General Principles Flashcards
1
Q
The CFP Board was founded in what year?
A
1985
2
Q
Within how many days must a CFP inform the CFP Board of an address change?
A
45 days
3
Q
How many CE hours per reporting period are required?
A
30 hours
4
Q
The CFP Commission can order a license suspension not to exceed ___ years.
A
5
5
Q
Responses to complaints shall be in writing and submitted within ___ calendar days
A
30
6
Q
Evidence in support of an investigation may be submitted up to ___ days prior to the scheduled hearing.
A
45
7
Q
Use of Initials: Registered Investment Advisor and Certified Financial Advisor
A
No:
- RIA
- C.F.P.
Yes:
- Registered Investment Advisor
- CFP®
- CERTIFIED FINANCIAL PLANNER™
8
Q
When can a CFP® licensee release client information to other persons?
A
- Subpoena: When an attorney or court subpoenas the information
- At the client’s request
- As a defense against charges of wrongdoing
9
Q
Determining Emergency Fund (3 or 6 months)
A
Fixed and Variable expenses and real estate taxes.
3 months if:
- Single with 2nd source of income.
- Married, both work.
- Married, only 1 spouse works, but has a second source of income.
6 months if:
- Single with one source of income (single wage earner).
- Married, and only one spouse works.
EFs can be invested in the following vehicles:
- Checking accounts (excluding funds to be used for expenses)
- Government money market accounts
- CDs close to maturity (<90 days)
- Savings vehicles
- Laddered CDs < 6 months
10
Q
How much consumer debt is considered acceptable?
A
≤20% of NET INCOME
Net is even less than gross. Should be spending the least on Consumer goods.
11
Q
How much Total Monthly Debt is considered acceptable?
A
Housing expense, auto loans, credit card debt.
≤36% of GROSS INCOME
12
Q
How much PITI is considered acceptable?
A
Principal, Interest, Taxes (property), Insurance (homeowners).
≤28% of GROSS INCOME
13
Q
Current Ratio
A
Current Assets / Current Liabilities
14
Q
Current Assets
A
- Cash Equivalents
- Marketable Securities
- Accounts Receivable
- Inventory
15
Q
Current Liabilities
A
- Accounts Payable
- Credit Card Debt
- Taxes Payable
16
Q
Securities Act of 1933
A
Requires that purchasers of new issues be provided with a detailed prospectus before the purchase is complete.
17
Q
Securities Act of 1934
A
Passed to regulate the Secondary Market (trading of issued securities).
Also created the SEC to ENFORCE securities laws.
18
Q
Investment Company Act of 1940
A
Authorized the SEC to regulate UITs and managed investment companies (closed/open), and variable products.
UITs
Managed Investment Companies
Variable Products
19
Q
Securities Investors Protection Act of 1970
A
Established the SIPC to SUPERVISE securities firms that get into financial difficulties.
SIPC insures investors against losses arising from the failure of a brokerage firm.
20
Q
529 Key
A
- Lump sum gift up to $85,000.
- Donor can retain control.
- K-12 distribution allowed up to $10,000/yr.
- Up to $10,000 PER PERSON distribution for student loans.
21
Q
Deductible Housing Interest
A
ALL MORTGAGES cannot exceed:
- $750,000 combined (MFJ)
- $375,000 (Single/MFS)
- Home equity interest is only deductible if used for home renovation/improvement.
22
Q
Federal Reserve Open Market Operations
A
Repos- Fed Buys securities = Expansionary/Easy money policy.
Reverse Repos- Fed sells securities = Contractionary/Tight money policy.
23
Q
GDP
A
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.
24
Q
Business Cycle
A
Recovery/Expansion
Peak
Recession/Contraction
Trough
25
Recession vs. Depression
Recession- TWO consecutive QUARTERS of economic decline (negative GDP).
Depression- SIX consecutive QUARTERS of economic decline (negative GDP).
