FP 99 Flashcards
Sam is a financial advisor who always uses the financial planning process (consistent with the factors laid out by the CFP Board) when dealing with clients. In which of the following situations would Sam be practicing single-purpose financial planning?
I. when he sells key-person life insurance to a single client who owns a small business
II. when he assists a single client with the client’s income, gift, and estate tax planning
(A) I only
Which of the following statements regarding the use of insurance for risk financing is (are) correct?
I. Insurance involves the transfer of risk to an insurance company for a relatively small premium.
II. The use of insurance is especially appropriate when both the frequency and severity of the loss are high
(A) I only
All of the following statements concerning the laws of intestate succession (or intestacy) are correct EXCEPT
(A) Distribution of assets under intestacy laws is identical in all states.
(B) If Alison dies without a valid will, her assets will be transferred according to the laws of intestate succession.
(C) Distributing assets under intestacy may make one’s estate subject to more taxes and other administrative expenses.
(D) State intestacy laws also apply to transfers under a will that is deemed invalid.
(A) Distribution of assets under intestacy laws is identical in all states.
Which of the following statements regarding a testamentary trust is (are) correct?
I. It is created under the will of a testator.
II. It becomes part of a deceased’s nonprobate estate.
(A) I only
Which of the following forms of jointly owned property becomes part of the probate estate at an owner’s death?
(A) property owned as a tenancy by the entirety
(B) property owned as a joint tenancy with right of survivorship
(C) property owned as community property
(D) property owned as a tenancy in common
Correct Answer
(D) property owned as a tenancy in common
All of the following statements concerning a taxpayer’s standard deduction are correct EXCEPT
(A) The amount of the standard deduction depends on a taxpayer’s filing status.
(B) The taxpayer may elect either the standard deduction or itemized deductions.
(C) The standard deduction amounts are indexed annually for inflation.
(D) The standard deduction is a type of “above the line” deduction.
(D) The standard deduction is a type of “above the line” deduction.
Which of the following individuals will have his or her Social Security benefits reduced or terminated because of the Social Security earnings test?
(A) Adam, a retired worker aged 62, who earns $35,000 annually from interest and dividends
(B) Barbara, a retired worker aged 64, who earns $35,000 annually from self-employment
(C) Charles, a retired worker aged 68, who earns $35,000 annually from consulting work
(D) Diane, a retired worker aged 64, whose only other income is $35,000 annually from an employer-provided pension
(B) Barbara, a retired worker aged 64, who earns $35,000 annually from self-employment
All of the following are methods for measuring an investment’s return EXCEPT
(A) current yield
(B) nominal rate of return
(C) holding-period return
(D) approximate yield
(B) nominal rate of return
Which of the following statements regarding long-term disability income plans is (are) correct?
I. Most long-term disability income policies provide benefits of 90 to 100 percent of the insured’s earnings.
II. Long-term disability income plans are commonly called sick-pay plans.
Correct Answer
(D) Neither I nor II
Which of the following statements concerning Social Security disability benefits is correct?
(A) Most claims for Social Security disability benefits are approved within 3 months.
(B) When a claim for Social Security benefits is approved, the benefits begin during the first full month after the disability is incurred.
(C) The definition of disability under Social Security is identical to the definition found in most individual DI insurance policies.
(D) The definition of disability under Social Security is very strict, which makes it difficult to get approved for benefits.
(D) The definition of disability under Social Security is very strict, which makes it difficult to get approved for benefits.
All of the following are examples of common exclusions in liability insurance coverage for a homeowners policy EXCEPT:
(A) Defense of the insured against groundless, false, or fraudulent lawsuits
(B) Liability arising out of the sale of a controlled substance
(C) Bodily injury to the insured
(D) Losses caused intentionally
(A) Defense of the insured against groundless, false, or fraudulent lawsuits
The Social Security and Medicare programs are important to financial advisors and their clients for which of the following reasons?
I. The most significant insurance expense for most individuals is their FICA contributions to these programs.
II. These programs form the foundation on which employee benefits and individual insurance plans are built.
(C) Both I and II
All of the following statements regarding traditional long-term care insurance premiums are correct EXCEPT
(A) The longer the elimination period selected for a policy, the lower will be the policy’s premium.
(B) Most insurers offer a premium discount if both spouses purchase coverage from the company.
(C) Inflation protection is typically included in most policies without additional premium costs.
(D) The longer the maximum benefit period selected for a policy, the higher will be the policy’s premium.
Correct Answer
(C) Inflation protection is typically included in most policies without additional premium costs.
Bill owns a municipal bond with a tax exempt yield of 4 percent. Bill is in the 33 percent marginal income tax bracket for 2016. What is Bill’s equivalent fully taxable yield from the bond?
(A) 4.00% x (1 + 0.33)
(B) 4.00% ÷ (1 – 0.33)
(C) 4.00% x (1 – 0.33)
(D) 4.00% ÷ (1 + 0.33)
(B) 4.00% ÷ (1 – 0.33)
All of the following are a “core benefit” in Medicare Supplement (Medigap) policies EXCEPT
(A) payment of the Part B percentage participation (usually 20 percent) for Medicare-approved physicians’ charges
(B) payment of all prescription drug benefits (after an initial deductible)
(C) payment for the first 3 pints of blood each year
(D) extended hospital coverage for an additional 365 days after Medicare coverage ends
(B) payment of all prescription drug benefits (after an initial deductible)
Which of the following statements regarding tax credits is (are) correct?
I. They are expense items that reduce the amount of a taxpayer’s income subject to taxation.
II. They are beneficial to a taxpayer but not as valuable as deductions of an equal amount.
(D) Neither I nor II
Bob is moving into a condominium that he bought, and he wants a homeowners insurance policy to protect the unit and its contents. As Bob’s insurance advisor, which of the following homeowners forms would you recommend that he buy?
(A) HO-2
(B) HO-4
(C) HO-6
(D) HO-8
(C) HO-6
All of the following are considered roadblocks to retirement saving EXCEPT
(A) unexpected expenses
(B) frequent employment changes
(C) a large inheritance
(D) inadequate insurance coverage
(C) a large inheritance
The growth of employee benefits stems from all of the following factors EXCEPT
(A) falling employee productivity
(B) increasing urbanization
(C) cost advantages
(D) government legislation
(A) falling employee productivity
All of the following are common definitions of disability found in a DI policy EXCEPT
(A) own-occupation
(B) any-occupation
(C) modified any-occupation
(D) modified own-occupation
(C) modified any-occupation
Which of the following statements concerning investment companies is correct?
I. A mutual fund is a closed-end investment company.
II. At formation, a closed-end investment company issues a given number of shares and rarely, if ever, issues additional shares.
(B) II only
Step 6 (Implementing the Recommendation(s)) of the financial planning process is when the advisor
(A) reviews changes in the client’s circumstances and the financial environment
(B) identifies the strengths and weaknesses in the client’s present financial condition
(C) does fact-finding by gathering considerable information from the client
(D) motivates and assists the client in completing each of the steps to implement the entire financial plan
(D) motivates and assists the client in completing each of the steps to implement the entire financial plan
Which of the following types of retirement plans can be adopted only by tax-exempt organizations and public schools?
(A) 403(b) plans
(B) SEPs
(C) SIMPLEs
(D) 401(k) plans
(A) 403(b) plans
Which of the following statements concerning investing and speculating is correct?
(A) Purchasing a lottery ticket, for most people, is a method of investing.
(B) Purchasing “penny stocks” is a common form of investing.
(C) Investing is purchasing an asset with consideration and knowledge of its expected return and/or risk.
(D) A recommended planning strategy for accumulating retirement funds is to have approximately 10 percent of one’s portfolio in penny stocks.
(C) Investing is purchasing an asset with consideration and knowledge of its expected return and/or risk.
The most important specialization in financial planning, based on the number of people affected, is
(A) education planning
(B) divorce planning
(C) closely held business planning
(D) nontraditional family planning
(A) education planning
Which of the followings statements concerning the definitions of disability used in disability income insurance policies is correct?
(A) The “any occupation” definition is the most narrow and strict definition of disability.
(B) The “own occupation” definition is not used in individual DI insurance contracts.
(C) The “any occupation” definition makes it easier to successfully claim benefits than the “own occupation” definition.
(D) A DI contract using the “any occupation” definition cannot impose an elimination (or waiting) period before benefits are paid.
