General Planning Flashcards
The CFP Board was founded in what year?
1985
Within how many days must a CFP inform the CFP Board of an address change?
30 days
How many CE hours per reporting period are required?
30 hours
The CFP Commission can order a license suspension not to exceed ___ years.
5
Responses to complaints shall be in writing and submitted within ___ calendar days.
30
Evidence in support of an investigation may be submitted up to ___ days prior to the scheduled hearing.
45
Use of Initials Registered Investment Advisor and Certified Financial Planner
NO:
* RIA
* C.F.P.
YES:
* Registered Investment Advisor
* CFP®
* CERTIFIED FINANCIAL PLANNER®
Acceptable nouns following CFP® or CERTIFIED FINANCIAL PLANNER®
Pretty Please CC ME
* Practitioner
* Professional
* Certificant
* Certification
* Mark
* Exam
When can a CFP® licensee release client information to other persons?
- When an attorney or court subpoenas the information
- At the client’s request
- As a defense against charges of wrongdoing
Determining the Release of an Emergency Fund (Use 3 or 6 months if…)
3 months if:
* Single with 2nd source of income
* Married, both work
* Married, only 1 spouse works, but have a second source of income
**6 months if: **
* Single wage earner
* Married and only 1 spouse works
Net Worth
Assets - Liabilities
How to calculate amount in an emergency fund
(Fixed Expenses + Variable Expenses)/12= Ans
Ans x (3 or 6 months)
Ideal savings rate
5-8% of Gross Income
How much consumer debt is considered acceptable?
≤20% of NET income
How much Total Monthly Debt is considered acceptable?
≤36% of GROSS income
How much PITI is considered acceptable?
≤28% of GROSS income
Current Ratio
Current Assets ÷ Current Liabilities
Current Assets
- Cash Equivalents
- Marketable Securities
- Accounts Receivable
- Inventory
Pro-Forma Statement
Projects expected profitability or return of the next year or longer. Estimates amount of excess income over expenses
Net Present Value Implications
- NPV = 0 … IRR = req. rate of return
- NPV = + … IRR > req. rate of return
- NPV = - … IRR < req. rate of return
- Choose highest IRR and NPV
What counts as emergency funds?
- Checking and savings accounts
- Laddered CDs ≤ 6 months
- Govt. Money Mkts
- CDs if close to maturity ≤ 90 days
Current Liabilities
- Accounts Payable
- Credit Card Debt
- Taxes Payable
Insurance Limitations on Deposits
- Individual Accounts = Max $250k on all accounts
- Joint Accounts = Only insured on their half up to $250k of all accounts
- Revocable trust (in trust for or payable on death) = $250k per bene
- IRAs and KEoghs: Insured separately but additional $250k per account
Main Goals of State Regulation of Insurance Companies
- Maintain solvency of insurers
- Protect policy holders against mistreatment by insurers
- Assure coverage will be available to all
- Maintaining fair competition
Federal Government’s Role in Affecting Insurance Companies
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- Legislative: Passes laws and provides funding for regulation
- Courts: Interpret laws and settle disputes
- Executive: Through insurance commissioner tey enforce regulatory laws.
Securities Act of 1933
The Securities Act of 1933 required that new issues purchasers be provided a detailed prospectus before the purchase was completed.
Securities Act of 1934
The Securities Act of 1934 was passed to regulate the secondary market (the trading of issued securities). The act also created the SEC to enforce securities laws.
Investment Company Act of 1940
Investment Company Act of 1940 authorized the SEC to regulate Unit Investment Trusts (UIT) and managed investment companies (closed- and open-end funds) and variable products.
Securities Investors Protection Act of 1970
Securities Investors Protection Act of 1970 established the SIPC to supervise securities firms that get into financial difficulties. The SIPC insures investors against losses arising from the failure of a brokerage firm.
College Funding Phase outs given (married filing jointly)
- Educational Bonds ($145,200 - $175,200)
- Lifetime ($160K - $180K)
- American Opportunity ($160K - $180K)
Education Savings Vehicles
- 529 Plans/QTPs
- UTMA/UGMA accounts
- EE bonds
- Coverdell Education Savings Account
2 Types of 529 Plans/ QTPs
College Savings
* Market based performance
* Can enroll anytime
* No restrictions on use, undergrad/grad school, and state
* School choice has no effect
* no state guarantee
* Refunds= return of investment + earnings(10% penalty)
Prepaid Tuition
* Tracks tuition inflation
* Specified enrollment time
* Restrictions on use, under-grad only, and state specific
* Choice of school impacts investment return
* can be state guaranteed
* Refunds = investment + low rate of interest
529 Keys
- Lump sum gift up to $90k but no extra donations for 5 year period
- Donor can retain control
- K-12 for tuition allowed up to $10,000/yr.