26
Exceptions to filing as an Investment Adviser
- Banks that are not also investment companies.
- Lawyers, Accountants, Teachers, Engineers where advice is incidental.
- B/Ds or RRs 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.
- An intrastate advisor in unlisted securities.
27
Exemptions to Filing as an Investment Adviser
- Advisers who only clients are insurance companies.
- Family office.
28
How does an Investment Adviser register with the SEC?
- 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.
29
FINRA Initial Registration Process
- Associate with a B/D.
- Register with FINRA through BD on form U-4.
- Take and pass appropriate exams.
- Get CRD number
30
FINRA Key Examinations/Licenses
- Series 6: Mutual funds, New UITs, and variables.
- Series 7: General Securities (UITs on Secondary market).
- Series 63: Uniform Securities Agent State Law Exam. Meets requirements to be licensed in states other than state of residence.
- Series 65: Uniform Investment Advisor Law Exam. RIA state requirement.
- Series 66- Uniform Combined State Law Exam.
31
Basic Components of a Legal Contract as Applied to Insurance
- Offer and Acceptance: Two parties. Offeror and acceptor.
- Consideration: Something of value
- Legal Object: Legal in purpose
- Competent Parties: Must have legal capacity to execute contract. Minors only have capacity to contract for necessities.
- Legal Form: Contract musts meet requirements.
32
Law of Agency (Insurance)
- Express Authority: Written, EXPLICIT direction.
- Implied Authority: What the public believes the individual holds. Includes signage, rate books, etc. This is actual authority 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.
33
Which debts are NOT cancelable by Bankruptcy? 6
- Student loans
- Government loans
- Child support
- Alimony
- Taxes and Wage withholding
- Rollovers from qualified plans are exempt (unlimited), and non-rollover IRAs (traditional or Roth) up to $1 million are exempt.
SEPs, SIMPLEs, ERISA plans, and deferred comp plans are generally exempt assets.
34
Business Capitalized Value:
Capitalized Value = Annual income / Cap Rate
35
Liquidity Ratio
Assets / Liabilities
Only include taxes when the material indicates taxes are due or taxes are payable. Only use mortgage information when the data tells you the CURRENT AMOUNT of mortgage due.
36
Savings Strategies
Ideally, a family should save at least 5-8% of gross income.
"Pay yourself first" is generally the best advice to succeed at saving.
Deposit a specific amount from each paycheck into a savings account.
37
Use of PMT Begin or End mode
Begin: College education paid, Retirement benefits received, Family needs.
End: 401(k) deferrals, Profit-sharing contributions, Bond interest paid, Mortgage payments.
38
Real rate of return
also referred to as the inflation adjusted interest rate.
WHENEVER A QUESTION ASKS FOR "TODAYS DOLLARS", USE THE INFLATION ADJUSTED RATE (REAL RATE).
39
Unequal cash flows/IRR/NPV:
1st Variation- Calculate PV
- Use the CFj function
- 0 as first input (usually first output will state "End of year 1" so this is why 0 is the first input)
- Make sure to input the Required Rate of Return as I/YR.
40
Unequal cash flows/IRR/NPV:
2nd Variation- Calculate IRR/DWR
- Use the CFj function
- Initial Investment is entered as a negative
- Solve for IRR
41
Unequal cash flows/IRR/NPV:
3rd Variation- Calculate NPV
- Use CFj function
- Always enter initial investment as a negative
- Make sure to input the Required Rate of Return as I/YR
Only difference between this variation (NPV) and the 1st variation (PV), is that when solving for NPV, there is an initial investment that is taken into consideration in CF0.
42
Mary and Paul Gardner plan to retire in 10 full years. They currently have $1 million in investments earmarked for retirement. During their retirement years they want to draw out $150,000 at the end of each year. They feel their joint life expectancy will be 25 years after retirement. When the second person dies, they want to leave $1 million to family members. What return do they need to achieve if no additional money is added to their investment account?