(A) The “any occupation” definition is the most narrow and strict definition of disability.
Which of the following statements concerning asset allocation is (are) correct?
I. Asset allocation should precede asset selection.
II. Asset allocation models recommend specific assets to buy for an investor’s portfolio.
(A) I only
Which of the following statements concerning human life value is correct?
(A) Human life value is based on a group’s sharing a common risk such as premature death.
(B) A person’s human life value is identical to his or her net worth at any time.
(C) A person’s human life value is the capitalized present value of his or her future net earnings.
(D) A person’s human life value is based on the needs of his or her survivors.
(C) A person’s human life value is the capitalized present value of his or her future net earnings.
All of the following are types of income annuities EXCEPT
(A) Single premium immediate annuities
(B) Deferred income annuities
(C) Structured annuities
(D) Qualified longevity annuity contracts
(C) Structured annuities
Expenses that tend to increase for new retirees include all of the following EXCEPT
(A) utilities and telephone costs
(B) medical and dental costs
(C) entertainment and dining costs
(D) income and property taxes
(D) income and property taxes
All of the following statements concerning tax deductions and tax credits are correct EXCEPT
(A) A tax deduction is a dollar-for-dollar reduction of the actual tax payable.
(B) A $1,000 tax credit is more beneficial to a taxpayer than a $1,000 tax deduction.
(C) A $1,000 tax deduction for a taxpayer in the 33 percent marginal tax bracket will reduce her taxable income by $1,000.
(D) A $1,000 tax credit for a taxpayer in the 15 percent marginal tax bracket will reduce his tax payable by $1,000.
(A) A tax deduction is a dollar-for-dollar reduction of the actual tax payable.
Which of the following typically is the most expensive benefit for employers to provide?
(A) medical expense insurance
(B) life insurance
(C) disability income insurance
(D) dental insurance
(A) medical expense insurance
Which of the following statements concerning tax rates is (are) correct?
I. A taxpayer’s marginal tax rate generally is less than her effective tax rate.
II. A tax credit will reduce a taxpayer’s effective tax rate.
(B) II only
All of the following are types of government debt securities EXCEPT
(A) revenue bonds
(B) general obligations
(C) agency bonds
(D) convertible bonds
(D) convertible bonds
All of the following are estate planning techniques that a financial professional may recommend, depending on the client situation and needs, EXCEPT
(A) intestacy
(B) durable power of attorney
(C) living will
(D) healthcare power-of-attorney
(A) intestacy
All of the following statements concerning homeowners insurance policies are correct EXCEPT
(A) Homeowners policies provide both property coverage and liability coverage to an insured.
(B) All homeowners policies provide a standardized amount of property coverage.
(C) Homeowners policies may cover property using either a “named perils” or “open perils” approach.
(D) The HO-4 homeowners policy form covers those who live in a rented dwelling or apartment.
(B) All homeowners policies provide a standardized amount of property coverage.
Determining whether a particular investment is suitable for a client requires the financial advisor to consider all of the following EXCEPT
(A) goals for making the investment
(B) possibility of inheriting a large sum of money
(C) psychological attitudes toward risk taking
(D) capacity to sustain a financial loss
(B) possibility of inheriting a large sum of money
Sandra receives interest semiannually from a $1,000 bond she owns and gives it to her son, Brett. Which of the following tax doctrines explains why Sandra is required to pay income tax on the interest income even though Brett actually receives it?
(A) constructive receipt doctrine
(B) shotgun doctrine
(C) fruit and tree doctrine
(D) economic benefit doctrine
(C) fruit and tree doctrine
Tom wants to buy a life insurance policy that will give him some flexibility in changing the death benefit after policy issue. He also wants a policy with flexible premiums. Which of the following types of life insurance would you recommend?
(A) traditional whole life
(B) variable life
(C) universal life
(D) 20-year level term
(C) universal life
Which of the following assets would be subject to the probate process in most states?
(A) a condo in the name of Albert and Susan Smith, jointly owned with right of survivorship
(B) an annuity, owned by Susan Smith, with her daughter Jennifer as the sole beneficiary
(C) a life insurance policy on Albert Smith, naming his son Alan as the sole beneficiary
(D) a 1955 classic Corvette, owned solely by Albert Smith
(D) a 1955 classic Corvette, owned solely by Albert Smith
Which of the following individuals would currently be eligible for Social Security benefits?
I. Alison, a 60-year-old single worker, who has 60 credits under Social Security
II. Beth, a 50-year-old widow, whose youngest child recently had his 12th birthday
(B) II only
Which of the followings statements concerning Roth IRAs is (are) correct?
I. Roth contributions may be fully deductible, partially deductible, or nondeductible for the participant.
II. Distributions from a Roth IRA are always tax-free.
Neither I nor II
In 2019, Pete had unreimbursed medical expenses totaling $9,500. If Pete has an adjusted gross income (AGI) of $80,000 and he itemizes deductions, how much of the medical expenses will he be allowed to deduct for income tax purposes?
(A) 10% x $9,500
(B) $9,500 – (10% x $80,000)
(C) 10% x $80,000
(D) $9,500
(B) $9,500 – (10% x $80,000)
Which of the following statements concerning universal life (UL) insurance is (are) correct?
I. All interest payments in a UL policy are guaranteed to the policyowner.
II. Agents who sell UL insurance must be registered with FINRA and have state insurance licenses.
(D) Neither I nor II
All of the following business entities are classified as pass-through entities for taxation EXCEPT
(A) sole proprietorships
(B) partnerships
(C) S Corporations
(D) C Corporations
(D) C Corporations
Which of the following statements regarding coverage to supplement Medicare is (are) correct?
I. Only about 5 to 10 percent of Medicare recipients have some type of coverage to supplement Medicare.
II. The NAIC initally adopted 10 standard Medigap plans that required specified basic benefits.
B) II only
Which of the following statements concerning expected return and risk of an investment is (are) correct?
I. The greater the range of possible returns, the less risky the investment.
II. The expected return of an investment should be higher for riskier investments
B) II only
Which of the following statements regarding a worker’s primary insurance amount (PIA) under Social Security is (are) correct?
I. It is the primary amount a worker’s beneficiary receives as a lump sum because of the worker’s death.
II. It is the amount on which monthly income for a worker’s eligible dependents is based.
(B) II only
Which of the following gifts will require Jennifer and Adam, a married couple, to file a federal gift tax return?
I. a joint gift of $100,000 from Jennifer and Adam to their son David
II. a transfer of $100,000 from Jennifer’s brokerage account to Adam’s savings account
(A) I only
All of the following are examples of nonprobate property that is transferred to the deceased’s beneficiary by operation of law EXCEPT
(A) life insurance proceeds payable to a beneficiary
(B) property held jointly with survivorship rights
(C) property held in a revocable living trust
(D) a joint securities account with survivorship rights
(A) life insurance proceeds payable to a beneficiary
All of the following are examples of tax avoidance EXCEPT
(A) Mel claims her itemized deductions, which are greater than her standard deduction
(B) Chen donates a highly appreciated stock position to a charity
(C) Lashay defers $15,000 this year to contribute to her 401(k)
(D) Mina doesn’t report income when her customers pay her in cash
(D) Mina doesn’t report income when her customers pay her in cash
All of the following are phases of the financial life cycle EXCEPT
(A) College years
(B) Early career
(C) Career development
(D) Peak accumulation
(A) College years
Which of the following statements regarding asset allocation is correct?
Asset allocation models are recommended investment portfolios for different age bands.
Asset allocation is the process of selecting different categories of assets and the percentage to be placed in each category.
Asset allocation typically comes after asset selection.
While asset allocation is important, research shows that it is far less important than asset selection.
Asset allocation is the process of selecting different categories of assets and the percentage to be placed in each category.
All of the following statements regarding negotiated and dealer markets are correct EXCEPT:
(A) In a negotiated market, sellers list their offerings with brokers who seek to attract buyers.
(B) In a dealer market, one or more dealers typically make an active market by offering to buy and sell as much of a particular security as desired by investors.
(C) In a dealer market, ultimately, state governments bears the risk of a dealer holding an inventory of the security.
(D) In a negotiated market, the transaction does not take place on the floor of an exchange.
(C) In a dealer market, ultimately, state governments bears the risk of a dealer holding an inventory of the security.
All of the following statements regarding preferred stock are correct EXCEPT:
(A) Preferred stockholders have the right to receive dividends before common stockholders.
