I Know It Flashcards by Omen Quelvog

Of a temporary or permanent bar, which one applies to those who are not currently CFP professionals?

Both of them only apply to those who are not currently CFP professionals

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When appropriate, the CFP® professional must consider which of the following when exploring potential alternative course(s) of action in Step 3 of the financial planning process?

I. The material advantages and disadvantages of each alternative.
II. The product(s) that will be recommended.
III. How each alternative integrates the relevant elements of the Client’s personal and financial circumstances.
IV. An estimated implementation timeline.

I, II, III, IV
I and III
II and IV
I only

I and III

I. The material advantages and disadvantages of each alternative.
III. How each alternative integrates the relevant elements of the Client’s personal and financial circumstances.

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What is the last day rule?

If on the first day of the last month, a client can contribute to an HSA, they can fund the entire year

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Which of the following statements regarding the Occupational Safety and Health Act of 1970 (OSHA) is NOT correct?

-OSHA requires removal of all recognized hazards from the work environment.
-OSHA imposes heavy fines for noncompliance.
-OSHA provides a provision for imprisonment in some cases where employees’ injuries are fatal.
-OSHA requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware.

OSHA requires notification of the Consumer Product Safety Commission (CPSC) by manufacturers and retailers of any product hazard of which they become aware.

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Which of the statements regarding a property insurance binder is NOT correct?

-A binder is a temporary contract in property insurance.
-A binder is often used before the issuance of the formal insurance policy.
-A binder must meet all the requirements for a legal contract. It is distinguished by its temporary nature (often 30 days or less).
-A binder must be in writing to be enforceable.

A binder must be in writing to be enforceable.

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What is the last clear chance doctrine?

If it can be shown that a party had a last clear chance to avoid damages and did not take that chance, that party can be found liable

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What is a binder policy?

A temporary policy that provides evidence of sufficient insurance until the actual policy underwriting is complete

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A bond is selling for $945 and has a coupon of 4.5% paid semi-anually. If the bond matures in 15 years at $1,000, what is the yield to maturity? (Get your signs right!)

5.03%
2.51%
4.23%
4.5%

N=yrs (x2(semi annual) (30)
PV= +/- coupon selling price (-945)
PMT = semi annual coupon payment (22.50)
FV = bond maturity (1000)

Solve I/YR = 5.03%

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Adam held an investment for three years and it provided returns of 12%, 14% and 6% respectively. What is the geormetric mean of these returns?

10.67%
10.61%
8.67%
9.36%

N = number of investment returns
PV = -1
FV = (1+/-r1)(1+/-r2)(1+/-rx…)
Solve I/YR

10.61%

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Given a 10 year bond with a 3% call premium, a current price of $961.63, a coupon of 8% that can be called in 3 years, what is the YTC (or year to worst (YTW))?

N = #yrs to call (x2 (semi-annual) (6)
PV= +/- current price (-961.63
PMT = coupon rate payment (semi) (40)
FV = bond price x call premium (1030)

Solve for I/YR = 10.40%

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Given a 10 year bond with a 3% call premium, a current price of $961.63, a coupon of 8% that can be called in 3 years, what is the YTM?

N = #yrs to maturity (x2 (semi-annual) (6)
PV= +/- current price (-961.63
PMT = coupon rate payment (semi) (40)
FV = bond price (1000)

Solve for I/YR = 8.58%

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What are the tax exclusion items (DADS MADE PACIFISM)(16)?

Death benefits
Adoption Assistance
Dependent care
Scholarships

Muni bond interest
Accident & Health plans (ER premiums)
Debt discharged (sometimes)
Educational assistance

Personal residence sales gain
Accident & Health plans (amount received)
Compensatory damages
Inheritances & gifts
Fringe benefits
Interest on education savings bonds
Support payments received
Meals and lodging for EEs

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What are common adjustment FOR (above the line) AGI?

