GP Review Questions Flashcards
Which of the following is an example of quantitative data?
A. The client would like to retire by age 60.
B. The client would like to provide a fully paid education program for his/her child.
C. The client will gift $14,000 to a parent each year.
D. The client has a low risk tolerance.
C - The other answers are qualitative data.
What types of specific information should be gathered in the planning process in regards to the client's life insurance contracts? I. Retirement account values II. Property insured III. Premium and dividend options IV. Policy loans V. Ownership A. All of the above B. II, III, IV, V C. III, IV, V D. III, IV E. I, II, III
C - ‘Retirement account value’ and ‘property insured’ don’t apply to life insurance contracts. One might argue that the cash value of life insurance could be used as a retirement resource. If the client has inadequate retirement savings, the planner might consider the cash value as a source. However, I, III, IV, and V is not a choice.
Therefore, Answer C is the best answer.
Which of the following is a client weakness?
A. Having no guardianship provisions for minor children
B. Having no debt
C. Having a standard of living within budget
D. Saving for retirement at age 55
A - Lack of guardianship for minor children is always a major weakness.
Dr. Walters, age 64, wants to retire next year. He has asked you do a retirement projection. He is asking for an impossible retirement income payout based on all his usable assets. In order to meet his projections, you will have to use very high return assumptions. What should you do?
A. Do nothing
B. Run the projections using only your normal return assumptions
C. Run the projections using both your normal return assumptions and necessary assumptions to meet his required retirement income payout
D. Refer him to your worst enemy in town
C - Remember this is a financial planning test. Answer C is being a financial planner. NOTE: Decline him as a client could be an answer on the exam, but even then you should consider Answer C to be the best answer. Welcome to the test. Answer D is Zahn humor.
Which of the following is not an example of qualitative data?
A. Client’s priorities
B. Client’s personal and financial goals
C. Client’s desired retirement date
D. Fair market value (FMV) of the client’s assets
D - Since a client’s desired retirement date is subjective, the selection of the appropriate time horizon is considered qualitative. Answer D is clearly quantitative.
Completing the data survey on the client’s family members (family tree) allows the financial planner to determine which of the following?
I. The potential life expectancy of the client
II. The insurability of the client
III. The special needs of the client’s family members
IV. The net worth of the client
A. I, II, III
B. I, II
C. I, II, IV
D. II, III
E. III, IV
A - The data survey (family tree) includes information such as date of birth and health. The net worth would be quantitative data obtained from the client’s financial statement.
Learning about a client's health should help the financial planner determine which of the following? I. Retirement needs II. Life insurance needs III. Disability needs IV. Estate tax consequence A. All of the above B. I, II C. II, Ill D. Ill, IV
A - Health affects retirement, life insurance, and disability needs. The client’s life expectancy would impact the estate tax consequences.
In the gathering-client-data step of financial planning process, there are two types of data. Which of the following is an example of qualitative data? A. Client's date of birth B. Amounts invested in stocks and bonds C. Client would like to retire by age 65 D. Names of financial advisors E. Copy of ILIT
C - The ability of the financial advisor might be considered qualitative but when you can retire is a quality of life Issue.
During the first meeting with a client, the financial planner and client need to mutually define the scope of the engagement before any financial planning services are rendered. Which of the following should be defined?
I. The financial planner’s compensation arrangements
II. The responsibilities of the client
III. The duration of the engagement
IV. The services to be provided
V. Information which would limit the scope of the engagement
A. All of the above
B. I, Ill, IV, V
C. I, II, V, V
D. I, IV, V
A - The duration (or time) and the scope can be limited.
When can a CFP certificant reveal confidential information?
I. To comply with legal process
II. In connection with a civil dispute between a CFP designee and a client
III. To defend the CFP designee against charges of wrongdoing
IV. Even if it causes irreparable harm to the client
V. With the client’s consent
A. All of the above
B. I, II, V
C. I, III, V
D. I, V
A - Irreparable harm - your client is getting a divorce. You are asked in court about your knowledge of his or her assets. You have to answer.
The Standards of Professional Conduct clarifies that the Code of Ethics and Professional Responsibility applies to which of the following?
A. All CFP Board certificants
B. Financial Planners
C. Candidates who are registered with the CFP Board
D. Individuals who have been certified In the past and retain the right to reinstate their CFP certification without passing the current CFP Board Certification Examination
A - Compliance requires CFP Board certificants to comply with the code.