- Can be used to pay student loans ($10,000/student over lifetime)
- If 529 is funded through a trust you can’t do the $90k lump sum
- Only one rollover within a 12 month period
Coverdell ESA
- Earnings are tax deferred
- Contribution limit: $2k per student/yr and no more contributions if student ≥ 18 yrs old
- MAGI Phaseout: (Single) $95k - $110k; (MFJ) $190k - $2200k
- Covered expenses include: tech, after school programs, internet, K - college, etc.
- All funds must be used up by age 30 (30 day grace period)
- Unused funds stay in the account and can be rolled over to another designated bene who is another fam member of OG bene.
Uniform Transfers to Minors Act (UTMA)
- Cash-type investments, real estate, or limited parternships
- Transferrable at up to age 25; custodian’s discretion
- Subject to Kiddie Tax
- $18k excluded as annual gift limit
- Asset owned by child
Uniform Gifts to Minors Act (UGMA)
- Cash-type investments only
- Transferrable at age of maturity based on state law
- Subject to Kiddie Tax
- $18k excluded as annual gift limit
- Asset owned by child
When does the kiddie tax apply?
Applies if unearned income > $2,600, lives w/ one parent and:
* Kids ≤ 18 years old
* Kid = 18 years old and earned income < half of support
* Kid = 19-23 yrs old, earned income < half of support, and full time student
Kiddie Tax Calculation
Earned income < Standard Deduction:
* $0-$1,300 tax free
* $1,301-$2,600 is taxed at 10%
* (Amt-$2600) is taxed at parent’s marginal tax rate
Earned income > Standard Deduction:
* $Earned income +$450 is tax free
* $1,301-$2,600 is taxed at 10%
* (Amt-$2600) is taxed at parent’s marginal tax rate
EE Education Bonds
- Normally purchased in parents name
- Can’t be issued by student or in a custodial account
- Must be redeemed in the year where owner pays qualified higher education expenses
- qualified education expenses are only tuition and fees
- If held in UTMA account, interest is taxable
Education Tax Credits
- American Opportunity Credit
- Lifetime learning Credit
- Student loan interest deductions
American Opportunity Credit
- Only for tuition, fees, and course material
- Only for the first 4 yrs of college
- Can’t be claimed for the same expense for the same year for the LLC, Coverdell or 529 Plan
- Student needs to be at least half time
- Student has no felony drug conviction
- Only expenses paid from laons, gifts, inheritances, or the earnings of the student qualify for the credit
American Opportunity Credit Calculation
100% of first $2000 + 25% of next $2000
Max of $2,500
Limited Lifetime Credit (LLC)
- Unlimited use for your lifetime
- Can be for anyone taking classes to acquire or improve job skills
- No drug conviction restriction applies
- Only expenses paid from laons, gifts, inheritances, or the earnings of the student qualify for the credit
- Can’t be claimed for the same expense for the same year for the LLC, Coverdell, or 529 Plan
Limited Lifetime Credit (LLC) Calculation
20% of the first $10k of qualified tuition expenses
Max of $2,000
Student Loan Interest Deduction
Max $2,500/yr
Funding during College Years (Poor)
Income ≤ $70k cap
* Pell Grants
* Supplemental Educational Opportunity Grant
* Subsidized Stafford Student loans
Important Divorce Situations
- Property Settlements are tax-free exchanges; No step-up in basis
- Maybe sell help before divorce is finalized to take advantage of $500k cap gain exlcusion (MFJ) vs $250k (Single)
Divorce Before 12/31/2018
Alimony is deductible by payor and taxable to payee if:
* Taxpayers are not MFJ and not living together
* Payments are made in cash
* Payment is not for child support
* Payments can’t extend beyond death of recipient spouse
Divorce After 2019
Alimony is no longer deductible by payor and taxable to payee because of TCJA
Can apply to modified divorce agreements after 12/31/2018 only if they say TCJA rules apply
Cash Payments that Qualify as Alimony
- Payment to third party for rent, mortgage, tax, etc.