Educator expenses
Business expenses
HSA contributions
Moving expenses (military)
ER portion of SE tax
SE retirement account contributions
Early withdrawal penalties
Alimony payments for divorces prior to Dec 31st, 2018
Student loan interest
Traditional IRA contributions

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Which of the following requirements must be met to claim a dependency exemption for an individual who is considered a qualifying child? (Select all that apply)

A relationship test
An age test
An abode test
A support test
An earned income test

A relationship test
An age test
An abode test
A support test

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Saul, age 50, plans on retiring at age 65 and expects to live in retirement until age 85. Based on his income replacement goal and leaving no balance at life expectancy, the capital needed to accumulate by day one of his retirement is $2,500,000. Saul has asked you to calculate the amount of capital needed if he wants to maintain the same purchasing power throughout retirement if he earns 8% and inflation is 2% during that period.

$2,789,784
$2,647,060
$3,297,018
$3,560,684

$3,297,018

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Saul, age 50, plans to retire at age 65 and expects to live in retirement until age 85. His current income is $250,000 per year and he wants to assume an income need of $250,000 throughout retirement. Using the capital preservation approach, what amount of capital does Saul need on hand on day one of retirement to support this approach if he assumes he can earn 8% per year and inflation will be 2% throughout retirement?

$3,723,036
$3,516,201
$4,042,621
$2,981,152

$3,723,036

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Under the excess method for integration with Social Security, what is the maximum excess contribution rate to the plan if the base contribution percentage is 5%?

10%
5%
10.7%
25%

10%

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Andre and Corinna are good friends who bought a lakefront dock together as JTWROS. Andre paid 75% of the $250,000 purchase price and Corinna paid 25%. When Corinna died, the FMV of the dock was valued at $500,000. Later in the year, following property transfer, Andre sold the dock for $600,000.

What is Andre’s realized gain on the sale of the property?

$150,000
$187,500
$225,000
$287,500

$287,500

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Select the classification evidence that provides the proof needed to categorize property as community or separately owned.

I. Furnishing records
II. Purchase receipts
III. Deeds of title
IV. Records of deposit or withdrawal

I, III, and IV
I, II, III, and IV
II and IV
III only

I. Furnishing records
II. Purchase receipts
III. Deeds of title
IV. Records of deposit or withdrawal

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Zohara made a series of misrepresentations to financial planning clients related to a loan used to purchase bank stock on behalf of her clients. The DEC reviewed the Hearing Panel recommendation and issued a final order of revocation. Zohara intends to contest the ruling and hopes to begin re-using her CFP® marks as soon as possible.

Which of the following options are available to Zohara?

-Appeal to the Board of Directors Appeals Committee
-Apply for reinstatement after 1 year
-Request a Settlement Hearing
-None of these

-None of these

Revocation is final and there are no appeals.

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Thorough Consumption and Savings Planning requires periodic review of each of the following items EXCEPT:

cash flow statement
quarterly bank statement
a balance sheet
net worth statement

quarterly bank statement

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Rank the Long-Term Care Facilities from lowest to highest level of support.

I. Adult Day Health Care (ADC)
II. Nursing Home Care
III. Assisted Living Facility (ALF)
IV. Home Health Aide Services

II, III, I, IV
IV, I, III, II
IV, I, II, III
III, IV, I, II

IV, I, III, II

Home Health Aide Services
Adult Day Health Care (ADC)
Assisted Living Facility (ALF)
Nursing Home Care

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What are the 6 activities of daily living (ADL)? (BEDCOT)

Bathing
Eating
Dressing
Continence
On/Off Toilet
Transferring

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What does a partnership LTCi do?

Gives extra protection if LTCi is exhausted. Protects assets to prevent spend down and still be eligible for Medicaid

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What are the OWN OCC, ANY OCC and SS definitions?

Own OCC: not being able to perform own occupation will result in disability Any OCC: must not be able to work any occupation to receive disability SS definition: Any OCC and must be for 12+ months or result in death

An ER is required to carry COBRA coverage if they have more than _____ EEs

Stock ABC returns 20%, 15%, -9%, 34% and -16% over the last five years respectively. What percentage of the time would you expect a return between -12% and -32.8%? 50% 97.5% 68% 13.5%

13.5%

What is home health care?