Which of the following is a true statement?
A. The Principle of Objectivity states that the interests of the CFP designee and the client are of equal importance.
B. A CFP certificant may not provide references consisting of current or former clients since this would violate the rule of confidentiality.
C. There is no requirement to disclose conflicts of interest that develop after the professional relationship is under way.
D. Compensation disclosure to ongoing clients must be furnished biannually.
B - As written, this is a true statement. If we added to the question that a client gives permission to use their name as a reference, then one may use them as a reference. Conflicts of interest always need to be disclosed.
Which of the following is/are true about CFP Board Code of Ethics, Part I?
I. It covers the seven principles.
II. It covers the rules.
III. It covers general statements and professional goals.
IV. It applies to specific activities performed by CFP Board designees.
A. I, II
B. I, III
C. I, IV
D. III
E. IV
B - Part I covers the seven principles. Part II covers the rules. Answer IV applies to the rules, not the principles.
During the analyzing and evaluating step of financial planning, which of the following would likely occur?
I. Development of a statement of financial condition
II. Identification of strengths and weaknesses
III. Identification of goals and objectives
IV. Identification of recommendations on investments
A. I, II
B. I, II, IV
C. II, III
A - Answer III is wrong. Identifying goals is part of the data gathering step. Answer IV is wrong. Making recommendations on investments is part of the developing and presenting planning recommendations step. It comes before implementation.
Toby Adams CFP is meeting with a new client. He wants to establish and define the relationship. What are his obligations to the client?
I. To disclose his exact commissions on the potential sale of life insurance
II. To define the time frame for the engagement
III. To give the client a brochure about the firm
IV. To explain the client’s responsibilities
A. All of the above
B. I , II, IV
C. II, III
D. II, IV
E. Ill, IV
D - Toby must discuss how he will be compensated, but he does not need to disclose the exact commissions he could receive from the sale of life insurance products. A brochure is not required.
Conflicts of Interest are disclosed under which principle and rule? I. Objectivity II. Fairness III. Professionalism IV. 2.2 V. 6.1 A. I, IV B. I, V C. II, IV D. II, V E. III, V
C - Conflicts of interest are spelled out in Fairness and Rule 2.2. Very Picky.
Under the CFP Board’s Financial Planning Practice Standards, which of the following actions must take place prior to providing any personal financial planning services?
I. The CFP certlficant shall obtain sufficient and relevant quantitative Information and documents applicable to the scope of the engagement and the services being provided.
II. A client’s personal and financial goals, needs, and priorities relevant to the scope of the engagement and the services to be provided shall be mutually defined by the financial planning practitioner and the client.
III. An engagement letter covering the services to be provided must be signed by both the financial planning practitioner and the client.
IV. The scope of the engagement shall be mutually defined by the financial planning practitioner and the client.
A. I, II, III
B. II, IV
C. I, III, JV
D. I, II, IV
D - An engagement letter, while advisable and recommended, is not required.
Roughly a dozen times a year, Bruce Leonard, a CFP certificant, encounters clients having serious cash flow and net worth deficits. He generally recommends they consider bankruptcy. Typically, the clients ask Bruce for a referral to a bankruptcy attorney. Bruce generally refers such clients to Mark Mason Esq. Bruce has no formal arrangement with Mr. Mason, but Mr. Mason pays Bruce $150 in cash for every referral who becomes a bankruptcy client. Which of the following statements best reflects the ethical aspect of this situation?
A. Acceptance of any referral fees clearly violates the Principle of Fairness found in the Code of Ethics and Professional Responsibility.
B. Acceptance of any referral fees does not violate the Principle of Fairness found in the Code of Ethics and Professional Responsibility If the nature and source of the referral fee is disclosed in writing to each client referred.
C. Referral fees to attorneys do not violate the Principle of Fairness found In the Code of Ethics and Professional Responsibility because they do not involve product commissions with potential to compromise the Principle of Objectivity.
D. Bruce has no obligation to research Mr. Mason’s competence providing Mr. Mason holds a valid legal license.
B - The code does not prohibit a planner from accepting referral fees; however, the source and nature, but not the amount of such fees, must be disclosed. The code does not distinguish whether the planner’s side compensation represents commissions or referral fees. The Principle of Diligence requires the planner to research the competence of other professionals to which the planner refers clients. Mr. Mason could be an estate planning attorney and know very little about bankruptcy law.