6.88%
-1,000,000, CFj
0, CFj
10, golf, Nj
150,000, CFj
25, gold, Nj
1,000,000 CFj
Gold, IRR/YR
43
If a bank is federally or nationally chartered, it is regulated by: (3)
The Comptroller of the Currency
The Federal Reserve
The FDIC
44
FDIC insured amount and types of ownership categories:
(Each ownership category gets separate coverage)
$250,000/person/bank/ownership category
- Individual
- Joint. Each individual has their own $250,000. This means JT accounts are covered up to $500k. $250k for one ind, and $250k for the other.
- Revocable Trust (in trust for, or payable on death to). Additional $250,000/beneficiary.
- IRAs and Keoghs. Insured separately, additional $250,000/account.
- Insurable: Checking, Savings, MMDAs, CDs
- Not Insurable: Stocks, Bonds, Mutual funds (including money market mutual funds), US treasury bills/notes/bonds. These are covered by SIPC
*ALWAYS NET CDs AND MMDAs*
45
State Insurance regulators
Three branches of the state government:
- Legislative branch passes insurance laws and provides funding for regulation.
- Courts interpret insurance laws and resolve disputes
- Executive branch, through the insurance commissioner, enforces insurance regulatory laws.
46
Federal Insurance Regulators
Three major areas:
- cobra and Hipaa, as they relate to health coverage continuation.
- Standardization of Medicare supplement policies
- Taxation of various insurance policies, including life insurance, annuities, long-term care, viatical settlements, disability, etc.
47
Trust Companies
Typically engage in fiduciary investment management and estate planning.
Assets are typically in trust, a legal document that spells out the beneficiaries and how the assets may be distributed.
Needs a trustee
Trust companies can be named as an executor or personal rep.
48
College Funding Needs Analysis:
Step 1: INFLATE. Determine the cost of the first year of college
- This is a straight forward FV calculation using the college cost inflation rate. SOLVE FOR FV.
Step 2: ADJUST. Determine the amount that must be available when the child is age 18 to fund the required years of college (typically 4 years)
- Invested college funds will continue to grow, but so will the cost of college. THIS MEANS THE INFLATION ADJUSTED RETURN (REAL RATE) MUST BE USED.
- Put calculator in BEG mode
- FV from step 1 becomes PMT. This is because that is the amount that is being paid each year.
- Solve for PV. This is the amount needed to cover college costs.
Step 3: INVEST. Determine how much parents need to invest
- Lump sum needed will be solved using PV.
- Annual saving amount will be solved using PMT.
- This step can be in BEG or END mode depending on client preference.
- PV in Step 2 becomes FV
- I/YR is the after-tax return that the parents can earn.
49
Funding Strategies: Funding Years
- UGMA/UTMA: Subject to Kiddie tax for children under 24.
- EE Education Bonds: Parents own bonds. Will not work in an UGMA/UTMA.
- CESA: Limited to $2,000/year contribution.
- 529 (QTP): College Saving or Prepaid Tuition. $17,000/year contribution per child, or $85,000 5 year frontload.
50
Funding Strategies: College Years- Wealthy
Wealthy parents are a PLUS.
Parent Loans for Undergraduate Students
51
Funding Strategies: College Years- PooriSSh
Pell Grants
Supplemental Education Opportunity Grant
Subsidized Stafford Student Loans
52
Funding Strategies: College Years- Tax Credits, Distributions and Withdrawals. Cannot be combined for same child/expense. USE ONLY ONE.
American Opportunity Credit
Only first $4,000 is taken into consideration for a max credit of $2,500
- $2,000
- 25% of next $2,000
- Considers FIRST FOUR years of college only.
- Student must take at least 1/2 of the normal full-time student load.
- Student MAY NOT have a felony drug charge.
- Cannot be claimed for the same expenses, in the same year as the Lifetime Learning Credit.