(B) Many preferred stocks have a cumulative provision, which requires the corporation to pay all the skipped preferred dividends before paying a dividend to common shareholders.
(C) Only preferred stockholders elect the board of directors that oversees the management of the firm.
(D) Preferred stockholders have the right to receive up to a specified amount for each share at the time of liquidation.
(C) Only preferred stockholders elect the board of directors that oversees the management of the firm.
All of the following are basic characteristics of a managed plan EXCEPT
(A) Controlled access to providers
(B) Preventive care
(C) Risk sharing
(D) Low-quality care
D) Low-quality care
Which of the following represent(s) a planning problem associated with nonqualified plans?
I. Promised benefits are typically subject to loss for a variety of reasons.
II. They have somewhat inflexible withdrawal provisions
(C) Both I and II
Which of the following describes a nontax advantage of making lifetime gifts?
I. The donated property is protected from the claims of the donee’s creditors.
II. The donor gets the pleasure of seeing the beneficiary enjoy the gift.
II only
Which trend is associated most with the development of new financial products and increasing the ability to customize them to individual client needs?
Rising median age
Increase in dual-income families
Volatility of financial conditions
Technological change
Technological change
All of the following are qualifying events for which employees or their dependents can extend medical expense coverage under COBRA EXCEPT
(A) Death of the covered employee
(B) Divorce of the covered employee and spouse
(C) Termination of employee for any reason, including gross misconduct
(D) A child’s ceasing to be an eligible dependent under the plan
(C) Termination of employee for any reason, including gross misconduct
Which of the following is a key difference between a defined-benefit plan and a defined-contribution plan?
The costs for a defined-contribution plan are more predictable.
Defined-benefit plans provide much greater flexibility in terms of annual funding.
An employer bears greater risk with a defined-contribution plan.
Defined-benefit plans have no IRS limitations on benefits or contribution amounts.
The costs for a defined-contribution plan are more predictable.
Which of the following processes is used to deal with pure risks involving the possible damage or destruction of property or legal liability?
Risk management
Financial needs analysis
Cash flow analysis
Capital needs analysis
Risk management
Which of the following statements regarding the alternative minimum tax (AMT) is (are) correct?
I. It ensures a taxpayer pays a minimum amount of income tax.
II. The AMT requires the taxpayer to add back certain deductions allowed for regular tax purposes in order to calculate the AMT.
Both I and II
Which of the following represent(s) how variables related to a client’s retirement plan can change and adversely affect the plan?
I. Inflation has averaged 2 percent, rather than the expected 3 percent, over the past 10 years.
II. At her projected retirement age, the client decides to work at least two more years because she’s healthy and enjoys her job.
Neither I nor II
Which of the following statements regarding eligibility for Medigap policies is (are) correct?
I. Persons aged 65 or older may buy a Medigap policy only if they are receiving Social Security benefits.
II. Persons aged 65 or older may buy any available Medigap policy, regardless of health status, during the 6-month period after initial enrollment for Medicare Part B.
II only
Which of the following statements regarding dollar-cost averaging is (are) correct?
I. It means that the investor buys more shares when prices are low.
II. It is difficult to implement with mutual funds.
I only
Ulonda owns some tax-exempt municipal bonds that yield 2.40 percent. If Ulonda is in the 24 percent marginal tax bracket, which equation below represents her equivalent fully taxable yield?
2.40% x (1 – 0.24)
2.40% ÷ (1 + 0.24)
2.40% x (1 + 0.24)
2.40% ÷ (1 – 0.24)
2.40% ÷ (1 – 0.24)
Which of the following property passes under the laws of intestate succession if an individual dies without a valid will?
All property
Only non-probate property
All probate property
Only personal property
All probate property
Which of the following statements regarding Medicare Part C is correct?
It provides coverage for prescription drugs.
It enables Medicare beneficiaries to buy Medigap policies to cover medical expenses not paid by Medicare.
Referred to as Medicare Advantage, Part C plans provide benefits available under Parts A and B, and often include or, for an additional fee, offer other benefits.
It is jointly funded by the federal government and the states.
Referred to as Medicare Advantage, Part C plans provide benefits available under Parts A and B, and often include or, for an additional fee, offer other benefits.
All of the following are examples of investment assets EXCEPT
(A) Stock
(B) Mutual fund
(C) Car
(D) ETF
Car
At a minimum, a comprehensive financial plan should address all of the following subjects as major planning areas EXCEPT
(A) Estate planning
(B) Retirement planning
(C) Investment planning
(D) Divorce planning
(D) Divorce planning
Which of the following medical expenses would likely be payable under Medicare Part A?
A visit to the doctor for strep throat
A five-day stay in the hospital
A prescription for antibiotics to treat strep throat
Dental expenses
A five-day stay in the hospital
Malik would like his sister, Jordan, to be able to enjoy the exclusive use and possession of a home Malik currently owns for as long as Jordan lives. However, when Jordan dies, Malik would like the home to go to his daughter, Tasha. Which of the following ways could Malik transfer ownership to Jordan to achieve his goals?
I. Life estate
II. Fee simple estate
I only
Which of the following statements regarding Coverage E, personal liability coverage, on a homeowners insurance policy is correct?
It provides protection for legal liability involving bodily injury or property damage.
It provides protection for legal liability involving personal injury to others.
It is very different from other liability insurance coverage.
It won’t provide coverage if a suit is groundless, false, or fraudulent.
It provides protection for legal liability involving bodily injury or property damage
Examples of personal risks include which of the following?
I. Disability
II. Unemployment
(C) Both I and II
Which of the following situations will result in the greatest tax savings?
Shaq, who is in the 24-percent tax bracket, receives a $2,000 tax credit.
Jack, who is in the 32 percent tax bracket, receives a $2,000 tax deduction.
Isabella, who is in the 32 percent tax bracket, excludes $2,000 from her federal income.
Monet, who is in the 12-percent tax bracket, receives a $2,500 tax credit.
Monet, who is in the 12-percent tax bracket, receives a $2,500 tax credit.
Which of the following statements regarding Medicare Part D is (are) correct?
I. Part D plans may be part of a Medicare advantage plan or a stand-alone plan.
II. Part D plans cover dental and vision expenses.
I only
All of the following are characteristics of IRAs EXCEPT
(A) Any person under age 70 ½ who receives compensation may make a contribution to a traditional IRA up to the lesser of the IRS annual limit or 100 percent of compensation.
(B) Contributions to a traditional IRA are deductible if certain eligibility requirements are met.
(C) Distributions from a Roth IRA are tax-free if they meet certain IRS criteria.
(D) Contributions to a Roth IRA are deductible, regardless of the taxpayer’s level of income.
(D) Contributions to a Roth IRA are deductible, regardless of the taxpayer’s level of income.
All of the following statements regarding long-term care insurance policies are correct EXCEPT:
(A) The majority of new policies pay benefits on a reimbursement basis.
(B) Home health care is typically not covered by long-term care insurance.
(C) Under a pool of money approach, there is an amount of money that can be used to make benefit payments as long as the pool of money lasts.
(D) The cost of an automatic increase option is built into the initial premium.
(B) Home health care is typically not covered by long-term care insurance.
Ivan passes away at age 65. All of the following family members may be eligible for some type of Social Security benefit on his earnings record EXCEPT
(A) His ex-wife, to whom he was married for five years
(B) His son, age 17
(C) His wife who is caring for his children, ages 12 and 17
(D) His daughter, age 12
(A) His ex-wife, to whom he was married for five years
All of the following are common roadblocks that prevent clients from accumulating adequate retirement savings EXCEPT
(A) Inadequate insurance coverage
(B) Marriage
(C) Divorce
(D) Frequent changes of employers
(B) Marriage
Which of the following statements regarding the standard deduction is correct?
The taxpayer may claim the standard deduction in lieu of itemized deductions on Schedule A.
The standard deduction is subtracted from gross income to determine adjusted gross income.
The amount of the standard deduction is the same regardless of the taxpayer’s filing status.
The standard deduction is only increased if Congress passes new tax legislation.
The taxpayer may claim the standard deduction in lieu of itemized deductions on Schedule A.
All of the following assets are liquid EXCEPT
(A) Shares of ABC stock
(B) Cash
(C) Money market account
(D) U.S. Treasury bill
(A) Shares of ABC stock
All of the following statements regarding A/B trust arrangements are correct EXCEPT:
(A) The A/B trust arrangement results in some estate tax being paid at the death of the first spouse.