Practice standard 400-2 refers to which of the Following?
A. Objectivity
B. Competence
C. Analysis and evaluation of the client’s financial status
D. Development of the recommendations
D - Practice standards refer to steps in the personal financial planning process. Analysis and evaluation is Practice Standards 300. Practice Standard 400-2 is Development of Financial Planning Recommendations.
A prospective client calls and tells you a mutual fund that she is considering purchasing will pay a huge capital gain in a few weeks. What questions should you as a financial planner ask this client at this point?
I. What is the client’s date of birth?
II. What are her investment objectives?
III. What other investments does she have?
IV. Will she take the capital gains in cash or reinvest?
V. What is the client’s investment experience to date?
A. I and II
B. II and III
C. IV
D. All of the above
D - All the questions are important. However, the only possible answer is all of the above.The age of the client could be important. The client could be a child. The account is an UTMA. The parent is the custodian.
Which of the following are inflows for the cash flow statement? I. Savings II. Insurance premiums III. Inheritance received IV. Trust income received V. Alimony received A. All of the above B. I, II, IV C. II, IV, V D. III, IV, V E. None of the above
D - Savings and insurance premiums are not inflows.
At what value are assets shown on the statement of financial position? A. Market value B. Replacement value C. Current fair market value D. Market value less any encumbrances E. Appraised value
C Fair market value
Which of the following are not cash/cash equivalents? I. Mutual Funds II. Money market accounts III. III. Cash under mattress IV. CDs with long maturity remaining V. Publicly traded stock A. I, II, IV B. I, IV, V C. II, III D. III, IV, V E. IV, V
B - The mutual fund and the stock fluctuate in value. The long-term CDs entail a penalty if they are converted into cash.
Tom is debt-free. He used $4,000 from his money market account to contribute to a Roth IRA. From his cash flow, he invested $25,000 in a new mutual fund fund during the year. In addition, due to good investment choices, his existing investments plus his home grew in value by $100,000. What was his change in net worth for the year? A. $29,000 B. $100,000 C. $121,000 D. $125,000 E. $129,000
D - The Roth investment ($4,000) was offset by a decrease in this money market, resulting in no change to net worth. If the Roth had been funded from cash flow, net worth would have increased. Mutual fund ($25,000) plus investment growth ($100,000) equals $125,000.
Todd Jones asks for your help to prepare his cash flow statement. He tells you that his salary before taxes is
$250,000 and that he has no mortgage on his home. Which of the following statements is true about Robert’s cash flow statement?
A. The taxes on his salary are an expense.
B. The value of the home is an income source since there is no mortgage.
C. The value of the home is an asset.
D. The taxes on his salary are a liability.
A - Answers B and C regarding his home have nothing to do with the cash flow statement.
Mr. and Mrs. Young want to set up a 3-month emergency fund ($15,000). Both of them work, but due to mortgage interest and property taxes, their marginal income tax bracket is only 15%. What kind of account should they set up for the emergency fund? A. High-yield bond fund B. Aggressive growth fund C. Government money market fund D. Tax-free money market E. Tábills
C - Answers A and B are too risky to be used as an emergency fund. The government money market account provides a better equivalent yield than a tax-free because of their low marginal income tax bracket. Government market fund is significantly simpler than T-bills which are large denominations and can have maturities of up to 12 months.
In designing a business budget for a couple that is self-employed, which of the following items would be included as inflows? I. Self-employment taxes II. Keogh contributions III. Notes payable IV. Fees for services rendered V. Checking account interest A. I, II, IV, V B. II, III, IV C. III, IV D. IV, V E. I, V
D - Answers I, II, and III are outflows.
A client provides a current personal balance sheet to the financial planner during the initial data-gathering meeting. This financial statement will enable the financial planner to gain an understanding of all except which of the following?
A. Diversification of the client’s assets
B. Amount of the client’s net cash flow
C. Client’s liquidity position
D. Client’s use of debt
B - The question is asking about the balance sheet.