- A above the line deduction alternative of $4,000/$2,000 is available if LLC is being used.
- There is a MAGI Phaseout on tax sheet.
- Cant be used for room and board.
53
Funding Strategies: College Years- Tax Credits, Distributions and Withdrawals. Cannot be combined for same child/expense. USE ONLY ONE.
Lifetime Learning Credit
- ONLY for higher education. Undergrad, Grad, CE.
-20% of the first $10,000. $2,000 MAX CREDIT.
- Per period, not per student.
- No student load required for the credit.
-Student MAY HAVE a felony drug charge.
- There is a MAGI Phaseout on tax sheet.
54
Funding Strategies: College Years- Tax Credits, Distributions and Withdrawals. Cannot be combined for same child/expense. USE ONLY ONE.
Coverdell withdrawal
- Must be used before student is 30.
- There is a MAGI Phaseout on tax sheet.
55
Funding Strategies: College Years- Tax Credits, Distributions and Withdrawals. Cannot be combined for same child/expense. USE ONLY ONE.
529 (QTP) Distrubution
-NO MAGI PHASEOUT
56
Funding Strategies: College Years- Tax Credits, Distributions and Withdrawals. Cannot be combined for same child/expense. USE ONLY ONE.
NOTE IMPORTANT!
In addition to the four options, gifts, earnings, and UGMA/UTMA/2503(c) funds can be used.
57
Funding Strategies: Graduate Years- Options
- Fulbright Scholarship
- Stafford Loan
- 529 distribution
- CESA withdrawal if student is under 30.
58
Are gifts to an UTMA/UGMA, CESA and 529 plans a gift of present interest?
Yes
59
QTP/529: College Savings vs Prepaid Tuition
- Risk Tolerant vs Risk Averse
- Not restricted to tuition and fees vs. Restricted to tuition and fees
60
QTP/529: Gifting through a trust
If the trust is funded first and then contributions to the 529 plan are then made directly by the trust, the 5-year averaging election is not available because the gift is to the beneficiary via the trust, not via the 529 plan.
61
QTP/529: Rollovers to different programs
One transfer within a 12-month period may receive rollover treatment from one QTP to another, for the benefit of the same beneficiary. This will not be considered a distribution.
- Prepaid tuition to savings program maintained by same state.
- State-sponsored plan to prepaid tuition.
529 beneficiaries do not gain control at age of majority.
If student does not attend college, the shares can be rolled over to a family member in the same generation. If generation below, the rollover will be a taxable gift.
62
T or F: Under the TCJA, federal tax-free withdrawals will be available from 529 Plans for tuition in Kindergarten through 12th grade up to $10,000/year.
T
63
Under the SECURE Act, will 529 plans allow distributions to pay student loans?
Yes, up to $10,000 LIFETIME.
64
CESA:
- $2,000/year/child under 18.
- Nondeductible, tax free if used for qualified education expenses.
- Contributions to a QTP and CESA in the same year are allowed.
- Covered expenses extend to room and board, uniforms, computers/tech, etc.
- MUST be used by 30 (30 day grace)
- CESAs can be rolled over to a beneficiary who is another family member of the original beneficiary.
65
529 vs CESA
- No income limit vs. MAGI Phaseout.
- Assets not used for educational expenses can be reclaimed vs. Cannot be reclaimed.
- 17k (85k) per donor vs. 2k per beneficiary.
- Contributions can be made for beneficiary of any age vs. No contribution after 18.
- No age limit on distributions vs. Must distribute by 30 or rolled.
- $10k lifetime limit on student loan payment vs. Not allowed.
-CESA offers greater investment flexibility.
Both are treated as parental assets for financial aid purposes. Non-parent sources can be considered assets of the child and could affect financial aid. Use non-parent sources in junior/senior years of college to not affect FAFSA/Aid.
66
UTMA/UGMA
Custodial accounts opened for minors enables assets to be held for the benefit of children.
