Live Review Cards Flashcards
tax equivalent yield
tax exempt yield/(1-marginal tax rate)
bond duration
measures the weighted average maturity of the bond’s cash flow on a present value basis.
lower coupon = what duration
higher duration
duration is _________ related to the current yield on comparative bonds
inversely
when is a portfolio immunized?
if the average duration (not the maturity) of the bonds in the portfolio is equal to a pre selected time horizon for the financial goal
strong form
stock prices fully reflect all information, both public and private
Neither fundamental analysis nor technical analysis can produce superior results over time on risk-adjusted basis
semi-strong form
all PUBLICLY KNOWN INFO is fully reflected in stock prices
neither technical analysis nor fundamental analysis can produce superior results over time
weak from
historical price data is already reflected in current stock prices
technical analysis will not produce superior results
FUNDAMENTAL analysis may produce superior results
example: warrent buffet. he believes a random walk is real but that he can pick with fundamental analysis, wins
the EMH does not find value in what?
technical analysis
r2
is the coefficient of determination
it is the square of the correlation coefficient (R)
what is the approximate alpha of an S&P 500 fund?
0 (technically a little less with any fees)
what is the beta of the S&P 500
1
ex dividend
to be listed on the corporation’s books as holder of record, the investor must purchase its stock before the ex-dividend date
“at margin” price formula
(1-initial margin)/(1-maintenance margin)
Then multiply by the purchase price
active strategies for investing?
tactical asset allocation
dow theory
frivolous return
penalty is $5k
Negligence
penalty is 20% of the portion of the tax underpayment
civil fraud
75% of the portion of the tax underpayment
failure to file
5% of the tax due per month (25% max)
failure to pay
.5% per month (25% max)
estimated tax penalty
90% of the current year liability or 100% of the previous year liability
(110% of the pervious year’s adjusted gross income exceeded $150k)
child unearned deduction
$1300
maximum deduction for state, local, sales, and real estate tax?
$10k
deductible casualty loss
MUST BE a federally declared disaster
Use the lesser of basis or FMV
then subtract any insurance coverage
then subtract $100 floor
the subtract 10% of AGI
home office deduction
suspended UNLESS you’re self employed
the deduction is taken on schedule C and limited to the gross income derived from the activity reduced by all other deductible expenses
child tax credit vs child and dependent care credit
dependent care expenses:
-until age 13
-$3k for one dependent or $6k total
20% credit
child tax credit:
-$2k for each qualifying child under 17
400k MAGI phase out
$1700 is deductible
interest paid for sole props
interest paid (without limit) on the debt is deductible on schedule c
partnership losses
up to basis
what entity can’t have ESOPs?
partnerships (there isn’t stock)
Section 197
intangibles
amoritized under a tax section called section 197
recovery method is similar to straight-line depreciation
179 deduction
tangible personal property (1245 property)
Renting your vacation home
personal use cannot exceed the longer of (1) 14 days or (2) 10% of the rental use
low-income housing programs (taxes)
low income housing programs that are held as a passive activity may generate a deduction-equivalent tax credit up to $25k
allowed annually over a ten year “credit-period”
when is alimony deductible by the payor and taxable to the payee
for divorces finalized BEFORE 1/1/19
cannot file a joint return or live together
must be cash
Matching contributions for SIMPLEs
mandatory
Salary cap on SIMPLEs
trick there isn’t one.
