Final

Question 1

Acts as a will substitute and tenants must be married to each other.

Answer 1

Tenancy by the entirety has the same right of survivorship feature as joint tenancy,

Question 2

Definition of personal financial planning includes

Answer 2

A continuous process, subject to review and revision.

Helping a client achieve personal and financial goals.

Question 3

Effective personal financial goal includes

Answer 3

Goals should be clearly defined and quantified

Question 4

Cash flow statement includes

Answer 4

Income

Outflows

Question 5

Statement of financial position includes

Answer 5

Invested assets and net worth

Question 6

Main reason for using credit

Answer 6

Convenience

Access to source of funds for an emergency

Question 7

If John invests $10,000 into an account that will pay him 10% compounded monthly, how much will his account be worth in 20 years?

Answer 7

Set calculator for 12 P/YR, end mode, C ALL 10,000 +/- PV, 10 I/YR, 20 DOWNSHIFT N (240 compounding periods), solve for FV = $73,280.74.

Question 8

Assume

• You plan to contribute $3,000 per year at the end of each year to a tax-deferred retirement plan.
• You plan to retire in 35 years
• You want to have an account worth $1 million at retirement

What annual rate of return will you need to earn to achieve your goal?

Answer 8

Set calculator for 1 P/YR, end mode, C ALL 3000 +/- PMT, 35 N, 1000000 FV, solve for I/YR = 10.89%.

Question 9

What are types of systematic risk?

Answer 9

Interest rate risk
Market risk

Systematic risk is nondiversifiable risk, two types of which are inerest rate risk and market risk. Remember the acronym PRIME for types of systematic risk: purchasing power, reinvestment, interest rate, market, and exchange rate risk. Business risk and financial risks are unsystematic risks that are unique to each individual investment.

Question 10

The advantages of investing in mutual funds include?

Answer 10

Pooling of investors’ funds
Diversification
Access to professional money managers
Detailed recordkeeping of shareholder investments and transactions

Mutual funds pool the money of many investors and hire a professional money manager to invest that money.

They provide diversification and detailed record keeping.

Question 11

What are potential returns an individual can achieve by investing in common stock?

Answer 11

Dividends
Capital appreciation

Interest is income paid on bonds, not stocks. Investing in common stocks can yield dividends and capital appreciation.

Question 12

A SWOT analysis includes?

Answer 12

SWOT stands for strengths, weakness, opportunities and threats

Question 13

Taxable income is defined as?

Answer 13

Adjusted gross income (AGI) reduced by the greater of itemized deductions or the standard deduction.

Taxable income is the AGI reduced by the greater of the itemized deductions or the standard deduction.

Question 14

Reasons to invest in bond mutual funds

Answer 14

professional management
interest income
diversification

Bond mutual funds have an inverse relationship with interest rates, meaning the principal amount can go up or down in value. the longer the maturities in the bond fund, the more volatile the fund can be, so there is not necessarily safety of principal. Receiving interest income, having diversification, and professional management are all possible reasons to invest in a bond mutual fund.

Question 15

A tax credit is the amount

Answer 15

subtracted directly from tax liability.

A tax credit is a dollar-for-dollar offset against the income tax liability. thus, it is deducted directly from the tax liability.

Question 16

The marginal income tax bracket is

Answer 16

the tax rate applied to a taxpayer’s last dollar of taxable income.

The rate of tax paid on the last dollar of taxable income is defined as the marginal tax bracket – the rate of tax at the margin.

Question 17

The tax benefits of qualified retirement plans include?

Answer 17

Employee contributions to the plan are excluded from taxable income
Earnings on invested funds inside the plan are tax-deferred until withdrawn.
Distributions are taxed as ordinary income only when withdrawn.

The earnings on the funds within the retirement plan are tax-deferred, not tax-free. Also, the distributions are taxed as ordinary income, they are not tax-free.

Question 18

Bryan and Sarah received stock as a gift that Bryan’s parents purchased several years ago for $5,000, and it was worth $7,200 when the couple received it. they just sold the stock for $7,500 and want to know what their basis is, and any tax ramifications. You would correctly advise them the the cost basis is:

Answer 18

$5,000, and they will owe capital gain taxes on $2,500.

Generally, the cost basis carries over to the individual(s) receiving the gift. (There are different rules for property that has a loss. ) In this, case the basis would be $5,000 – the original purchase cost for Bryan’s parents. Bryan and Sarah would pay capital gains taxes on any amount they receive above the $5,000; in this case is $2,500.

Question 19

Educational credits are:

Answer 19

The Lifetime Learning Credit includes expenses to acquire or improve job skills.

The American Opportunity Credit is only available for the first four years of postsecondary education. The maximum American Opportunity Tax Credit is $2,500, it is not unlimited. The Lifetime Learning Credit equals 20% of qualified expenses up to $10,000, and can be used for education expenses for acquiring or improving job skills.