Care at the house a few days per week. Can be either medical, performed by an RN, or assistance with daily living, performed by a CNA.

What is Hospice Care?

Care for terminally ill patients and may take place at the home, care center, or nursing home.

What is the most important rider in LTC insurance?

Inflation Protection Rider

Difference between collar and straddle?

A collar is a put and call with a spread strike price. A straddle is a put and a call at the same strike price

Each of the following have a 45 calendar day deadline EXCEPT Present Documents Notice Identifying Witnesses Provide Written Statements Present Stipulations

Notice identifying Witnesses needs to happen within 30 days.

Which of the following reviews and decides all appeals? Disciplinary and Ethics Committee (DEC) Appeals Committee CFP Board Counsel Hearing Panel

Appeals committee

What is the target savings rate?

10%

How is gift splitting reported on the 709 form (how is tax calculated)?

The total gift is split in two and then the taxable amount becomes what is above the annual exclusion (e.g. $50k gift split becomes $25k gift with $9k taxable on 709)

What are the refundable credits?

AOTC (100% of first $2k, 25% of next $2k) Earned Income Credit Additional Child Tax Credit Premium Tax Credit

What are the nonrefundable tax credits?

Lifetime learning credit Child and dependent care Child tax credit Retirement savings contribution credit

How is spousal JTWROS basis calculated when one spouse dies?

50% of FMV at purchase + 50% at death of spouse

How is basis calculated for non-spousal JTWROS when one partner dies?

%price owned at purchase + partner's %of FMV at death

What are the threshold percentages of withholdings estimate tax payments AGIs above and below $150k?

Below $150K - lesser of ((.9 x current year taxes) / 4) or 100% of last years taxes (/ 4). Above $150K - lesser of 90% of current year taxes or 110% of last years taxes

What are the limits and tax treatment of personal use property (for rental)?

Rent for >14 days. Income does not have to be reported. Deductions are mortgage interest and property tax

What are the limits and tax treatment of rental use property?

Personal use does not exceed greater of 14 days or 10% of rental days. $25k loss deduction applies for passive income.

What are the limits and tax treatment of mixed use property (rent and personal)?

Number of personal days exceeds 14 days or 10% of rental days. Expenses must be separated. Deductions are limited to amount of income. Other losses can be carried forward.

Schedule K-1

Partnership distributions

Schedule D

Capital gains/losses

Schedule B

Dividends and interest income

Form 5500

Qualified plan reporting

Schedule E

Rental and royalties

Form 1041

Estates and trusts

What is the tax flow formula?

All income (except exclusions) = gross income -> minus gross deductions = adjusted gross income -> minus itemized or standard deductions = taxable income -> times tax rates (table) = gross tax -> minus credits = final tax due

What is the formula for determining deductible IRA contribution amount if considered an active participant?

(top end - total income) / (top end - bottom end) x $6000

To qualify for the foreign-earned income exclusion, the taxpayer must either be a bona fide resident of one or more foreign countries for an entire taxable year or be present in one or more foreign countries for ________ during a period of 12 consecutive months. 330 days 274 days 183 days 307 days

330 days

Describe the purpose and "step 3" N value / interest rate calculations of the following: Capital utilization Capital preservation Purchasing Power

Capital UTILIZATION expects to spend money down to zero at death - N = yrs until ret & I/YR = nominal rate Capital PRESERVATION leaves an amount leftover at death - N = yrs IN ret & I/YR = nominal rate. ADD Step 3 PV to Step 3 FV for total amount required at retirement Purchasing power keeps accounts for inflation throughout retirement - N = yrs IN ret & I/YR = INF ADJ rate. Add PV to FV for total amount required at retirement

What is the per capita distribution?

Split evenly amongst all survivors

What is the per stirpes distribution?