In certain states, and UGMA/UTMA account may be transferred to a 529. The child becomes the owner. The child is still the beneficial owner.
67
UGMA Characteristics
- Cash-type investments like EEs, stocks, mutual funds, CDs, savings accounts.
- Transferred to child at age of majority. 18/21.
- Gift of present interest ($16k).
- Subject to Kiddie tax.
- Assets count against/owned by child for Financial Aid purposes.
68
UTMA Characteristics
- Cash-type investments like EEs, stocks, mutual funds, CDs, savings accounts.
- T FOR TRUMP! REAL ESTATE OR LPs CAN ALSO BE HELD.
- Transferred to child at by the custodian up to age 25.
- Gift of present interest ($17k)
- Subject to Kiddie tax.
- Assets count against/owned by child for Financial Aid purposes.
69
Kiddie Tax
Intended to discourage the shifting of income to children in a lower tax bracket as a tax-avoidance technique. Kiddie tax rules apply to CERTAIN children with UNEARNED income greater than $2,500 and who have a least one living parent at the end of the year.
If Kiddie Tax applies:
1. The child gets a $1,250 standard deduction.
2. The next $1,250 is taxed at the child's income tax rate of 10% ($115).
3. Amounts greater than $2,500 are taxed at the parent's marginal tax rate.
*IF THE CHILD HAS ERNIEEEE EARNED INCOME GREATER THAN THE STANDARD DEDUCTION OF $1,250, THE AMOUNT OF EARNED INCOME + $400 IS USED IN STEP ONE
70
Series EE Savings bonds
Normally purchased in the parents name. Anyone 24+
Cannot be issued in the name of the child or in a custodial account (can be held in an UTMA, but then they wont qualify for the educational expense exclusion. If redeemed for college, interest is taxable).
Must be redeemed in a year in which the owner (parent) pays qualified higher education expenses.
71
AOTC and LLC Qualifying expenses
Eligible: Tuition, fees, supplies, books, equipment.
Not-Eligible: Room and Board.
Same taxpayer can elect both credits provided they aren't used for the same student expenses.
72
AOTC and LLC coordination with CESA:
Taxpayer may claim AOTC or LLC for the same taxable year as amounts distributed from a CESA as long as there is sufficient qualified education expenses to cover BOTH.
73
AOTC and LLC coordination with 529:
Taxpayer may claim AOTC or LLC for the same taxable year and a QTP but only if the distribution is not used for the same expenses for which a credit was claimed. They coordinate for the same expense like CESA.
74
Student loan interest deduction:
Above the line deduction for interest paid on qualified education loans. Max deduction is up to $2,500, and has a MAGI Phaseout.
75
Pell Grants
- Only available to undergraduate students.
- If EFC is below a certain amount, the student will be eligible
76
Subsidized Stafford Student Loan
These are available to students who show financial need after their EFC, pell grant eligibility, and aid from other sources are subtracted from the cost of attendance. The loan is limited.
77
Questions only indicating one expense (tuition)
Do not select any combination of the American opportunity credit, lifetime, Coverdell ESA withdrawal, or qualified tuition distribution in any one year due to the coordination rules. When the question only indicates one expense, being tuition, only use one of the four programs as an answer.
78
College Financial Aid
- The Free Application for Federal Student Aid (FAFSA).
- No Application fee
- In order to determine the EFC, the student and parents must submit their income tax return forms, and are based on the returns dating two years prior.
- IRAs and small businesses are excluded as assets
79
Alimony payments BEFORE 1/1/2019
Deductible by Payor, Taxable to Payee if the following are met:
- Cannot file Jointly or live together.
- Must be cash payment.
- Must be for benefit of payee spouse.
- Payments cannot extend beyond payee spouse's death.