What is the independent rule of thumb for PITI? A. 20% of net income B. 28% of net income C. 28% of gross income D. 36% of gross income
C - See details of PITI within Lesson 3 materials
Torn purchases a CD for $50,000. He expects it to increase in value at 7.5% compounded annually for the next five years. How much will the CD be worth at the end of the fifth year? A. $34,827.93 B. $70,127.59 C. $71,781.47 D. $72,113.90
C - HP10BII / 17BII 12C 1 gold P/YR $50,000 $50,000 ± PV CHS PV 7.5 I/YR 7.5 i 5N 5 n FV = $71,781.47 FV = $71,781.47
Tim expects to receive $100,000 from a trust fund in 5 years. What is the current value of this fund if it is compounding at 7% annually? A. $71,068.13 B. $71,298.62 C. $100,000.00 D. $140,255.17
B - 10BII / 12C / 17BII+ (Enter 1 gold P/YR for 10BII / 17BII+) $100,000 FV 7 i 5 n PV = $71,298.62 The calculator will actually show a negative number; PV is negative.
Mac expects to receive $100,000 in 10 years. What is the current value of this money if it compounds monthly at 12%? A. $30,299.48 B. $31,863.08 C. $32,197.32 D. $310,584.82
A - 10BII / 17BII+ 12C 12 $100,000 FV gold 1* i P/YR 120* n $100,000 FV 12 I/YR 10 gold xP/YR PV = $30,299.48 PV = $30,299.48 *[12% Ö 12 months = 1 i, 12 months x 10 years = 120n, or shortcut 10 blue n = 120n]
Jane purchased 1,000 shares of a mutual fund for $10 per share 5 years ago. Today, she sold the fund for $20 per share. What was her average annual compound rate of return?
A. Error 5 B. 2.97% C. 13.89% D. 14.87% E. 15.26%
D - 10BII / 17BII 1 gold P/YR $10,000 ± PV $20,000 FV 5 N I/YR = 14.87% 12C $10,000 CHS PV $20,000 FV 5 n I = 14.87
Louise wants to purchase a home in 5 years. She anticipates making a 20% down payment on a $150,000 home. How much should Louise invest at the end of each year if she expects a return of 9% per year on the investment? A. $2,720.70 B. $4,598.87 C. $5,012.77 D. $22,994.37
C - End mode 10BII / 12C / 17BII+
$30,000 FV, 5 n, 9 I, PMT = $5,012.77
Billie receives an inheritance of $100,000. She wants to withdraw equal periodic payments at the beginning of each month for the next 5 years. Billie expects to earn 9% compounded monthly on the $100,000. What amount will Billie receive each month? A. $1,965.54 B. $2,060.38 C. $2,075.84 D. $2,142.43
B - Start in Begin mode 10BII / 17BII 12C 12 gold P/YR $100,000 CHS PY $100,000 ± PY .75* i 9 I/YR 60* n 5 gold x P/YR PMT = $2,060.38 PMT = $2,060.38 *[9% ± 12 months = .75 i/12 months x 5 years = 60n, or 9 blue i = .75 i, 5 blue n = 60 n] NOTE: Answer C is using end mode.
If John has already invested $100,000 and wants to accumulate $200,000 more in 10 years, what amount is the annual investment he must make by the end of each year to accomplish his goal? Assume both the initial investment and new investment will earn 8%. A. $5,375.83 B. $5,805.90 C. $12,077.08 D. $13,805.90
B End mode 10BII / 17BII+ 1 gold P/YR $100,000 ± PV $300,000 FY 10 N 8 I/YR 12C $100,000 CHS PY $300,000 FY 10 n 8 I PMT = $5,805.90 PMT = $5,805.90
Meg and John bought an older home ($40,000) that was in need of improvements. Immediately after moving in, they spent $5,000.
- End of year one, spent $1,000 (lawn)
- End of year three, spent $3,000 (gutters)
- End of year five, spent $1,500 (windows)
If they sold it at the end of year five for $100,000, what is the IRR?
A. 9.56%
B. 11.28%
C. 15.55%
D. 21.09%
C - 10BII $45,000 ± CFj $1,000 ± CFj $0 CFj $3,000 ± CFj $0 CFj $98,500 CFj gold IRR/YR 12C $45,000 CHS g CFo $1,000 CHS g CFj $0 g CFj $3,000 g CHS CFj $0 g CFj $98,500 g CFj f IRR 17BII CFLO clear data yes #T? off off Flow 0 = $45,000 ± Input $1,000 ± Input $0 Input $3,000 ± Input $0 Input $98,500 Input Exit calculate IRR
Tony purchased a mountain cabin 5 years ago for $40,000. Subsequent transactions were the following.