- Premium payments may by payor spouse for life insurance owned by the payee spouse wehre the payor is the insured
Cash Payments that Don’t Qualify as Alimony
- Payments to maintain property owned by payor spouse but used by payee spouse
- Premium payments may by payor spouse for life insurance owned by the payee spouse wehre the payor is the insured
Not Deductible bc not alimony
Child Support
Non-taxable and non-deductible
Best Transfer Arragenmetns for unmarried domestic partners
- Revocable Trust
- Tenancy-in-Common (TIC)
Consodilated Omnibus Budget Reconciiliation Act (COBRA)
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Employers providing group or self-funded health coverage are required to offer terminated employees the right ot buy continued health coverage
Companies < 20 employees for at least 1/2 year are exempt
Structured Settlements
Personal injury victime receives tax-free recurring payments from a negligent defendant
Compensatory Damages
Usually tax-free lump sum payment because of personal physical injuries or physical sickness
* interest paid are taxable
* In discrimination cases or non-physical injury are taxable but
damages up to amount of actual mediucal care expenses are attributable to emotional distress like psyciatirc care are tax free
Punitive Damages
Usually taxable and are to punish wrongdoing
Exception: Damages paid in conjunction with a wrongful death are tax-free
Annuitized Awards
Taxable: Lump sum received is tax-free but if turned into an annuity or invested, earnings are taxable
Non-Taxable: Annuity option is chosen and victim is paid periodically and they have no control over the investments and the payments; includes earnings on fund
Only have 60 days to choose between lump-sum or annuity
Prizes and Awards
Alwaysincluded in gross income even if prize/award comes in annuity payments
Reserve Requirement
Percentage of deposits that banks must keep. Remaining percentage can be loaned out
Reserve Requirement Fed Action
Expansionary Policy/Easy Money
Reduce Reserve req. → Money Supply ↑ → i(r) ↓ → inflation ↑
Remember interest is the cost to borrow $
Reserve Requirement Fed Action
Contractionary Policy/Tight Money
Increase Reserve req. → Money Supply ↓ → i(r) ↑ → inflation ↓
Remember interest is the cost to borrow $
Discount Rate
Rate Fed Reserve charges it member banks to borrow to meet reserve requirements
Discount Rate Fed Action
Expansionary Policy/Easy Money
Lower discount rate → Money Supply ↑ → i(r) ↓ → inflation ↑
Remember interest is the cost to borrow $
Discount Rate Fed Action
Contractionary Policy/Tight Money
Raise discount rate → Money Supply ↓ → i(r) ↑ → inflation ↓
Remember interest is the cost to borrow $
Federal Reserve Open Market Operations
- Repos - Fed buys securities/bonds = expansionary/easy money policy
- Reverse Repos - Fed sells securities/bonds = contractionary/tight money policy.
BEST
Buying Expansionary Selling Tight
FOMC Fed Action
Expansionary Policy/Easy Money
Repo/buy bonds or securities → Money Supply ↑ → i(r) ↓ → inflation ↑
Remember interest is the cost to borrow $
FOMC Fed Action
Contractionary Policy/Tight Money
Reverse repo/ sell bonds or securities → Money Supply ↓ → i(r) ↑ → inflation ↓
Remember interest is the cost to borrow $
Leading Indicators
Help forecast the business cycle
* Avg. weekly hours for production workers in manufacturing
* Initial claims for unemployment insurance
* New manufacturing orders
* Vendor performance measured as a % of companies reporting slower deliveries
* Contracts and orders for plants and equipment
* New private housing units
* Interest rate spread
* Stock prickes, 500 common stocks
* Money Supply
* Index of consumer expectations
Bold is most important
Coincident Indicators
Move in tandem with broad economy
* Number of employees on non-agricultural payrolls
* Personal income - transfer payments (SS payments, welfare)
* Industrial production
Bold is most important
Lagging Indicators
Confirming indicators and respond after the economy has begun to change
* Avg. duration of unemployment
* Avg. prime rate charged by banks
* Commercial and industrial laons outstanding
* Ratio of conumser installment credit outstanding to personal income
* Change in the CPI for services
Bold is most important; CPI in general is lagging indicator
Gross Domestic Product (GDP)
Total dollar value of all goods and services produced within the US only.
* GDP counts economic activity without regard to yearly price fluctuations.
* The GDP does not include any income generated outside the US or adjustments for foreign currencies.
Producer Price Index
Index of price of vartious items such as farm products and industrial commodities.
Leading indicator
Business Cycle
- Expansion
- Peak
- Recession/Contraction
- Trough
- Recovery/Expansion
Recession vs. Depression
- Recession - Two consecutive quarters of economic decline (negative GDP).
- Depression - Six consecutive quarters economic decline (negative GDP).