(B) The A trust receives assets in a manner that qualifies them for the federal estate tax marital deduction and provides for maximum access to the surviving spouse.
(C) The B trust is designed not to qualify for the marital deduction and receives assets equal to roughly the applicable exclusion amount.
(D) The A/B trust arrangement makes maximum use of each spouse’s applicable credit amount.
(A) The A/B trust arrangement results in some estate tax being paid at the death of the first spouse.
Which of the following involves the possibility of financial loss or gain?
Pure risk
Uncertainty
Speculative risk
Personal risk
Speculative risk
Which of the following is (are) considered to be gross income for federal income tax purposes?
I. Gambling winnings
II. Gifts and inheritance
I only
Which of the following would be considered a legitimate eligibility requirement for employee benefits?
Full-time employment status
Gender
Religion
Marital status
Full-time employment status
Which of the following statements regarding how Social Security and Medicare are financed is (are) correct?
I. Social Security and Medicare Part A are financed through payroll and self-employment taxes.
II. Employees pay an additional 0.9 percent Medicare tax on wages in excess of $250,000 for joint filers and $200,000 for single filers.
Both I and II
Mel owns a rental unit that produces $10,000 in net income each year. The rent is paid to an account owned by her nephew, Matt. Matt also pays all of the expenses related to the rental unit out of that account. Which of the following statements regarding the taxation of the income is correct?
(A) Matt will need to include the $10,000 as income under the economic benefit doctrine.
(B) Mel will need to include the $10,000 as income under the doctrine of the fruit and tree.
(C) Matt will need to include the $10,000 as income under the constructive receipt doctrine.
(D) Each will need to include $5,000 as income under the doctrine of the fruit and tree.
(B) Mel will need to include the $10,000 as income under the doctrine of the fruit and tree.
Requirements for a valid will include which of the following?
I. The will must be notarized.
II. The testator must file a copy with the probate court when she or he executes it.
Neither I nor II
Which of the following statements about risk as it relates to investments is correct?
An asset with a narrow range of possible returns is considered risky.
Investment risk refers to the probability that returns are uncertain.
Investment risk is measured by the likelihood that realized returns will differ from expected returns.
An asset with a wide range of possible returns is consider more secure
Investment risk is measured by the likelihood that realized returns will differ from expected returns.
Which of the following would be considered a common financial goal people have?
I. Increasing leverage
II. Buying an antique car
(D) Neither I nor II
Marla is a financial professional who always uses the financial planning process (consistent with the factors laid out by the CFP Board) when dealing with clients. If she focuses only on meeting the disability needs of her clients, which of the following best describes her approach to financial planning?
Multiple-purpose approach
Single-purpose approach
Comprehensive approach
Holistic approach
Single-purpose approach
All of the following represent one of the categories of employee benefits EXCEPT
(A) Extra cash payments, other than wages and bonuses based on performance to employees
(B) Tax withholdings paid to federal, state, and local governments
(C) Payments for time not worked
(D) Payments for private insurance and retirement plans
(B) Tax withholdings paid to federal, state, and local governments
Which of the following statements regarding marginal and effective tax rates is correct?
There are seven income brackets, each with a different tax rate applicable, which is a marginal tax rate.
A taxpayer’s effective tax rate will always exceed her marginal tax rate.
A taxpayer’s marginal tax rate is equal to her total tax liability divided by her taxable income.
The marginal tax rate is the rate at which a taxpayer would be taxed if his taxable income were taxed at a constant rate.
There are seven income brackets, each with a different tax rate applicable, which is a marginal tax rate.
All of the following are coverages included in a standard homeowners policy EXCEPT
(A) Dwelling coverage
(B) Coverage for other structures
(C) Coverage on personal property
(D) Coverage for personal injury
(D) Coverage for personal injury
Acme Insurance totaled Maria’s car and wrote her a check for $10,000. A new car will cost her $15,000. Assuming she had no deductible, the $5,000 difference is likely due to
Actual cash value
Replacement cost
Depreciation
Liability
Depreciation
All of the following are reasons financial professionals should be aware of employee benefits EXCEPT
(A) They form the basis of almost all financial plans.
(B) Many employees can purchase additional insurance and retirement benefits through employer-sponsored plans.
(C) Their insurance offerings are always more flexible than those that can be purchased on the individual market.
(D) Many executives can negotiate their own compensation packages, including employee benefits.
(C) Their insurance offerings are always more flexible than those that can be purchased on the individual market.
When analyzing and evaluating the client’s current financial situation, which of the following activities will a financial professional complete?
I. Outline the responsibilities of both the financial professional and client.
II. Disclose the length and scope of the relationship.
Neither I nor II
Which of the following benefits would be considered a qualified benefit under Code Sec. 125 (cafeteria plan)?
Group health plan coverage
Transportation fringe benefits
Scholarships and fellowships
Employee discounts
Group health plan coverage
Which of the following would an advisor do in the “Implementing the Recommendation(s)” step of the financial planning process? [LO 1.1]
(A) Review the changes in the client’s circumstances and the financial environment.
(B) Identify the strengths and weaknesses in the client’s present financial condition.
(C) Gather considerable information from the client via a fact finder.
(D) Motivate and assist the client in completing each of the steps to implement the entire financial plan.
(D) Motivate and assist the client in completing each of the steps to implement the entire financial plan
For insurance and financial planning purposes, risk is defined to mean the [LO 2.1]
(A) possibility of financial loss
(B) uncertainty of financial loss
(C) probability of financial loss
(D) cause of financial loss
(A) possibility of financial loss
Which of the following statements concerning risk is correct? [LO 2.2]
(A) Personal risks include the possibility of damage to your residential property.
(B) Property risks include the possibility of damage to your vehicle or other possessions.
(C) Liability risks include the loss of income from retirement or a disability.
(D) Liability risks cannot be covered by insurance because insurance companies cannot afford to take such large exposures to the risk.
(B) Property risks include the possibility of damage to your vehicle or other possessions.
Which of the following situations represents a speculative risk? [LO 2.1]
(A) the possibility of damaging your new car in an accident
(B) the possibility of a person needing medical care at a hospital
(C) the possibility of losing a wage earner’s income due to premature death
(D) the possibility of a house appreciating or depreciating in market value
(D) the possibility of a house appreciating or depreciating in market value
Insurance is used most efficiently in dealing with risk situations involving losses that are both [LO 2.3]
(A) low frequency and low severity
(B) low frequency and high severity
(C) high frequency and low severity
(D) high frequency and high severity
(B) low frequency and high severity
Which of the following statements concerning life-cycle planning is correct? [LO 1.4]
(A) The career development phase is between ages 25 and 35 for most people.
(B) The preretirement phase typically lasts 10 to 15 years before retirement occurs.
(C) A client in the peak accumulation phase generally has the greatest opportunity for accumulating wealth.
(D) Clients in the early career phase are most concerned with estate planning goals.
(C) A client in the peak accumulation phase generally has the greatest opportunity for accumulating wealth.
If the daily benefit for institutional care in a traditional long-term care insurance policy is $250 and the benefit period is 1,095 days (or 3 years), the policy’s pool of money would be [LO 2.4]
(A) $91,250
(B) $182,500
(C) $273,750
(D) $821,250
(C) $273,750
Kirk is moving into an unfurnished apartment that he just rented. He wants a homeowners policy to protect his personal property. As Kirk’s financial advisor, which of the following homeowners forms would you recommend that he buy? [LO 2.5]
(A) HO-2
(B) HO-4
(C) HO-6
(D) HO-8
B) HO-4
Which of the following types of total-disability definitions contained in disability income policies is most beneficial for an insured? [LO 2.4]
(A) an own-occupation definition
(B) an own occupation for 2 years, then any suitable occupation
(C) an own occupation for 5 years, then any suitable occupation
(D) any occupation for which the insured is reasonably suited by education, training, or experience
(A) an own-occupation definition
A variable universal life (VUL) policy differs from a universal life (UL) policy in which of the following ways? [LO 2.4]/p>
(A) A VUL policy provides for a flexible premium after the first year.
(B) A VUL policy permits partial withdrawals from its cash value.
(C) A VUL policy permits the policyowner to decrease the death benefit at any time.
(D) A VUL policy allows the policyowner to direct the investment of the cash value.