- End of year one, (new roof): $3,000
- End of year two, (new well): $5,000
- End of year three, (new fireplace): $10,000
- End of year four, (new windows): $8,000
- End of year five, (sold property): $85,000 What is the IRR?
D. 16.2%
A - 10BII $40,000 ± CFj $3,000 ± CFj $5,000 ± CFj $10,000 ± CFj $8,000 ± CFj $85,000 CFj gold IRR/YR 12C $40,000 CHS g CFo $3,000 CHS g CFj $5,000 CHS g CFj $10,000 CHS g CFj $8,000 CHS g CFj $85,000 g CFj f IRR 17BII CFLO clear data yes #T? off #T? off Flow 0 = $40,000 ± Input $3,000 ± Input $5,000 ± Input $10,000 ± Input $8,000 ± Input $85,000 Input Exit, Calculate IRR
Helen participates in a retirement plan with the following characteristics:
- Her current balance: $28,000
- Yearly contribution paid by her employer: $7,500
- Annual Return: 9%
How long will it take for her to accumulate $300,000 in the plan?
A. 14 years (12C) / 13.62 years (10B / 17BII+) B. 15 years (12C) / 14.35 years (10B / 17BII+) C. 17 years (12C) / 16.8 years (10B / 176II+) D. 18 years (12C) / 17.7 years (10B / 17BII+)
B Start in End mode 10B $28,000 +/- PV $7,500 +/- PMT 12C $28,000 CHS PV $7,500 CHS PMT 9I 9 i 300,000 FV = N $300,000 FV = n 15 years (12C) 14.35 (10BII/17BII) Retirement plan contributions are made at year end. Please review page 4-4 for begin/end usage. She does not contribute. This is not a 401( k).
What is the future value of $100,000 at 7% for 10 years? A. $50,834 B. $100,000 C. $176,431 D. $196,715
D - 10B $100,000 +/- PV 7 I/Y 10 n Solve for FV 12C $100,000 CHS PV 7 I 10 N Solve for FV .
Which of the following investment products is federally insured? A. Bonds B. Variable annuities C. Time deposits D. Treasury bills
C - A time deposit means a CD (federally insured) by FDIC. Bonds may be insured, but the question would have to say so. Variable annuities may provide some guaranteed rate of return and have some state guarantees. Treasury bills are guaranteed by the federal government.
Which of the following investments is insured?
A. Securities held at a brokerage company
B. Treasury bonds
C. Mutual funds
D. Annuities
A - Picky. The SIPC insures investors against losses arising from the failure of the brokerage firm.
Which of the following statements concerning federal law is correct?
A. The Securities Act of 1933 provides for protections from misrepresentation, deceit, and other fraud in the sale of existing securities.
B. The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of poor investment choices.
C. The Investment Company Act of 1940 authorized the SEC to regulate mutual funds.
D. The Investment Company Act of 1940 requires that persons or firms advising others about securities investments must register with the Securities and Exchange Commission.
C - Answer D is wrong. The Investment Advisors Act of 1940 covers registration of persons or firms advising others, not The Investment Company Act of 1940.
What regulates brokerage companies? A. SEC B. FINRA C. NYSE D. Securities Act of 1934
B - The SEC regulates brokerage companies through the FINRA.
Mrs. Smith has the following assets at one FDIC-insured bank. Asset Various Certificates of Deposit Ownership Mrs. Smith Balance $200,000 Money Market Deposit Account Mrs. Smith $150,000 IRA Rollover Mrs. Smith $200,000 Passbook Savings Joint with son $100,000 Checking Account Joint with daughter $100,000 Savings Account Joint with husband $150,000 How much is currently insured by the FDIC? A. $700,000 B. $750,000 C. $800,000 D. $850,000 E. $900,000 Material is solely for the use in preparation for the November 2014 CFP Certification Examination .
C - She is insured for $250,000 for the CD and money market and $200,000 for the IRA. The joint accounts are handled as follows.