money purchase pension plan keys
up to 25% employer deduction
fixed contributions
Stable cash flow needed
Target benefit pension keys
up to 25% employer deduction
fixed contributions
stable cash flow
favors older employees
profit sharing plan keys
up to 25% employer deduction
flexible contributions (must be recurring and substantial)
401(k) provisions $23K (FICA) (HARDSHIP WITHDRAWALS)
SIMPLE 401k is exempt from creditors - see SIMPLE for additional info
stock bonus plan keys
- up to 25% employer deduction
- flexible contributions
- 100% of the contribution can be invested in company stock
- ESOP cannot be integrated with social security or cross tested
SIMPLE IRA keys
- for small employers (100 or fewer)
- requires employer match (immediate vesting)
- salary reduction limit up to $16k (FICA)
- company cannot have another plan
SEP IRA key
no salary deferrals
1. up to 25% contribution for owner /up to 18.59% contribution for self employed
2. account immediately vested
3. can be integrated with social security
4. special eligibility: 21+ years old, paid at least $750, and worked 3 of the 5 prior years
SARSEP keys
- may have up to 25 employees, and 50% of the eligible employees must defer
- must have been in existence before 12/31/96
- salary deduction limit $23k (FICA)
- new employees may participate in a SARSEP if it was established before 1/1/97
403(b)keys
- for 501c3 organizations and public schools
- subject to ERISA only if employer contributes
- salary reduction limit up to $23k (FICA)
- employwer contributions may be subject to vesting schedule
“year of service”
1000 hours during the initial 12 month period
ratio percentage test
the plan must cover a % of NHCE that is at least 70% of the HCE employees
average benefits test
Average benef for NHCE must be at least 70% of that for HCE employees
what is a highly compensated employee
a greater than 5% owner OR any EE earning in excess of $155k in the preceeding year
what’s a key employee
a greater than 5% owner OR
an officer AND comp .$220 OR
a greater than 1% owner and comp .$155k
attribution rules
IRAs/SEPs/SARSEPs/SIMPLES required beginning date (RBD)
april 1st of the year following age 73
subsequent must be made by december 31st of each year after
what happens if you miss RMD
25% excise tax
qualified charitable distribution (QCD)
direct transfer from an IRA to a qualified charity
age 70.5 (not 73) or older
taxation of workers comp
benefits are received income tax free
taxation of unemployment insurance
included in recipient’s gross income (generally taxable)
noncancellable (disability insurance)
means it’s a continuous term policy guaranteeing the insured’s right to maintain the policy at the STATED PREMIUM
Steps in the Financial Planning Process
- Understanding the client’s personal and financial circumstances
- identifying and selecting goals
- analyzing the client’s current course of action and potential altervative course
- developing the financial planning rec
- presenting it
- implemeting it
- monitoring progress and updating
proper use of the marks
inc cant be with CFP
RIA must be written out
CERTIFIED FINANCIAL PLANNER(TM)
CFP(R)
what do you need to do if CFP or CERTIFIED FINANCIAL PLANNER(TM) marks are used in a sentance?
must be followed by a noun:
-certificant
practitioner
professional
certification
mark
exam
max mortgage loan for interest deduction
$750k (MFJ)
age for a reverse mortgage
62
American Opportunity Tax Credit
100% of the first $2k
25% of the next $2k
(max2500)
*can’t use if you have a felony drug conviction
Lifetime learning credit
2000 max
(20%)
coverdell
$2k per year total
must be used before 30
coordination of usage for college funding
fiscal policy
tax rates and spendingm
monetary policy
action taken by the federal reserve:
-reserve requirement/discount rate
-open market operations
fed funds rate
BANKS to BANKS
prime rate
BANKS to BEST customers
the sec regulates the requirements for disclosures via……
Form ADV
debts generally NOT cancelable by bankruptcy
student loans
child support
taxes
govt loans
alimony
survivorship rights in community property
NONE!
spousal basis calc at death common law vs community property
at the death of the first spouse property receives a 100% step up in basis for COMMUNITY property only
estate tax - non spouse joint tenant
JTWROS with a non spouse requires FULL value of jointly held property is included in the gross estate of the first tenant to die unless the survivior can document that they contributed to the purchase price of the JT property
gifts =/= contributions
TBE
tenancy by the entirety
only for spouses
The same as community property
no probate
TIC
tenancy in common
subject to probate
several possible owners
undivided interest
can transfer their share to others
assets subject to probate
Individual
Community property
Estate as beneficiary
Tenants in Common
does a testamentary trust pass through probate?