(D) A VUL policy allows the policyowner to direct the investment of the cash value
Trends creating opportunities for advisors engaged in financial planning include which of the following?
I. impact of technology in the financial services industry
II. continuing stability of financial conditions in the economy [LO 1.6]
(A) I only
Reasons people begin financial planning include which of the following?
I. building a retirement fund
II. home purchase/renovation [LO 1.7]
Both I and II
Which of the following statements concerning whole life insurance is (are) correct?
I. The cost per thousand for any given issue age is cheaper for whole life than for term policies.
II. Whole life insurance is appropriate when there is a permanent need for coverage. [LO 2.4]
(B) II only
Which of the following statements regarding Part D (coverage for damage to your auto) of an auto insurance policy is (are) correct?
I. The two primary coverages are “collision” and “other-than-collision.”
II. Damage payments under Part D are subject to a deductible limit chosen by the insured. [LO 2.5]
C) Both I and I
Personal umbrella liability policies typically cover which of the following types of losses?
I. damage to the insured’s own property from a covered peril
II. personal injury in the form of libel and slander [LO 2.5]
B) II only
Which of the following statements regarding Coverage B (other structures) of homeowners insurance policies is (are) correct?
I. Coverage B covers all structures owned by the insured.
II. All losses to other structures covered by Coverage B are settled on an actual cash value basis.
[LO 2.5]
Neither I nor II
Which of the following statements regarding Part B (medical payments coverage) of the Personal Auto Policy (PAP) is (are) correct?
I. Medical expenses of the named insured and/or family members are covered if they are struck by a motor vehicle.
II. Medical expenses of persons other than the named insured and family members are covered if they are injured while in a covered auto. [LO 2.5
C) Both I and II
All of the following advisors using the financial planning process consistent with the factors laid out by the CFP Board would be considered to be practicing single-purpose financial planning EXCEPT [LO 1.2]
(A) a stockbroker who advised a customer to buy shares of common stock of a particular company
(B) a tax attorney who assists clients with their income, estate, and gift tax planning
(C) a banker who opens a trust account for the benefit of a customer’s handicapped child
(D) a life insurance agent who sells key person life insurance to the owner of a small business
(B) a tax attorney who assists clients with their income, estate, and gift tax planning
All of the following statements regarding annuities are correct EXCEPT [LO 2.4]
(A) Life-only payouts guarantee a lifetime income for the annuitant.
(B) Annuities can be purchased on a qualified or nonqualified basis.
(C) Variable annuity account value returns depend on the performance of the subaccounts the annuity owner selects.
(D) Immediate annuities can be used to accumulate a retirement nest egg.
(D) Immediate annuities can be used to accumulate a retirement nest egg.
Loss-control techniques typically available to individuals and families include all the following EXCEPT [LO 2.3]
(A) loss prevention
(B) retention
(C) risk avoidance
(D) loss reduction
(D) loss reduction
All of the following are key terms related to the risk measurement process EXCEPT [LO 2.3]
(A) actual cash value
(B) replacement cost
(C) inflation
(D) depreciation
(C) inflation
All of the following statements concerning life insurance policies are correct EXCEPT [LO 2.4]
(A) Term life policies provide coverage for limited periods such as 5 or 10 years.
(B) Whole life insurance will pay the face amount to a beneficiary upon death of the insured, regardless of when death occurs, if the policy has remained in force.
(C) Universal life insurance policies require payment of at least a minimum premium in all policy years.
(D) Variable universal life (VUL) policies shift the investment risk to the policyowner.
(C) Universal life insurance policies require payment of at least a minimum premium in all policy years.
All of the following statements concerning annuities are correct EXCEPT [LO 2.4]
(A) Annuities can be purchased with either a single premium or on an installment basis.
(B) All deferred annuities are purchased with a single premium, even though the annuity payments are deferred to some future date.
(C) Deferred annuities can provide for liquidation of one’s financial resources over the lifetime of the annuitant.
(D) Deferred annuities provide a tool to accumulate financial resources on a tax-deferred basis.
(B) All deferred annuities are purchased with a single premium, even though the annuity payments are deferred to some future date.
All of the following are common obstacles that prevent or hinder clients from developing effective financial plans EXCEPT [LO 1.8]
(A) the human tendency to procrastinate
(B) the tendency for individuals and families to live beyond their financial means
(C) the lack of financial knowledge among consumers
(D) the lack of available insurance and tax-favored vehicles clients can use to meet financial planning goals
(D) the lack of available insurance and tax-favored vehicles clients can use to meet financial planning goals
All of the following are considered major planning areas that follow the general principles of financial planning EXCEPT [LO 1.7]
(A) insurance planning and risk management
(B) divorce planning
(C) investment planning
(D) estate planning and risk management
(B) divorce planning
Which of the following statements concerning traditional major medical plans is correct? [LO 3.4]
(A) They restrict insureds to specific physicians and hospitals.
(B) They limit reimbursement to reasonable and customary charges.
(C) They are typically less expensive than managed care plans.
(D) They negotiate deep discounts with physicians and hospitals.
(B) They limit reimbursement to reasonable and customary charges.
Dental expenses are paid on a reasonable and customary basis (subject to any exclusions or limitations in the contract) under which type of dental plan? [LO 3.4]
(A) scheduled plan
(B) nonscheduled plan
(C) qualified plan
(D) nonqualified plan
(B) nonscheduled plan
Employer contributions for dependent life insurance are not taxable to the employee if the amount of the coverage on the dependent does not exceed [LO 3.4]
(A) $2,000
(B) $5,000
(C) $10,000
(D) $50,000
(A) $2,000
Emily quits her job at ABC Company to start her own business. Under COBRA, she will be eligible to extend her current group health plans for up to [LO 3.4]
(A) 0 months
(B) 12 months
(C) 18 months
(D) 36 months
(C) 18 months
The cost of continuing coverage under COBRA may be passed on to the employee, but it cannot exceed what percent of the cost of the plan for a similarly situated active employee? [LO 3.4]
(A) 100 percent
(B) 102 percent
(C) 105 percent
(D) 108 percent
(B) 102 percent
Preferred provider organizations (PPOs) typically differ from HMOs in which of the following ways?
I. Employees are not required to use the practitioners or facilities in the plan’s network.
II. PPOs generally do not cover preventive care while HMOs generally do. [LO 3.4]
(A) I only
Characteristics that distinguish HMOs from traditional medical expense contracts include which of the following?
I. HMOs provide for the delivery of medical services.
II. HMOs emphasize control of medical expenses. [LO 3.4]
(C) Both I and II
Which of the following statements concerning taxation of employee benefits is (are) correct?
I. The cost of providing benefits is generally tax deductible for the employer.
II. Taxation is consistent from benefit to benefit and from type of plan to type of plan. [LO 3.4]
(A) I only
Which of the following statements concerning the taxation of disability benefits is (are) correct?
I. All benefits paid from fully contributory plans are taxable income to the employee.
II. All benefits paid from noncontributory plans are received by the employee tax free. [LO 3.4]
(D) Neither I nor II
Which of the following statements concerning employee benefits is (are) correct?
I. Most employee benefits are issued without evidence of insurability on the employee.
II. No underwriting is required for group benefits because all employees are still healthy and actively working. [LO 3.3]
A) I only
All of the following statements regarding the taxation of group term life insurance are correct EXCEPT [LO 3.4]
(A) Premiums are taxable income for key employees if the plans are considered discriminatory.
(B) Death proceeds generally are not taxable income to beneficiaries when paid in one lump sum.
(C) Employer contributions for dependent life coverage are not taxable to the employee if death benefits do not exceed $2,000.
(D) Death proceeds are fully-taxable income to beneficiaries if they are paid in installments over more than one taxable year.
(D) Death proceeds are fully-taxable income to beneficiaries if they are paid in installments over more than one taxable year.
Group medical expense plans containing coordination-of-benefits (COB) provisions have established all of the following priorities for determining which plans pay benefits EXCEPT [LO 3.4]
(A) Coverage as a retired employee is primary to coverage as an active employee.
(B) Coverage as an employee is usually primary to coverage as a dependent.
(C) If a child lives in a two-parent household, the plan of the parent whose birthday falls earlier in the calendar year is primary.
(D) If a child does not live with both parents, the plan of the parent with custody of the child is primary in the absence of a court order specifying otherwise.
