’s beneficiary gets balance of death benefit.
EndoRsement method
Employer pays premium.
V
Premiums paid or cash value
V
Refunded at death or surrender
Split-dollar Plan - Collateral ASSignment Method
Collateral aSSignment method
- Employee is owner.
- Employee is Shareholder.
- Employee aSSigns the policy.
Death or policy surrender
- Employer receives premiums paid.
- Employee gets balance of cash value (surrender), or beneficiary gets balance of death benefits.
Employee is charged with Table 2001 insurance cost.
V
Balance of any death benefits
V
Beneficiary receives income tax free.
Life insurance inclusion in the decedent’s estate
(When Decedent is insured (You))
You own the policy and die.
- Death benefit is included in your estate.
Your spouse owns your policy.
a. You gift to her/him and die within three year of transfer.
- Death benefit is included in your estate
(3-year rule).
b. You gifted it to her/him, and never changed the beneficiary (your estate).
- Death benefit is included in your estate.*
*probate too
You sold your policy
- Nothing is included in your estate (no 3-year rule).
Life insurance inclusion in the decedent’s estate
(Someone else insured (Your spouse))
You own the policy on your spouse.*
- Replacement cost is included in your estate (term - unused premium: whole life - interpolated terminal reserve plus unearned premium) (no 3-year rule).
*probate
You gifted your spouse’s policy to your daughter.
- Nothing included in your estate (no 3-year rule).
Post-Mortem elections for Estate Liquidity
Section 303 stock redemption
Business must be incorporated (closely held stock).
2. Value of stock must exceed 35% of decedent’s adjusted gross estate.
Amount of stock redeemed as capital gain cannot exceed the sum of the estate taxes plus administrations expenses.
Post-Mortem elections for Estate Liquidity
Installment payment of estate taxes (6166)
Safe Answer
- Property must be in a sole proprietorship, partnership, or corporation. (Aggregation is allowed if more than 20% interest in each business.)
2 Interest must be carried on as of the day of death. - Value of businesses) must exceed 35% of decedent’s adjusted gross estate.
- During first 4 years (of 14 years) can pay interest only on taxes due
- The interest rate will be 2% on the first $1,000,000 (indexed to $1,750,000 in 2023).
- The 2% is not deductible.
Post-Mortem elections for Estate Reduction
Special use valuation (2032A)
- Real estate used for farming or a closely held business
- Several rules to qualify:
- 50% of the gross estate must consist of real and personal property
- 25% of the gross estate must consist of real property. - $750,000 reduction in decedent’s gross estate ($1,310,000 in 2023)
- Must be qualified use: 5-out-of-8 rule before death / 10 years after death
“Decline the Client”
Typically a wrong answer unless illegal activity
Always eliminate ________ answers
Wrong
RTFA and RTFQ
Exam will give good sounding non-answers
AFTQ too!
Quick Calc
$100,000 mortgage at 6%
$600/mo
Question too easy?
You are more likely to miss a question you think you know, because you went too fast
“IRA” Means _________ IRA
Traditional
Life Insurance Death Benefit Type
Unless stated otherwise, always assume Type 1/A
(DB only, no cash value added)
In your mind, always add this word before “marital deduction”
UNLIMITED marital deduction
Assume taxpayer is _________, unless stated otherwise
Single
If taxpayer is married, always assume married filing ________ unless stated otherwise
JOINTLY
Always assume __________________ property unless stated otherwise
Common law. They will tell you it’s community property
CDs are always considered ___________
Bank CDs (not brokered), unless otherwise stated.
No interest rate risk
Bonds always have ____ payments per year and a par of _______
2 - even zero coupon bonds
$1000
Dividends are always considered ________________ and taxed as ________________ unless otherwise stated
ORDINARY (not qualified)
ORDINARY INCOME (not cap gains)
Assume a “REIT” is always exchange traded or OTC
Don’t assume non-traded REIT unless stated (rare)
“______________ the client” is often a good answer
Educate
When evaluating retirement plan options. You are acting from the perspective of the ________
Boss/owner
For plan selection:
- “Stable cash flow” means _________
- “Vary year to year” means __________
“Stable” -> pension
“Varies” -> profit sharing or DC plan
Default age of an individual in CFP world is _____. Unless stated.
35, assume early w/d penalties
Do not assume ________ income.
AGI does not mean ________
Earned
If they don’t say “part of an employer plan” or “active participant” assume they are ____________________
Not an active participant
“Taxed as…
1. “Compensation”
2. “Ordinary Income”
3. “Capital Gain”
- Comp: Ord. Income Tax + FICA/FUTA
- Ord Inc: Ord. Income Tax (no FICA/FUTA)
- Cap Gain
- Short Term: Ord. Income Tax (no FICA/FUTA)
- Long Term: Capital Gains Rates (no FICA/FUTA)
“Salary Continuation Plan”
- This is group disability insurance
- Premiums are paid by employer
- If no tax to employee, benefits taxable later
- 162’s are taxable now, tax free later
MECs - Modified Endowment Contracts
For test purposes;
- ALL single premium insurance are MECs
- Once a MEC, ALWAYS a MEC
“Endowment” life insurance contracts are always a __________ answer
Wrong
“Hope” as an answer is ______ a strategy
NOT
“Paid up” means your insurance is paid for how long?
Forever
Insurance: Dividend vs Nonforfeiture
“Stop paying” -> nonforfeiture
“Additional benefit” -> dividend
“Settlement” -> money to beneficiaries (cash/annuity options)
Exam assumes all annuities are _______________
Annuitized
Exam prefers _______ rate mortgages over _________
Fixed; Variable
Don’t assume mortgage refinance points are ___________; can be paid _____________
- rolled into the loan
- out of pocket
Exam Tip from Brad
Cash flow is king -> then focus on adequate life insurance coverage (huge focus at even the hint of a family with children) -> then move to personal liability and umbrella coverage ensuring underlying limits on the cars and home meet the umbrella minimum
Dynasty trust
- a “B” trust that benefits multiple future generations
- simple trust
- Gift of Future interest unless Crummey provisions
In certain states, a dynasty trust, free of estate, gift, and GST taxes, can last for the lives in being plus 21 years and 9 months (rule against perpetuities) or as long as local law allows.
- Beneficiary interests are limited to life estates.
Dump Sheet #4 - Estate Flow Chart
GE AGATE TB TT NET
Minus Minus Plus Minus Minus
GE
AGE
TE
TB
TT
NET
Ch 7 - Bankruptcy
exempt property
C - Car
H - house
I - insurance (life/annuity)
P - personal property (limited)
P - paycheck (head household)
P - pensions/plan (ERISA)