Split evenly at the first generation and then split again amongst the second generation

Select characteristics of assets titled tenancy in common. I. Owners must have an equal interest in the property. II. Tenancy in common property is included in the probate estate. III. Property will pass to whomever is named in a will. IV. Several owners can own property simultaneously. I only I and IV II, III, and IV I, II, III, and IV

II. Tenancy in common property is included in the probate estate. III. Property will pass to whomever is named in a will. IV. Several owners can own property simultaneously.

Property acquired by spouses while residing in a common-law state, which is treated as community property after they move to certain community property states is referred to as hybrid-community property. quasi-community property. proportional community property. common-community property.

quasi-community property.

Under the common law, liability may be based upon each of the following, EXCEPT: Breach of contract Statutory violation Negligence Fraud

Statutory Violation

What does the process of arbitrage take advantage of? Differential pricing Abnormal returns Low stock price Volatility of stock

Differential pricing

What are the tax penalties for... -Negligence -Fraud -Frivolous return -Failure to file -Failure to pay

-Negligence: 20% of the deficiency -Fraud: 75% of the deficiency -Frivolous return: $5000 -Failure to file: 5% per month up to 25% -File to pay: .5% per month up to 25% **Failure to file and pay tops out at 5% per month

What is the maximum number of owners in an S-Corp?

100

What are the straight-line and MACRS years for the following? Autos Heavy Machinery Commercial (non residential) real estate Computers Office furniture Residential Real Estate

Autos 5 Computers 5 Heavy machines 7 Office furniture 7 Residential real estate 27.5 Nonresidential real estate 39

1031 exchange: what is the amount realized?

FMV rx +/- (net boot tx)

1031 exchange: what is recognized gain?

The lesser of realized gain or net boot rx’d

1031 exchange: what is realized gain?

Amount realized - tx basis

1031 exchange: what is deferred gain?

Realized - recognized gain

1031 exchange: what is substitute gain?

FMV rx - deferred gain

What is being long (in futures)

Owning a product

What is being short (in futures)?

Buying a product (construction company is short lumber)

When opening a margin account with a brokerage firm, which agreement must an investor sign? Commission-waiver Hold-harmless Limit order Hypothecation

Hypothecation

An asset allocation strategy that gives simultaneous consideration to the investor's goals and policies and capital market conditions and uses these data as inputs to an optimizer is known as: Insured asset allocation Dynamic asset allocation Integrated asset allocation Strategic asset allocation Tactical asset allocation

Integrated asset allocation

Which of the following financial laws recast and expanded the powers of the SEC outlined in the ’34 Act? Sarbanes-Oxley Act of 2002 Dodd-Frank Act of 2010 Gramm-Leach-Bliley Act of 1999 Securities Investor Protection Act of 1970

Sarbanes-Oxley Act of 2002

What are the tax consequences when the ER pays premiums and reports them as EE compensation under Section 162?

The EE then pays taxes on the premiums paid and receives the benefits tax free

When may someone contribute to a HSA?

When they have only one HDHP

What is the waiting period for taking SS disability benefits?

5 months

The accumulated earnings tax rate is ____ on excess accumulated earnings above a specified threshold. 15% 21% 20% 37%

20%

A gift in anticipation of imminent death is called ____________. a bequest a gift of future interest a testamentary gift a gift causa mortis

a gift causa mortis

Which of the following are individual accounts are grouped into one total as part of FDIC coverage? Checking Money Market Savings CDs

Checking Savings CDs

A Respondent must deliver a written Answer to an Amended Complaint no later than the later of ____________ of delivery of the Amended Complaint or the date an Answer to the original Complaint was due. 14 calendar days 30 calendar days 45 calendar days 90 calendar days

14 calendar days

At the commencement of an investigation, a Respondent must deliver to CFP Board Counsel a document acknowledging receipt of the Notice of Investigation within ____________from delivery to Respondent of the Notice of Investigation. 14 calendar days 30 calendar days 45 calendar days 90 calendar days