80
Qualifies as Alimony, Qualifies for tax deduction- BEFORE 1/1/19
(Expenses)
Qualifies as alimony:
- Cash payment from PAYOR spouse to third-party if made pursuant to divorce instrument for an obligation of PAYEE spouse, such as:
- Rent
- Mortgage
- Tax
- Tuition
81
Qualifies as Alimony, Qualifies for tax deduction- BEFORE 1/1/19
(Life Insurance)
Qualifies as Alimony if Premium payments made:
by the payOR
owned by the payEE
where the payOR is the insured.
82
Does not qualify as alimony, does not qualify for tax deductibility- BEFORE 1/1/19
Any payments to maintain property OWNED by the payOR spouse, and USED by the payEE spouse. Even if required by divorce instrument. This includes mortgage payments (Rent is excluded from this).
Transfer of non-cash items.
83
Divorces finalized ON OR AFTER 1/1/19
Alimony will NOT be deductible by the payOR, nor includable in the gross income for the payEE.
84
Best transfer arrangements for the exam for unmarried partners:
Revocable Trust & TIC. Trusts are private.
Wills can be contested by family members. No will is also a bad answer for intestacy purposes. JTWROS is also not a good answer because a disgruntled partner can siphon the entire amount.
85
Compensatory damages
Comp (think workers comp) is TAX-FREE.
Interest paid on compensatory damages IS taxable tho.
Damages received from discrimination or non-physical injury are tax free up to the the actual medical care expenses, and then are taxable.
If the award is annuitized, only the distribution of the actual award is tax-free. Any gains are taxable.
86
Punitive Damages
These damages are generally TAXABLE.
PDs do not provide comp for injuries but rather are intended to punish wrongdoing by the negligent defendant who was sued.
ONE EXCEPTION: Damages paid to a bene in conjunction with wrongful death are received TAX-FREE.
87
Fiscal Policy
Fiscal = Federal. Federal Taxation and Spending.
Designed to level out the business cycle, and to achieve full employment, price stability, and sustained growth.
88
Monetary Policy
Action taken by the Fed (Federal Reserve Board) to influence the growth of the money supply.
The objective is the same as Fiscal Policy, a stable domestic economy.
The Fed meets to analyze economic trends and to decide on actions relative to the money supply.
The Fed has the power to influence the supply of credit in the US economy.
CREDIT AND MONEY
89
Fed Tools:
ODR!!! 🏒
Reserve requirement: Fed sets the reserve requirement that its member banks must maintain. Easy money = reduce, Tight money = increase.
Discount rate: Fed charges this rate to its member banks when they borrow to meet reserve requirements. Easy money = lower rate, Tight money = raise rate.
Open market operations: Repos and Reverse-repos. Repurchase agreement = Fed purchases securities (easy money). Reverse-repurchase agreement = Fed sells securities (tight money).
Margin rates: Fed sets initial margin rates for securities under Reg T. Easy money = decrease, Tight money = increase.
90
Leading economic indicators
- Initial claims for unemployment insurance
- New manufacturing orders
- New private housing units
- Stock prices
- Index of consumer expecations
- average weekly hours for production workers in manufacturing
- vendor performance measured as a percentage of companies reporting slower deliveries
- Contracts and orders for plants and equipment
- Interest rate spread
- Money supply
91
Coincident indicators
- Industrial production
- Number of employees on non-agricultural payrolls
- personal income less transfer payments. Social Security, welfare. 
92
Lagging indicators
- Avg. duration of unemployment
- Avg. prime rate charged by banks
- Commercial and industrial loans outstanding
- Change in CPI for services
- Ratio of consumer installment credit outstanding to personal income.
93
Does the PPI lead the CPI?
Yes. The PPI does not include the value of services as does the CPI. As producer costs rise, they are then passed on to consumers and ultimately reflected in the CPI.
It is a “leading” indicator. It anticipates.
94
Stagflation
Slow economic growth/high unemployment paired with inflation (rising prices).
95
Balloon payment
Payments are based on a long-term mortgage at a given interest-rate. For example, after a five-year period, the unpaid balance must be either paid off or refinanced.