(A) Coverage as a retired employee is primary to coverage as an active employee.
Group term insurance contracts often provide additional insurance benefits in the form of all of the following coverages EXCEPT [LO 3.4]
(A) supplemental life insurance
(B) accidental death and dismemberment insurance
(C) dependent life insurance
(D) long-term disability income insurance
(D) long-term disability income insurance
All of the following factors have contributed to the growth of employee benefits EXCEPT [LO 3.1]
(A) industrialization of the American economy
(B) organized labor
(C) the decreasing role of Social Security for American workers
(D) wage controls during the 1940s and 1950s
(C) the decreasing role of Social Security for American workers
All of the following are qualifying events under COBRA EXCEPT [LO 3.4]
(A) the divorce or legal separation of the covered employee and spouse
(B) the spouse of the covered employee becomes eligible for Medicare
(C) a child ceases to be an eligible dependent under the employer plan
(D) the death of the covered employee
B) the spouse of the covered employee becomes eligible for Medicare
Harry owns some municipal bonds that provide him with a tax-exempt yield of 4 percent. If Harry is in the 25 percent marginal income tax bracket, what is his equivalent fully taxable yield from the bonds? [LO 4.5]
(A) 3.25 percent
(B) 4.75 percent
(C) 5.33 percent
(D) 16.00 percent
(C) 5.33 percent
ABC stock is priced at $100 per share and pays an annual dividend of $4 per share. What would be ABC’s after-tax current yield if a taxpayer in the 22 percent marginal income tax bracket were to buy it at this price? [LO 4.5]
(A) 3.12 percent
(B) 3.40 percent
(C) 3.78 percent
(D) 4.00 percent
(A) 3.12 percent
Which of the following is a privilege that provides preferred stockholders a preferential position relative to common stockholders? [LO 4.4]
(A) the right to receive dividends before dividends are paid out to the common stockholders
(B) the right to maintain their relative voting power by purchasing shares of any new issues of common stock
(C) the right to elect the board of directors
(D) the right to vote on issues such as mergers and stock splits
(A) the right to receive dividends before dividends are paid out to the common stockholders
Which of the following asset categories historically has provided the largest average annual before-tax returns? [LO 4.6]
(A) long-term corporate bonds
(B) common stock investments
(C) U.S. Treasury bills
(D) long-term government bonds
(B) common stock investments
The net asset value of an investment company is equal to [LO 4.4]
(A) number of shares outstanding/(total assets + total liabilities)
(B) number of shares outstanding/(total assets − total liabilities)
(C) (total assets + total liabilities)/number of shares outstanding
(D) (total assets − total liabilities)/number of shares outstanding
(D) (total assets − total liabilities)/number of shares outstanding
Which of the following statements regarding an investment’s expected return and risk is (are) correct?
I. An asset with a wide range of possible returns is considered a risky investment.
II. Investing is based on a reasoned consideration of expected return and the risk associated with that return. [LO 4.2]
(C) Both I and II
Which of the following statements concerning corporate debt instruments is (are) correct?
I. If they have features that benefit the bondholders, the interest rate paid will be higher.
II. High yield bonds have strong quality ratings from ratings agencies and are considered
investment-grade securities. [LO 4.4]
(D) Neither I nor II
Components of the interest-rate risk include which of the following?
I. business (default) risk
II. reinvestment-rate risk [LO 4.4]
B) II only
Which of the following statements regarding an open-end investment company is (are) correct?
I. Its shares are traded in the stock market like those of large corporations.
II. It issues a given number of shares at formation and rarely, if ever, issues additional shares. [LO 4.4]
(D) Neither I nor II
Which of the following is (are) a source of investment risk?
I. purchasing power risk
II. interest-rate risk [LO 4.4]
C) Both I and II
Which of the following statements regarding holding periods for common stock investments is (are) correct?
I. Short holding periods, such as one year or less, may produce negative total returns.
II. Individually owned stocks should generally have planned holding periods of at least 5 years.
C) Both I and II
All of the following statements concerning asset allocation models are correct EXCEPT [LO 4.3]
(A) They are portfolio recommendations of asset categories.
(B) They emphasize the category and percentage to be placed in each category.
(C) They provide specific assets in which clients should invest.
(D) They are most effective when they reflect a client’s risk-tolerance level.
(C) They provide specific assets in which clients should invest.
All of the following are considered cash equivalents EXCEPT [LO 4.4]
(A) American depository receipts (ADRs)
(B) nonnegotiable certificates of deposit (CDs)
(C) money market deposit accounts (MMDAs)
(D) U.S. Treasury bills (T-bills)
(A) American depository receipts (ADRs)
All of the following statements regarding the ownership of liquid assets are correct EXCEPT [LO 4.5]
(A) Liquid assets tend to have the lowest expected rates of return.
(B) Owning liquid assets provides flexibility for emergency purposes.
(C) There are often substantial opportunity costs to owning liquid assets.
(D) There typically is a sizable investment risk in owning liquid assets.
(D) There typically is a sizable investment risk in owning liquid assets.
Reasons for the popularity of investment companies include all of the following EXCEPT [LO 4.4]
(A) Each share in an investment company benefits from the pooled diversification of the portfolio.
(B) The wide diversity of investment companies allows an investor to select the portfolio that best suits her objectives.
(C) Investment companies typically perform better than the market averages because they have no fees.
(D) Investment companies have professional managers that select and continuously monitor the portfolio’s securities.
(C) Investment companies typically perform better than the market averages because they have no fees.
Helen has unreimbursed medical expenses totaling $11,000 in 2019. If Helen’s adjusted gross income (AGI) is $80,000 and she itemizes deductions, how much of the medical expenses will she be allowed to deduct for income tax purposes? [LO 5.2]
(A) $3,000
(B) $4,000
(C) $6,475
(D) $7,000
(A) $3,000
Marco owns a rental property but the income goes to his grandson. Most likely, Marco will be taxed on the income based on the [LO 5.8]
(A) fruit and tree doctrine
(B) assignment of income doctrine
(C) constructive receipt doctrine
(D) economic benefit doctrine
(A) fruit and tree doctrine
During the past taxable year, Susan sold some common stock she held for several years and incurred a capital loss of $6,000. Susan had no capital gains during the year, and her other income for the year was $60,000. How much of the capital loss can Susan deduct for the taxable year? [LO 5.9]
(A) none
(B) $3,000
(C) $5,000
(D) $6,000
(B) $3,000
Taxpayers must generally include which of the following in their gross incomes?
I. gifts and inheritances
II. workers’ compensation benefits [LO 5.1]
(D) Neither I nor II
Which of the following statements regarding tax credits is (are) correct?
I. A $100 tax credit provides the taxpayer the same benefit as a $100 deduction.
II. A $200 tax credit is worth more to a taxpayer in the 35 percent bracket than to a taxpayer in the 12 percent bracket. [LO 5.5]
(D) Neither I nor II
Which of the following statements regarding federal income tax rates is (are) correct?
I. The highest marginal tax rate for an individual taxpayer is currently 39 percent.
II. An individual taxpayer’s effective tax rate is always higher than his marginal tax rate. [LO 5.4]
(D) Neither I nor II
Which of the following statements regarding tax-preference items is (are) correct?
I. They provide a taxpayer with greater tax benefits than regular deductions.
II. They are items deductible for regular tax but face different rules under the alternative minimum tax (AMT). [LO 5.6]
(B) II only
Which of the following types of entities are classified as taxable entities?
I. C corporation
II. S corporation [LO 5.10]
(A) I only
All of the following statements concerning itemized deductions are correct EXCEPT [LO 5.3]
(A) All itemized deductions are below-the-line deductions.
(B) A taxpayer can either itemize deductions or claim the standard deduction.
(C) Itemized deductions are claimed on Schedule B of IRS Form 1040.
(D) The standard deduction amounts are indexed annually for inflation.
(C) Itemized deductions are claimed on Schedule B of IRS Form 1040.
All of the following statements regarding tax credits are correct EXCEPT [LO 5.5]
(A) Tax credits are more beneficial to the taxpayer than deductions of an equal amount.
(B) A tax credit is a dollar-for-dollar reduction of the actual tax payable.
(C) Each tax credit has its own set of rules for eligibility.
(D) Tax credits are itemized on Schedule A of IRS Form 1040.
(D) Tax credits are itemized on Schedule A of IRS Form 1040.