30 calendar days

If CFP Board Counsel finds probable cause to believe that Respondent violated the Code and Standards or the Pathway to CFP® Certification Agreement, then CFP Board Counsel must take one or more of the following actions: I. Letter of Dismissal II. Suspension III. Settlement Offer IV. Complaint IV only I and III II only I, III, and IV

I, III, and IV Letter of Dismissal Settlement Offer Complaint

Material changes and updates to public disciplinary history or bankruptcy information must be disclosed to the Client within _________. 14 calendar days 30 calendar days 45 calendar days 90 calendar days

90 days

A CFP® professional must provide written notice to CFP Board within ___________ after the CFP® professional engages in adverse conduct. 14 calendar days 30 calendar days 45 calendar days 90 calendar days

30 calendar days

What is the partial deduction active participant formula?

Excess above min MAGI / (max-min MAGI threshold) x IRA contribution allowance

On July 1st Harold suffers severe spine and brain injuries as the result of a horrible motorcycle accident that leaves him in a coma. Doctors do not feel he will survive beyond a year. Harold has group long-term disability insurance with a 30-day elimination period, and a benefit of 40% of Harold’s gross salary of $10,000 per month, payable until age 65. The group policy has a split definition of disability, with “own occupation” for 2 years and “any occupation” to age 65. Harold’s employer pays 60% of the premium and Harold pays 40%. Harold also has an individual disability income insurance policy with a flat $2,000 per month benefit, 90-day elimination period, with benefits payable to age 65. This policy also has a split definition of disability with own occupation for two years and a modified definition to age 65. Harold pays for this policy himself with after-tax dollars each year. Harold’s most recent statement from Social Security shows an estimated disability income benefit of $1,000 per month. Assuming Harold is in a 22% marginal income tax bracket, what will be Harold’s aggregate net after-tax disability income benefits in the year the injury occurred? $6,000 $24,173 $19,000 $24,210

$24,173 After a 30-day elimination period, the policy will pay $4,000 per month for 5 months his year. The total for this year is $20,000. Sixty percent of the benefits, $12,000 is taxable at 22%. Taxes total $2,640. The net after tax amount this year is $17,360. Individual policy: After a 90-day elimination period, the policy will pay a benefit of $2,000 per month for 3 months this year. The total for this year is $6,000 The policy is paid for with after-tax dollars, therefore, there is no tax. Social Security disability: After a 5-month waiting period, Social Security will pay a disability benefit of $1,000 for one month this year. Because of Harold’s income 85% of the benefit, $850, is taxable at 22%. The tax is $187, resulting in an after-tax benefit of $813 this year.

When must a client stop contributing to a HSA?

When they go on Medicare

What market deals in short term debt? Primary Secondary Money Securities

Money market

What market covers securities that are traded? Primary Secondary Money Securities

Secondary

What are the 6 defined contribution plans? Which are PS and which are pension?

PS: 401(k), traditional PS, SBP, ESOP Pension: Money and Target

What is the formula for determining maximum SE contributions to retirement?

[Income - (7.065%)] x (ER cont% / (1 + ER Cont %)) = max contribution

For gifted loss property where the basis is $40k and the FMV is $20k on the date of gift, what is the basis and holding period when... The property's final sale is above adj basis of the DR The property's final sale is below FMV on the date of gift The property's final sale is in between adj basis of the DR and FMV on date of gift

Where FMV is higher than basis on sale, the DE uses DR basis to calculate gains Where FMV is lower than FMV at gift, the DE uses the FMV at gift and holding period from there Where FMV is in between DR basis and gifted FMV, there is no gain or loss - no holding period

Setting value on an initial point of information

Anchoring

More recent information is better than old information

Recency bias

Overestimate abilities and underestimate risks

Overconfidence

Snake-bite bias

Takes less risks based on historical interactions

Break-evenitis

Takes more risks because the winner is just around the corner Gambling

Naïve diversification

Mental accounting

Which of the options can be termed as the face value of a bond, or the amount that's returned to the bondholder at maturity? (Select all that apply) Par Premium Discount Principal