96
Mortgage calculations: Calculating net after-tax mortgage payment after one year
Step 1: Set 12 p/yr, solve for PMT. Multiply by 12 for annual payment.
Step 2: Use Amort function to find interest paid, and multiply by tax bracket. This is the amount that is deductible.
Step 3: Subtract step 2 from step 1.
97
Mortgage calculations: Calculating net after-tax mortgage payment in the future
Step 1: Set 12 p/yr, solve for PMT. Multiply by 12 for annual payment.
Step 2: Use Amort function to find interest paid in the future, and use the Amort function to find the interest paid in the year prior. Multiply that number by tax bracket!!
Step 3: Subtract step 2 from step 1.
98
SEC/State regulatory requirements
RIAs with less than $100 million under management currently register with their state of office domicile. If the state has no provisions for registration, advisors can register with the SEC.
99
George, a life insurance broker, is crafty at answering questions on applications Joyce needed life insurance because of a possible medical problem. George wrote the application without discussing the possibility and the life policy was issued. What is the carriers obligation?
Actions of BROKERs authority do not extend to insurers. Given that it is not obligated to pay the claim, the carrier would refund the premium (rescission), and null the contract.
100
What is not true about insurance brokers?
The broker cannot make insurance effective (binding). The broker is not a party to the insurance contract.
101
Bankruptcy (Chapters 7, 11, 13)
Ch. 7: The bankruptcy code permits a debtor to claim either the "federal" exemptions or the exemptions available under the state law. Straight bankruptcy, walk away from debt.
Ch. 13: REORGINIZATION. Payments to creditors are typically reduced to be more manageable. Debtor is generally not required to relinquish assets.
Ch. 11: For individuals who don't qualify under Ch. 13 because they EXCEED the debt limits or don't have a regular source of income.
102
Chapter 7 Bankruptcy means test
If the debtor's average monthly net income for 60 months is > $10,000, Ch. 7 is NOT an option.
If the debtor's average monthly net income for 60 months is < $6,000, Ch. 7 is an option.
If net monthly income is between $6,000 and $10,000, then the debtor can file under Ch. 7; if net monthly income is < 25% of all non-priority unsecured debt.
Filer must complete consumer credit counseling within 6 months of filing along with tax returns, earnings projections and info on retirement accounts, CESAs, and 529s.
103
Are funds in a traditional or Roth IRA exempt up to $1 million?
Yes. Rollovers are exempt unlimited.
If IRA income exceeds debtors need, it is not exempt.
104
Does bankruptcy law make it safer to roll over 401(k) funds into an IRA account, or to leave the funds in the 401(k)?
401(k). ERISA protection in the 401(k) applies regardless of state law. The IRA may only afford limited protection under bankruptcy (state) law.
105
The Financial Planning Process:
1. Understand the clients personal and financial circumstances
2. Identify and Select goals
3. Analyze current course of action and potential alternative courses of action
4. Develop recommendations
5. Present recommendations
6. Implement recommendations
7. Monitor progress and Update
CFP® Professionals and their firms must understand that adherence to the seven steps is required when financial planning is provided. It provides a roadmap to best serve clients.
It must be followed when there is a written agreement, when financial advice is being given based on a given client's personal or financial circumstances, and when a client reasonably believes the CFP® Professional will provide, or has provided financial planning.
106
Cash/cash equivalents
- Cash
- Checking accounts
- Savings accounts
- CDs close to maturity
- Laddered CDs
- Money market deposit account (bank)
- Money market mutual fund (security)
life insurance cash values are not cash or cash equivalents because they may be delayed.
107
Positive vs Negative calculator inputs
Positive if money is deposited into the client's checking account.
Negative if money is moving out of the client's checking account.
108
Use of begin mode:
College tuition payment
Retirement benefits received
Family needs
109
When there are unequal cash flows, what calculator function is used?
the CFj function.