Joint with son
Joint with daughter
Mrs. Smith
$ 50,000
50,000
Others
$50,000 50,000
Joint with husband 75.000 75.000
$250,000 single + $200,000 IRA + $175,000 JT + $175,000 JT
The JT account for Mrs. Smith is under the $250,000 maximum.
Jill wants to fund her daughter’s college needs. She needs $40,000 available ($10,000 per year) at age 18. Her daughter is age 2. She feels that she can make an 8% after-tax return and that inflation will be 3% over the pre- college years. How much does Jill need to deposit today to meet her goal?
A. $10,385 +/- $1 B. $11,675 +/- $1 C. $16,665 +/- $1 D. $18,735 +/- $1
B - $40,000 FV 16 n 8 i = $11,675.82 PV The question does not say $40,000 in today's dollars, just $40,000.
Tom and Jennifer are struggling but would like to make monthly deposits to fund their new baby's college education. They realize college costs will Increase with inflation, but they want to start with a small amount of savings to fund $100,000 at age 18. They plan to invest $200 at the end of each month. What rate of annual return do they need to achieve? A. 6.92% B. 6.97% C. 7.84% D. 8.37%
D - End mode, Keystrokes below You solved for monthly interest Annual interest = .6974 i x 12 8.37% 10B 12 P/YR 100,000 FV 200 +/- PMT 18, gold P/YR I = 8.37% *18 years x 12 12C $100,000 FV 200 CHS PMT 216 n*
During the educational funding period (pre-college), which of the following techniques will work for a middle-class family ($60,000 MAGI) for their son?
A. An UTMA funded with EE education bonds
B. A parent loan to undergraduate student (PLUS)
C. Yearly gifts by a grandparent to a 529 plan and yearly contributions to a Coverdell ESA by the parents
D. A Pell Grant
C - Answer A is wrong because EE education bonds cannot be owned by a UTMA. It is tax-deferred but not qualified. The child owns the UTMA, not an adult over age 24. PLUS and Pell Grants are available during the college years. The question is asking about the pre-college years.
During the college years, which of the following techniques will work for families ($180,000 MAGI) to pay the tuition for the 1st year of college?
A. A 529 withdrawal to pay tuition and a Lifetime Learning credit using the tuition payment
B. Coverdell ESA withdrawal to pay tuition and an American Opportunity Credit using the tuition payment
C. A Pell Grant and a 529 withdrawal to pay tuition
D. A PLUS and a Coverdell ESA withdrawal to pay tuition
D - A 529 or a Coverdell ESA withdrawal cannot be used to pay the tuition and then to take a credit for the tuition paid (Answers A and B). A Pell Grant Is needs-based. This is a wealthy family. In answer B, the American Opportunity Credit is phased out.
QTPs differ from UTMA accounts in all ways except which of the following:
A. A gift to a QTP is considered a gift of a future interest; a gift to a UTMA is considered a gift of a present interest.
B. The owner of a QTP retains the right to determine how and when to use the money in the account; the custodian of a UTMA loses control when the student reaches the age of majority.
C. The owner of a QTP can change the beneficiary; the custodian of a UTMA cannot change the beneficiary.
D. QTPs grow tax-deferred, and distributions are tax-free if used for qualified educational expenses; UTMA growth and Income distributions can be subject to both regular tax and kiddie tax.
A - Answers B, C, and D are correct; they spell out the differences. A QTP is a gift of a present interest even though the owner retains control. This is the same as a gift to a UTMA (present interest).
Parents ($160,000 MAGI filing jointly) with one child in the first year of college should choose which of the following credits if he/she pays tuition of $10,000 in the current year?
A. A Coverdell ESA of $2,000
B. An American Opportunity Credit of $2,500
C. A Lifetime Learning Credit of $2,000
D. An UTMA gift of $10,000
B - Both answers B and C are correct, but Answer B Is greater and so would be the parent’s choice. In this case, the Lifetime Learning credit completely phased out (MAGI above $128,000). The question is asking about credits.
Which of the following is true about Coverdell ESAs?
A. Multiple $2,000 contributions can be made on behalf of one beneficiary per year by multiple individuals (not both parents).