Short-term Debt vs. Long-Term Debt
- Short-term debt: consumer debt and auto debt
- Long-term debt: everything else
Deductible Housing Interest
- All mortgages cannot exceed: $750K combined (MFJ) and single
- $375K (MFS)
- Home equity interest is only deductible if used for home renovation/improvement
Reverse Mortgage
Way to access equity in a home even if home is not fully paid off. The funds received are tax-free lump sum, ongoing pmts, line of credit, or a combo. The interest and fees are added to the balance so there are no monthly payments
Reverse Mortgage Repayment
Occurs when:
* Owner dies,
* owner moves out for a min. of 1 yr, or
* term years end
Once this happens they can sell the house to pay if off
If owner dies, heirs/estate deal with repayment
Reverse Mortgage Reqs.
- 62+ yrs old
- Living in a condo/single fam home
- no income qualifications
- stowll own property and lives there
- loan amt based on age, home value, interest rates, and type of reverse mort.
- not repaid till borrower moves out permanently
Reverse Mortgage Effects on Medicaid/SSI
Medicaid:
* Selling home → cash proceeds not protected → lose medicaid
* Pmts ≠ income if spent w/in same month received
* Pmts accumulate → asset amount > eligibility limits → Bye Medicaid
* Unspent lump sum → asset amount > eligibility limits → Bye Medicaid
SSI
* Pmts may be seen as income even if spent w/in same month received, depends on state
* Unspent lump sum → asset amount > eligibility limits → Bye Medicaid
Investment Advisor Def
A,B,C
* Gives advice
* In the business of giving advice
* Gets compensation for services
Filing as Registered Investment Advisors
- RIA < $100m AUM must register with state of domicile
- RIA = $110m AUm must register with SEC (can start at 100m AUM)
Exceptions to Filing as an Investment Adviser
- Banks that are not also investment companies
- Lawyers, accountants, teachers where advice is incidental
- Broker/dealers or registered reps whose performance is incidental and who get no special compensation for advice
- Publishers of bona fide newspapers
- Those who give advice solely relating to US government securities
Remember BLAT
Exemptions to Filing as an Investment Adviser
Advisers whose only clients are insurance companies
Family office
How does an Investment Adviser register with the SEC?
- Initially, file ADV part I and II with the SEC
- Pay minimum filing fee of $150.
- RIA must submit part I of ADV and schedule I annually.
Financial Industry Regulatory Authority (FINRA) Initial Registration Process
- The individual associates with a broker/dealer.
- Registers with FINRA through broker/dealer on form U-4.
- Takes and passes appropriate exams.
- Is issued a CRD number (Central Registration System).
FINRA v. SEC
FINRA mostly for licenses
SEC the ult regulator
Financial Industry Regulatory Authority (FINRA) Key Examinations/Licenses
- Series 6 - Mutual funds, UITs, and variables (only new UITs)
- Series 7 - General securities (including UITs on secondary market)
- Series 63 - Uniform Securities Agent State Law Exam
- Series 65- Uniform Investment Adviser Law Exam
- Series 66 - Uniform Combined State Law Exam (combines 63 & 65 exams).
Series 6 and 7 have to do with commuissions
Basic Components of a Legal Contract as Applied to Insurance
- Offer and Acceptance - Two parties, offerer and acceptor
- Consideration - Something of value (money)
- Legal Object - Legal in purpose
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Competent Parties - Principle must have legal capacity to execute contract
- Intoxicated adults have limited or no capacity
- Minors only have capacity to contract for necessities (food, clothing, shelter)
- Legal Form - Contract must meet requirements
Law of Agency (Insurance)
- Express Authority - Written, explicit direction from principal to agent
- Implied Authority - Is that which the public believes the individual holds and includes signage, rate books, etc. Implied is actual authority that the agent has to carry out the principal’s business,
- Apparent Authority - Arises out of negligence of the principal in allowing the agent to appear to have authority because of certain actions of the agent in the past. This typically affects terminated agents.
Which debts are not cancelable by Bankruptcy?
- Student Loans
- Government Loans
- Child Support
- Alimony
- Wage Withholding
- FICA Taxes
- Income Taxes Due
- Rollovers from qualified plans are exempt (unlimited) and non-rollover IRAs up to $1 million are exempt.
Bankruptcy Codes
(Lucky) Ch. 7: Allows debtor to claim federal or state exemptions. Must pass means test
(Unlucky) Ch. 13: Reorganize assets to make debt more manageable and no relinquishing of assets
Ch.11: Exceed debt limitations for Ch. 13 and do not have stable income
Means test for Bankruptcy
- Avg. monthly net income for 60m > $10k … no filing ch.7
- Avg. monthly net income for 60m < $6k … can file ch.7