All of the following are taxpayer filing statuses for federal income tax purposes EXCEPT [LO 5.4]
(A) married taxpayer filing jointly
(B) married head of household
(C) married taxpayer filing separately
(D) single taxpayer
(B) married head of household
All of the following statements regarding the standard deduction are correct EXCEPT [LO 5.3]
(A) The amount of the standard deduction depends on the taxpayer’s filing status.
(B) The standard deduction is classified as an above-the-line deduction.
(C) The taxpayer may choose to itemize deductions instead of taking the standard deduction.
(D) The standard deduction amounts are indexed annually for inflation.
(B) The standard deduction is classified as an above-the-line deduction.
All of the following are pass-through entities for federal income tax purposes EXCEPT [LO 5.10]
(A) C corporations
(B) limited liability companies (LLCs)
(C) S corporations
(D) partnerships
(A) C corporations
All of the following statements regarding the alternative minimum tax (AMT) for individual taxpayers are correct EXCEPT [LO 5.6]
(A) The taxpayer pays the AMT amount if the AMT is greater than the regular tax.
(B) The AMT is a separate and parallel income tax system to the regular system.
(C) The computational process for determining the AMT is different from that used to determine the regular tax.
(D) The AMT calculation permits taxpayers to deduct the same items that they can deduct for regular tax purposes.
(D) The AMT calculation permits taxpayers to deduct the same items that they can deduct for regular tax purposes.
All of the following statements regarding the standard deduction are correct EXCEPT [LO 5.3]
(A) The taxpayer may claim the standard deduction in addition to her above-the-line deductions.
(B) The amount of the standard deduction is subtracted from gross income to determine adjusted gross income.
(C) The standard deduction amount generally changes annually with an inflation adjustment.
(D) A taxpayer may claim the standard deduction in lieu of claiming itemized deductions on Schedule A of Form 1040.
(B) The amount of the standard deduction is subtracted from gross income to determine adjusted gross income.
Which of the following correctly describes the unit-benefit formula found in defined-benefit pension plans? [LO 6.7]
(A) It directly ties the participant’s pension benefit to both service and salary.
(B) It bases the participant’s pension benefit on final average salary only.
(C) It provides each participant with the same pension benefit.
(D) It provides each participant with a flat benefit amount for each year of service.
(A) It directly ties the participant’s pension benefit to both service and salary.
Which of the following is a method for determining retirement income that assumes that the standard of living enjoyed during the years just prior to retirement will be the determining factor for the standard of living during retirement? [LO 6.5]
(A) the expense method
(B) the capital-utilization method
(C) the capital-retention method
(D) the replacement-ratio method
(D) the replacement-ratio method
Which of the following types of retirement plans is a qualified plan? [LO 6.6]
(A) a SIMPLE plan
(B) a 401(k) plan
(C) a SEP plan
(D) a 403(b) plan
(B) a 401(k) plan
Which of the following statements concerning contributions to traditional IRAs is correct? [LO 6.9]
(A) Contributions may be used to buy life insurance policies.
(B) Contributions may be deductible or nondeductible.
(C) Contributions may be commingled with a taxpayer’s other assets.
(D) The maximum contribution is 10 percent of the taxpayer’s income.
(B) Contributions may be deductible or nondeductible. Contributions
Which of the following expenses tend to decrease for retirees?
I. mortgage payments
II. medical and dental costs [LO 6.5]
(A) I only
I. The employer assumes the preretirement inflation and investment risks.
II. All contributions are allocated to the accounts of individual employees. [LO 6.7]
II Only
Which of the following statements regarding a 403(b) plan is (are) correct?
I. It allows deferrals in the form of a salary reduction chosen by the employee.
II. It can be used in conjunction with most other retirement plans. [LO 6.7]
(C) Both I and II
Which of the following statements regarding a Roth IRA is (are) correct?
I. Contributions can be made even after the owner attains age 70½ if he has earned income.
II. Distributions must begin no later than when the owner attains age 70½. [LO 6.7]
(A) I only
Which of the following statements regarding qualified plans is (are) correct?
I. Distributions can be rolled into an IRA.
II. A SEP is a qualified plan that uses an IRA. [LO 6.7]
(A) I only
Which of the following statements concerning Roth IRAs is (are) correct?
I. Contributions are not deductible.
II. Qualifying withdrawals are not subject to income tax. [LO 6.9]
C) Both I and II
Nonqualified retirement plans are potentially subject to all of the following problems EXCEPT [LO 6.8]
(A) somewhat inflexible withdrawal provisions
(B) the forfeiture or loss of benefits
(C) nondiscrimination rules that limit benefit amounts
(D) the threat of immediate taxation that would reduce the benefit amount
(C) nondiscrimination rules that limit benefit amounts
All of the following statements concerning simplified employee pension plans (SEPs) are correct EXCEPT [LO 6.7]
(A) Contributions typically are allocated as a level percentage of compensation.
(B) The allocation formula may be integrated with Social Security.
(C) All employer contributions are 100 percent vested at all times.
(D) Employers are required to make annual contributions in each plan year.
(D) Employers are required to make annual contributions in each plan year.
All of the following statements regarding SIMPLE plans are correct EXCEPT [LO 6.7]
(A) Assets cannot be invested in life insurance or collectibles.
(B) Participants are allowed to borrow from their accounts.
(C) Participants must be fully vested in all benefits at all times.
(D) Any type of business entity can establish a SIMPLE plan.
(B) Participants are allowed to borrow from their accounts.
All of the following statements regarding defined-benefit plans are correct EXCEPT [LO 6.7]
(A) Plan contributions are not allocated to individual employee accounts.
(B) The employer assumes the risk of preretirement inflation and investment performance.
(C) The costs associated with a defined-benefit plan are unpredictable.
(D) The law specifies the maximum allowable annual contribution that can be made for an employee.
(D) The law specifies the maximum allowable annual contribution that can be made for an employee
All of the following statements regarding a reverse mortgage are correct EXCEPT [LO 6.10]
(A) It typically is available only when the home is the borrower’s principal residence.
(B) If property values erode, the lender may end up with a loss.
(C) It typically is available regardless of the borrower’s age.
(D) It does not have to be repaid as long as the borrower lives in the home.
(C) It typically is available regardless of the borrower’s age.
Which of the following provides the holder the ability to transfer property to a limited class of potential recipients? [LO 7.2]
(A) a power of appointment
(B) a conventional power of attorney
(C) a durable power of attorney
(D) a special power of appointment
(D) a special power of appointment
The most complete ownership interest one can have in property is a [LO 7.2]
(A) fee simple estate
(B) life estate
(C) tenancy by the entirety
(D) future interest
(A) fee simple estate
A life insurance policy death benefit paid to a named beneficiary is an example of a transfer of property by operation of [LO 7.4]
(A) will
(B) law
(C) contract
(D) intestacy
(C) contract
A power of appointment over property that gives the holder the broad power to transfer the property to virtually any recipient is referred to as a [LO 7.2]
(A) special power of appointment
(B) general power of appointment
(C) legal power of appointment
(D) reversionary power of appointment
(B) general power of appointment
Which of the following types of concurrently owned property is freely transferable by a deceased owner’s will? [LO 7.2]
(A) tenancy by the entirety
(B) community property
(C) joint tenancy with right of survivorship
(D) tenancy in common
(D) tenancy in common
Which of the following property transfers at the client’s death is by operation of law? [LO 7.4]
(A) life insurance proceeds payable to a named beneficiary
(B) property transferred by an irrevocable living trust
(C) pay-on-death (POD) accounts
(D) retirement plan death benefits payable to a named beneficiary
(B) property transferred by an irrevocable living trust
Which of the following statements concerning a durable power of attorney is (are) correct?
I. It takes effect immediately upon execution.
II. It can replace or complement a revocable trust. [LO 7.3]
C) Both I and II
Which of the following statements regarding the gift tax annual exclusion is (are) correct?
I. It is available only for gifts to close relatives of the donor.
II. It is available only for gifts that provide the donee with a future interest. [LO 7.5]
(D) Neither I nor II
The federal gift tax applies only if which of the following elements is (are) present?
I. There is a completed transfer and acceptance of the property.
II. The transfer of the property is for less than full and adequate consideration. [LO 7.5]
(C) Both I and II
Advance medical directives include which of the following?