B. Expenses such as tuition can qualify even when they are for graduate school (to age 30).
C. Contributions to the ESA are tax-deductible.
D. All earnings must be paid out at age 18.
E. Contributions may only be made by a parent.
B - Earnings rnust be distributed when the beneficary reaches age 30. The aggregate contribution on behalf of a beneficiary cannot exceed $2,000.
Mr. and Mrs. Tice want to fund for their daughter's education. Their daughter is in the 1st grade and will need a computer with software in 2 years. How should they fund the computer and other elementary education expenses if they are in a 28% marginal income tax bracket (under $180,000 MAGI)? A. Save from cash flow B. Set up a Coverdell ESA C. Set up a UTMA account D. Invest in a 529 plan
B - UTMAs are subject to the kiddie tax. (Parents are in the 28% bracket.) Answer A is not a bad choice. Answer B answers the question with tax consequences. This is a writer-evaluation question/answer.
Sally, age 8, has an UTMA account funded by her grandfather (15% tax bracket). Her account generated $2,500 of interest and dividends. Her father is the custodian. His income tax bracket is 28%. What is the amount of tax due on Sally's account? A. $100 B. $140 C. $200 D. $240 E. $420
D - Income $2,500
Standard deduction - 1,000
Taxable at 10% - 1.000 @ 10% = $100 Remainder at 28% $ 500 @ 28% = + 140
$240
If the parents are alive always use their tax rate.
John and Helen want to fund a college education for their son, William, age 2. William will attend 4 years of college starting at age 18. They feel that the cost of college will be $12,500/yr in today’s dollars. They feel that they can achieve an 8% after-tax yield on their Investments and that inflation will be 5% over the next 20 years. Which of the following is true?
A. The lump sum needed to fund the education is $30,555 +/- 5.
B. The lump sum needed to fund the education is $29,706 +/- 5.
C. The lump sum needed to fund the education is $31,857 +/- 5.
A - Cost Deposit now $12,500 $30,555 16 @ 5% 16 @ 8% $27,285.93 1st year 2.8571 4 n During College $104,679.76 total If you calculated $101,728 then you used end mode. Frankly, you either understand this calculation or you don't. If you do not, you must make up your mind you do not and move on. You cannot waste time on one potential question. 2.8571 is 1.08 Ö 1.05, -1, x 100. Please go back to page 6-1 and substitute these numbers. General Principles Quiz Lesson 7
Which of the following qualifies for compensatory damages? A. Auto accident B. Headaches C. Age discrimination D. Stomach disorders
C - Vague physical symptoms such as insomnia, headaches, or stomach disorders are not considered physical injury or Sickness. There is not enough information about the auto accident to know whether it qualifies for compensatory
damages.
Sue was awarded a lump sum settlement of $1,000,000 in punitive damages as a survivor benefit due to the wrongful death of her husband in a job-related accident. How is the lump sum taxed?
A. 100% taxable
B. 100% excludabie
C. Punitive damages are always taxable.
B - The exception to the punitive damages tax inclusion rule is wrongful death.
Barry suffers from a work-related injury (lung disease caused by asbestos). He is awarded $1,000,000 as compensatory damages. The settlement is awarded in the form of a single premium immediate annuity. How is the payout taxed?
A. 100% taxable
B. 100% excludable
C. The $1,000,000 is excludable. Any Income earned is ineluctable.
D. The $1,000,000 is includable. Any income earned is excludable.
B - When a single premium immediate annuity is purchased by the party obligated to make the damage payments, the entire amount of each periodic payment is excludable by the taxpayer receiving the payments.
Harry and Sally won $200,000,000 In the Big Kahuna lottery. Within 60 days of winning, they decided to split the winnings and take payouts over 20 years rather than the lump sum. How much must be included In income this year?
A. The payment each received this year.
B. $200,000,000 because they split the winnings.
C. $200,000,000 because they had the option to choose cash.
D. The Income tax is based on the annuity Inclusion ratio.
A - A choice of either cash or an annuity made not later than 60 days after entitlement to the prize is disregarded in determining the tax year for which any portion of a qualified prizeis included In income.
Which of the following is/are among the normal economic indicators? I. Standard & Poor's 500 Index II. Supplier delivery delays III. The Yield Curve IV. Initial unemployment claims A. I B. II, III C. I, II, IV D. II, III, IV
C - The yield curve is not an economic Indicator unless it is moving. The others are normal economic Indicators that we hear about every day.