Question 20

The marital deduction used when settling the estates of married decedents provides that

Answer 20

an unlimited amount of property may be transferred between spouses to avoid tax on the estate of the first spouse to die.

An unlimited amount of property may be transferred between spouses to avoid tax on the estate of the first spouse to die.

Question 21

Defined benefit plans

Answer 21

provide a predetermined, fixed retirement benefit for participating employees.

Generally, only employers contribute to a defined benefit plan; employee contributions are usually not allowed. A defined benefit plan document specifies the formula for retirement benefits – the plan promises to pay a specific (not a variable) benefit at retirement. A defined benefit plan is a qualified plan.

Question 22

Requirement to receive retirement benefits from SS.

Answer 22

You must have at least 40 credits of coverage
You must be fully insured (not required to be currently insured)
You must be at least age 62

Currently insured status is less rigorous than fully insured, makes you eligible for disability benefits, and provides survivorship benefits if the worker dies.

Fully insured also provides disability and survivorship benefits.

Question 23

Social Security is

Answer 23

At full retirement age FRA workers can receive their primary insurance amount PIA

If they start their benefits earlier (as early as age 62) they will receive a reduced benefit for life. SS may be taxable up to 8% depending upon a retiree’s income.

Question 24

Caitlin makes $60,000 per year and is contributing 4% of her salary to her 401K plan. Her company provides a 50% match on up to 10% of compensation. How much is the company match for Caitlin’s contribution?

Answer 24

$3,000

To receive a match, the employee must contribute. In this case, Caitlin has contributed 4% of $60,000, which is $2,400. The company is matching 50% of that amount, which is $1,200. The company is matching up to 10% of compensation, so if Caitlin were to contribute $6,000 (10% of her compensation), she would receive a match of $3,000.

Question 25

Rules of risk management

Answer 25

Don’t risk a lot for a little
Don’t risk more than you can afford to lose
Consider the odds

Too expensive to insure against all potential issues.

Question 26

Larry purchased a building 10 years ago and insured it for $500,000 with a $2,000 deductible. The building’s current replacement cost is $1.2 million, but Larry has not increased the insurance. A recent hailstorm caused $400,000 in damage. If the insurance policy has an 80% coinsurance provision, how much of Larry’s claim will the policy pay?

Answer 26

Based on the coinsurance requirement, the building should be insured for $960,000 (80% of $1,200,000). As a result of being underinsured. Larry’s claim will be paid based on the following formula:
(Amount of Insurance / Amount of Insurance required * Loss)
- Deductible = Settlement

The calculation to determine how much will be paid is
[($500,000 /$960,000) * $400,000] - $2,000 = $206,333.33

Question 27

Mutual company dividend option

Answer 27

Receive in cash
apply to future premiums
use to purchase “paid-up” additions to the policy

reduce premiums
purchase one-year term (the fifth dividend option)
have the insurer hold the dividends
pay interest on them

Question 28

Carla recently had emergency surgery. Expenses for the surgery were Carla’s only medical expenses so far this year. She has a comprehensive major medical policy with a $2,500 annual deductible, and an 80%/20% coinsurance provision with a maximum out-of-pocket (MOOP) amount of $7,500. If Carla’s total bill was $10,500, how much will the insurance company pay on the claim?

Answer 28

$4,100

Total Expenses $10,500 Deductible $2,500
Carla Pays Deductible $2,500 + 20 Split $1,600
Insurance Pays 80 Split $6,400

Total of payments Carla $4,100 Insurance $6,400

The insurance company will pay $6,400, and Carla must pay $4,100. Carla will continue to pay 20% of any future medical expenses for the year, until she reaches her MOOP amount of $7,500.

Question 29

long-term care (LTC) coverage

Answer 29

In addition to the ADLs, cognitive impairment is a benefit trigger for qualified LTC insurance policies.

Question 30

premiums can be based upon under the Affordable Care Act

Answer 30

four different factors:

age, family size, smoking status, and geography.

Question 31

HSAs

Answer 31

available for individuals with high deductible health care plans. There are minimum deductibles and maximum out-of-pocket limits that must be met to be eligible to contribute to an HSA.

Question 32

fee simple ownership

Answer 32

Only one owner. Therefore, the owner does not have to get anyone else’s consent to mortgage or sell the property, does not have to share the income it produces, and can transfer the property to any person the owner desires both during life and at death. All other options are forms of co-ownership.

Question 33

What are the benefits of using trusts in estate planning

Answer 33

In trusts, current income can be accumulated for later distribution. All trusts are based on the principle of giving the current use or benefit of trust property to the income beneficiaries, while giving title to a different group of beneficiaries, known as remainder beneficiaries. Marital and charitable trusts can provide gift and estate tax savings by means of the marital and charitable deduction. Trusts can provide income tax savings by means of a charitable income tax deduction, or by shifting income to beneficiaries who are in a lower marginal bracket. The assets in a funded inter vivos trust avoid probate.

Question 34

probate

Answer 34

Testate estates are subject to probate.
Intestate estates are subject to probate.
Probate requires the appointment of a personal representative.