I. durable power of attorney for health care
II. living will [LO 7.3]
(C) Both I and II
All of the following statements concerning tenancy by the entirety are correct EXCEPT [LO 7.2]
(A) It is a property interest restricted solely to spouses.
(B) It is joint ownership of the property with rights of survivorship.
(C) It is a property interest that is disposed of by the will of the deceased spouse.
(D) It is a property interest that is severed automatically upon divorce.
(C) It is a property interest that is disposed of by the will of the deceased spouse.
All the following statements concerning a revocable trust are correct EXCEPT [LO 7.3]
(A) It can receive property from the client that avoids inclusion in the client’s estate at his or her death.
(B) It allows the client to observe the management of trust assets without relinquishing ultimate control of them.
(C) It can be drafted to provide the dispositive directions normally contained in the client’s will.
(D) It avoids the publicity, delay, and some expenses associated with the probate process.
(A) It can receive property from the client that avoids inclusion in the client’s estate at his or her death.
All of the following statements regarding a testamentary trust are correct EXCEPT [LO 7.3]
(A) It escapes probate at the client’s death.
(B) It does not receive property until the client dies.
(C) It is created under the client’s will.
(D) It is not irrevocable until the client dies.
(A) It escapes probate at the client’s death.
All of the following statements regarding a revocable trust are correct EXCEPT [LO 7.3]
(A) The creation involves a transfer that is a completed gift.
(B) A revocable trust will not protect the grantor from a Medicaid spend down if she requires nursing home care.
(C) It becomes irrevocable at the grantor’s death.
(D) Its creation has no effect on the grantor’s gross estate.
(A) The creation involves a transfer that is a completed gift.
All of the following statements regarding a durable power of attorney are correct EXCEPT [LO 7.3]
(A) It can help older clients avoid the trouble and expense of having a guardian or conservator appointed if they lose legal capacity.
(B) It can be designed for use in making medical care decisions.
(C) It becomes inoperative if the principal is incapacitated..
(D) It can give the attorney-in-fact (or agent) the power to manage the client’s assets should the client suffer a permanent or temporary loss of legal capacity.
(C) It becomes inoperative if the principal is incapacitated..
Which of the following statements concerning Medigap insurance plans is correct? [LO 8.6]
(A) Employer-provided Medicare supplement plans must meet all Medigap requirements.
(B) Persons aged 65 or older may buy any Medigap plan after enrolling in Medicare Part B.
(C) Medigap insurance only covers deductibles and copayments for expenses paid under Medicare Part B.
(D) All Medigap insurance plans issued since 2006 are required to provide prescription drug coverage.
(B) Persons aged 65 or older may buy any Medigap plan after enrolling in Medicare Part B.
Jean died and left behind a surviving spouse, aged 37, and a child, aged 12. The surviving spouse’s salary exceeds the earnings test threshold by $2,000. The surviving spouse’s annual benefit amount will be reduced by [LO 8.2]
(A) $500
(B) $1,000
(C) $2,000
(D) $4,000
(B) $1,000
Which of the following statements regarding monthly Social Security benefits for the family members of a 67-year-old retiree receiving full retirement benefits is correct? [LO 8.2]
(A) The 60-year-old spouse of the retired worker is eligible to receive 75 percent of the worker’s PIA.
(B) The 15-year-old daughter of the retired worker is eligible to receive 50 percent of the worker’s PIA.
(C) The 22-year-old son of the retired worker is eligible to receive 75 percent of the worker’s PIA if he stays in college.
(D) The 87-year-old mother of the retired worker is eligible to receive 50 percent of the worker’s PIA if she is a dependent.
(B) The 15-year-old daughter of the retired worker is eligible to receive 50 percent of the worker’s PIA.
Which of the following statements concerning quarters of coverage under Social Security is correct? [LO 8.2]
(A) The amount of earnings necessary for a quarter of coverage is adjusted annually.
(B) Credit for up to 10 quarters of coverage may be earned in any one calendar year.
(C) A person is fully insured if he or she has at least 20 quarters of coverage.
(D) A person is currently insured if he or she has at least four quarters of coverage.
(A) The amount of earnings necessary for a quarter of coverage is adjusted annually.
Which of the following statements regarding Social Security disability benefits is correct? [LO 8.2]
(A) Benefits are subject to a waiting period and commence one year after a disability begins.
(B) Benefits are payable as long as the worker who is disabled is unable to perform his or her regular job.
(C) Benefits are payable as long as the worker with disabilities is considered to be currently insured.
(D) Benefits cease at full retirement age but are replaced by comparable Social Security retirement benefits.
(D) Benefits cease at full retirement age but are replaced by comparable Social Security retirement benefits.
Which of the following persons will have his or her Social Security benefits reduced or terminated because of the earnings test? [LO 8.2]
(A) a widow, aged 39, who receives survivors benefits and has annual income of $24,000 from a full-time job
(B) a child, aged 12, who receives survivors benefits and has a monthly annuity income of $1,000 from a settlement option of her father’s life insurance policy
(C) a retired worker, aged 73, who earns $14,000 annually from part-time employment
(D) a retired worker, aged 64, who receives $18,000 annually from investment income
(A) a widow, aged 39, who receives survivors benefits and has annual income of $24,000 from a full-time job
Which of the following statements regarding Medicare Advantage programs is correct? [LO 8.4]
(A) Health maintenance organizations (HMOs) cannot be used in a Medicare Advantage plan.
(B) Medicare Advantage plans are required to include prescription drug coverage.
(C) Medicare Advantage programs allow Medicare beneficiaries to elect health care benefits through alternatives to traditional Medicare Parts A and B.
(D) Approximately 50 percent of Medicare beneficiaries are in a Medicare Advantage program.
(C) Medicare Advantage programs allow Medicare beneficiaries to elect health care benefits through alternatives to traditional Medicare Parts A and B.
To be “disability insured” under Social Security, a worker must meet which of the following requirements?
I. be fully insured under Social Security
II. be expected to die within 2 years (as diagnosed by two physicians) [LO 8.2]
(A) I only
Which of the following statements regarding Social Security benefits is (are) correct?
I. Social Security benefits are increased automatically in accordance with increases in the CPI-W.
II. If a person is eligible for more than one type of Social Security benefit, only the higher benefit is paid. [LO 8.2]
(C) Both I and II
Tracy dies, leaving behind a 40-year-old spouse and a child under the age of 16. Tracy’s PIA is $2,000 per month. Which of the following statements concerning survivor benefits is (are) correct?
I. The surviving spouse will receive $2,000 per month.
II. The child will receive $1,500 per month. [LO 8.2]
(B) II only
All of the following persons are also eligible for monthly benefits if a retired worker is receiving retirement benefits EXCEPT [LO 8.2]
(A) spouse aged 62 or older
(B) divorced spouse whose marriage lasted 5 years
(C) dependent unmarried child aged 13
(D) a child with disabilities, who is aged 26 and who was disabled at age 15
(B) divorced spouse whose marriage lasted 5 years
Basic benefits required to be in all Medigap insurance policies include all of the following EXCEPT [LO 8.6]
(A) a copayment for Part A benefits for the 61st through the 90th day of hospitalization
(B) a copayment for Part A benefits for the 21st through the 100th day of skilled-nursing facility care
(C) a Part B percentage participation for Medicare-approved charges for physicians’ and medical services
(D) a yearly 3-pint deductible for Part A coverage of blood as an inpatient hospital expense
(B) a copayment for Part A benefits for the 21st through the 100th day of skilled-nursing facility care
All the following statements concerning Social Security (OASDI) taxes are correct EXCEPT [LO 8.1]
(A) They are paid by all persons covered under Social Security.
(B) They are paid by the employers of all covered persons.
(C) All wages of covered persons are subject to these taxes.
(D) The tax rate applicable to both employers and their employees is 6.2 percent.
(C) All wages of covered persons are subject to these taxes.
Part A of Medicare provides benefits for all of the following types of expenses EXCEPT [LO 8.3]
(A) inpatient hospital services
(B) hospice care
(C) physicians’ and surgeons’ fees
(D) home health care visits
(C) physicians’ and surgeons’ fees
All the following are types of Medicare Advantage plans used with Part C of Medicare EXCEPT [LO 8.4]
(A) preferred-provider organization (PPO) plans
(B) private fee-for-service (PFFS) plans
(C) health maintenance organization (HMO) plans
(D) supplementary (Medigap) insurance plans
(D) supplementary (Medigap) insurance plans