- If there is no cash flow, 0 is entered
- If there is a positive and negative cashflow in the same period, they must be netted.
- The first cash flow, typically the purchase of investment, is considered CF0.
Using this function, you can solve for PV, IRR, and NPV
110
May and Paul Gardner plan to retire in 10 full years. They currently have $1,000,000 in investments earmarked for retirement. During the retirement years they want to draw out $150,000 at the end of each year. They feel their joint life expectancy will be 25 years after retirement. When the second person dies, after 25 years, they want to leave $1,000,000 to family members. What return do they need to achieve if no additional money is added to their investment account?
1,000,000, +/-, CFj
0, CFj
10, gold, Nj (same key as CFj)
150,000 CFj (positive because its going into their bank account)
25, gold, Nj
1,000,000 CFj
Gold, IRR/YR
111
Does the financial planning agreement need to be in writing?
Yes. It must be in writing.
112
What is Scenario Analysis?
It addresses future conditions rather than current conditions.
Would not be effective in evaluating a clients current strengths and weaknesses of their financial situation.
113
Use Assets
- Home
- Personal property
- Collectibles for personal enjoyment
- Vacation home
- Automobiles or recreational vehicles
114
Establishing an emergency fund vs highly monthly spending/debt.
Establishing an emergency fund is high priority, unless monthly spending/debt is out of control. If monthly spending/debt is an issue, then there wouldnt be any additional funds for establishing an emergency fund, and that would need to be taken care of first.
115
When asked to solve for N, but the calculator is set to 2 p/yr, what do you need to do?
Divide the answer by 2. The calculator doesn't auto correct for this.
115
Unequal cash flows/IRR/NPV:
Rules that apply (Read)
- Positive and negative CFs in the same period are netted.
- If there is no cashflow, a 0 is entered.
- The first outflow, usually the purchase, is "CF0"
116
Credit Unions
Nonprofit financial organizations serving members with common affiliation.
Insured by the National Credit Union Share Insurance Fund instead of FDIC. Coverage is the same amount at $250,000.
Members are provided with a safe, convenient place to save and borrow at reasonable rates.
117
Under a 529 program, who has the control of the assets?
The owner (parent) maintains control of the accounts, even though the contributions qualify as present interest gifts. This is a huge advantage over UGMA/UTMA accounts, but 529 accounts are treated as parental assets and may reduce the eligibility to participate in need-based financial aid.
118
What are supplemental education opportunity grants?
Available only for Pell Grant recipients, and offered up to $4,000/year.
119
Our child support payments taxable or deductible?
No. Child support payments are non-taxable to the payee and nondeductible by the payor
120
Property settlements. Transfers of property between spouses incident to a divorce.
Gift tax-free, and the transferors basis in the property is carried over to the transferee.
121
What are certain legal documents that should be prepared or reviewed?
A living will, a durable power of attorney for healthcare, and a living trust.
122
Cyclical industries vs defensive industries
Cyclical: auto makers, and appliance manufacturers.
Defensive: food producers, pharmaceuticals, public utilities.
123
Durable vs nondurable goods
Durable goods are hard goods. They do not wear out quickly and they’re cyclical.
Nondurable goods are soft goods. They may be used up immediately or have a short lifespan. Typically these are defensive.
124
What does paying down mortgage principal do?
It increases net worth. When paying a mortgage, each payment goes towards principal and interest. The portion that goes towards interest does not have an effect on net worth, but paying down the principal does increase net worth because it decreases a liability.
125
RIA registration requirements
RIAs with under $100 million under management must register with their STATE. They may wait until $100 million to register with the SEC.
RIAs with $110 million or more under management must register with the SEC.
<$100 MM = ST
>$110 MM = SEC
Little more $, Little more letters.
126
Investment advisors act of 1940
Defined the role and responsibilities of an investment advisor. The act authorized the SEC to monitor those who advise, pension funds, individuals, and institutions on investing.