Par Principal

When you have a fixed price in your head of what something should be worth

Anchoring

When you feel losses more than you value gains

Prospect or loss aversion

When you put more emphasis on recent experiences

Recency bias

When you look at the wrong data - that is the data that worked instead of the data that didn't work

Survivor bias

The assumption that someone else will take care of it

Bystander

Going down with the ship, all the while thinking that you can save the ship

Optimism bias

Only using information that confirms your beliefs

confirmation bias

What is a 179 deduction and what are the two deduction options?

This allows a business to take the entire depreciation value in year 1. Two options: - Take the whole thing. Any remainder will carryover to next year - Take up to business income and use MACRS for remainder over useful years. IMPORTANT: use entire income + year 1 MACRS up front!

What is max contribution for SE formula?

Net SE income - 1/2 SE tax->(.9235 x .0765) Adj SE income x [plan rate x (1+plan rate)]

What are the various tax limits to consider with an income above $250k?

Wage base $147k - cap at 15.3% Medicare tax: 2.9% above wage base Add medicare tax: .9% (on tax table)

What is the self-employment tax rate?

15.3% SE can deduct 1/2

When is allimony considered part of income for determining contribution limits to IRAs?

Prior to Dec 31st, 2018

What are the 3 standard deviation ranges?

68%, 95% and 99%

What is positively skewed?

Right-hand curve (tail)

What is negatively skewed?

Left-hand curve (tail)

What is leptokurtic?

Tall slender curve (lep for LEAP up) Very little standard deviation

What is platykurtic?

Flatter curve (plat for plateau) Wide standard deviation

When should you use Sharpe and when should you use Treynor?

Sharpe = small - when R2 < .7 Treyner - when R2 > .7

What do Treynor and Sharpe measure?

Risk-adjusted return

What is (Rm - Rf)?

Market risk premium

What are the steps for the SE tax above and below the wage base?

First step, multiply by .9235 Below wage base or up to $147k, mulitplly times .153 Above wage base, multiply the amount above $147k by .029 and add it to the amount below the wage base.

What is the maximum retirement plan contribution formula?

Ensure that you only subtract 1/2 SE tax from gross income. Adjust by contribution rate (EE max contribute / 1+EE max contribution)

What happens when a business capital expenses exceed $2.7M for a 179 deduction?

It reduces the 179 allowed expense dollar for dollar

When is the mid-month convention used?

Real estate

How is a grantor trust taxed?

To the grantor

When is a trust either included or excluded from the gross estate?

It is excluded if it is irrevocable. A revocable trust turned irrevocable can still be brought back into the estate if established less than 3 years prior to death.

What is distributable net income (DNI)?

It represents the maximum amount that can be taxed to the beneficiaries

Besides the number of policies, what are the major differences for the surviving owner(s) between a cross-purchase and an entity purchase agreement?

In a cross-sell, the remaining owner gains basis from the decedent's share - benefits pass tax-free to the owners to pay for the stocks. An entity purchase does not afford a basis increase to the surviving owners - benefits pass tax-free to the business to pay for the stocks

Identify the type(s) of policy illustrations. I. proposed II. vetted III. active IV. in-force I only I and IV II and III III only

I. proposed IV. in-force

If an employer provides and pays the premiums for long-term care insurance as an employee benefit, generally, which of the following statements correctly describes the tax treatment of the premiums and benefits paid under the policy? The premiums paid by the employer and the benefits paid under the policy are taxable to the employee. The premiums paid by the employer and the benefits paid under the policy are tax-free to the employee. The premiums paid by the employer are taxable to the employee and the benefits paid under the policy are tax-free to the employee. The premiums paid by the employer are tax-free to the employee and the benefits paid under the policy are taxable.

The premiums paid by the employer and the benefits paid under the policy are tax-free to the employee.