Probate includes situations where the decedent has a valid will (testate) and where the decedent does not (intestate). In either of these situations, a personal representative is appointed to direct the probate process. Probate is not speedy.

Question 35

A. Insurance premium payment
B. Basis of inherited stock
C. Purchase price of stock—statement of financial position
D. Credit card balance

Answer 35

A —cash flow statement
B—current fair market value
C—fair market value
D—statement of financial position

An insurance premium payment would show up on a cash flow statement. The purchase price of a stock is needed when the stock is sold to calculate the capital gain or loss, but its current fair market value is what would be used on the statement of financial position. A credit card balance would show up on the statement of financial position, not the cash flow statement. The basis of inherited stock is needed when the stock is sold—its current fair market value is what would be used on the statement of financial position.

Question 36

Sue has both an individual account with her local FDIC insured bank, as well as a joint account with her brother Dean. What is the maximum amount of FDIC insurance that Sue could have personally with these two accounts?

Answer 36

$500,000
The FDIC insurance amount is $250,000 per ownership category. In this case, Sue has two ownership categories, single and joint. Each would have a maximum amount of coverage of $250,000 for Sue.

Question 37

Purchasing power risk is related to

Answer 37

the rate of inflation.

Question 38

Which one of the following bonds is selling at a premium?

A)
6% Triad Industries, A rated, current price of $965
B)
11% Valez Corp., BBB rated, current price of $1,001
C)
7% Wellness Corp., AA rated, current price of $978
D)
13% Domino Industries, BB rated, current price of $995

Answer 38

11% Valez Corp., BBB rated, current price of $1,001

Question 39

Passive losses are best described as losses from

Answer 39

a business in which the investor does not materially participate.

Question 40

Which education credits or contributions does NOT have any phaseouts related to a taxpayer’s income?

Answer 40

Contributions to Section 529 accounts are not limited by the adjusted gross income (AGI) of the donor. Contributions to Coverdell accounts are phased out based on AGI, and so is the ability to use either the American Opportunity or Lifetime Learning credits.

Question 41

Vince works for Titan Industries, which contributes to a profit-sharing plan for all of its employees. The plan uses 2-to-6-year graded vesting, and Vince’s current balance in the account is $10,000. If Vince were to leave for another job, and he has completed four years of service, what would his vested balance amount be?

Answer 41

$6,000

20% 0 years
40% 2 years
60% 4 years
80% 6 years

Question 42

List the progression through the individual tax return (IRS Form 1040) in the CORRECT order

Answer 42

Gross income, adjusted gross income, standard or itemized deduction, taxable income, tax credits is listed in the correct order.

Question 43

List a type of exposure that would be covered by a personal umbrella liability policy

Answer 43

Mary is sued by the person with whom she just had an automobile accident while picking up her son at soccer practice.

Personal umbrella liability policies cover nonbusiness, nonprofessional personal liability exposures. Bill’s investment planning work would require professional liability coverage (errors and omissions). Watercraft that is excluded under a homeowners policy is not covered. There is no coverage for damage to the insured’s property and, as you cannot be liable to yourself, there is not coverage.

Question 44

Based on the following information about your clients—Stephen and Roxanne—what amount is available for their emergency fund, and is that amount adequate?

Salaries	annual	$75,000
Rental Income	annual	$20,000
Additional Investment Income	annual	$15,000
Fixed Expenses	monthly	$5,000
Variable Expenses	monthly	$2,500
Money Market	balance	$12,500
Passbook Savings	balance	$4,000
AAA Corporate Bond (matures in 10 years)	balance	$10,000
Stock Portfolio	balance	$165,000
IRA	balance	$18,500

Answer 44

$16,500; no

It is recommended to have liquid assets equal to three to six months of expenses (fixed and variable). While the clients have $210,000 in total assets, only the $16,500 in money market and passbook savings would be considered liquid. The clients’ monthly expenses are $7,500. Three times their monthly expenses is $22,500, so they would need at least an additional $6,000 in liquid assets to have an adequate emergency fund for a couple. Six months of funds to cover expenses is recommended for a single person.

Question 45

What are the implications if Britney and Calvin own a piece of property as joint tenants with right of survivorship (JTWROS), and Britney dies?

Answer 45

Calvin now owns the property, and nothing goes to Britney’s estate.

With JTWROS, when one of the tenants dies, she relinquishes all rights to the property, and it goes to the living survivor. This form of ownership does not work well if one of the tenants wants to leave her share to someone other than the joint tenant.

Question 46

Which business forms is a separate, taxable entity under the Internal Revenue Code and does not allow flow-through taxation to the owners?

Answer 46

C corporation

Question 47

property held as tenants by the entirety

Answer 47

The interest of a deceased tenant passes by right of survivorship outside of the probate process.

Tenancy by the entirety has the same right of survivorship feature as joint tenancy, and thus, it acts as a will substitute. The tenants, though, must be married to each other.