NO. the will CREATES the trust
annual renewable term
premiums increase annually
level term
premiums level for term of years
decreasing term
decreasing death benefit/level premium (Mortgage premium)
variable universal life (what should you think)
various and flexible
reinstatement clause
provides for a policy to be reinstated within a specified period after the date of premium default (WITH PROOF OF INSURABILITY)
“Conversion” in life insurance
exchange term for a permanent type plan without having to prove evidence of insurability
“5th dividend”
industry language for a one year term
nonforfeiture options (life insurance)
cash
paid up reduced amount
extended term/paid up term
dividend options
Cash
Reduce Premium
Accumulate with Interest
Paid Up Additions
One Year term/5th dividend
once a MEC
always a mec
Settlement options
Cash
Pure life/single life
refund
period certain
specified period/income
interest only
ALL single premium polices areeeeee
MECS
MEC Provisions
distributions = LIFO
before 59.5 = 10% penalty
risk
condition in which there is a possibility of loss
peril
the cause of a possible loss
hazard
a condition that may create or increase the chance of loss from a given peril
Characteristics of Insurable risk
large number of homogeneous exposure units
loss must be definite and measurable
must be fortuitous or accidental
must NOT be catastrophic (to insurer)
self insurance is a type offffff
risk rentention (formal)
Examples for each type of risk
avoidance
diversification
reduction
retention
transfer
avoid = don’t drive
diversification = spead of assets
reduce = sprinkler systems
retain - deductibles
transfer - insurance
principle of indeminity
insurer generally seeks to reimburse the insured for the amount lost. Not more. not less
insurable interest
property and casualty - preset at inception AND loss
life insurance - only at inception
subrogation
gives the insurer all rights the insured possessed against negligent third parties
unilateral
only one party is bound; the insured makes no promise
adhesion
contract is acccepted “As is”
aleatory
of dollars given up is unequal. Outcome is uncertain
Parts of the insurance contract (remember DDICE)
declatrations
definitons
insuring agreements
conditions
exclusions
attractive nusiance
high degree of care is imposed on the land occupier for certain conditions on the land
example: swimming pool/vacant lot
negligence per se
situation where the standard of care is set by a statute
Example: school zones or cross walks
absolute liability
an extra hazardous condition which results in losses to others
examples: keeping of wild animals, blasting
Workers’ compensation
strict liability
generally limited to manufacturers and distributors for defective products
example firestone tires
vicarious liability
when one person is held liable for the negligent behavior of another person
Principals responsible for their agents
contributory negligence
any negligence on the part of the injured party, even though slight, defeats the claim
examples: jaywalking, driving while drunk, etc
capital utilization approach
uses annuitization to provide needed income but leaves no money at the end of the presumed term
human life value
based on the individual’s income-earning ability
present value of the income lost by dependents as a result of the insured’s death
it does NOT consider other resources available to provide for income and cash needs because of an individual’s premature death
participating vs nonparticipating policies
participating policies pay annual dividends (due to larger premiums). if extra premium isn’t used, it is returned (generally tax free)
nonparticipating policies =company retains the profits for its shareholders
insurance companies (ratings)
AM Best (A++ to F)
Standard & Poors (AAA to CCC)
express authority
written, explicit direction from PRINCIPAL (the insurance company) to the agent
implied authority
the public believes the agent holds and includes signage, rate books, etc
apparent authority
rises out of the negligence of the principal in allowing the agent to appear to have the authority because of certain actions of the agent in the past
home owners insurance parts
A - Abode
B - Buildings
C - Contents
D (‘dditional or ‘demnity)
E - enemies
F - first aid
Home owners coverage a
Dewelling and ATTACHED structures
Homeowners B
structures separated from the dwelling by a clear space (like dads garage)
Homeowners C
contents and personal property (anywhere in the world)
Boats and trailers limited to $1k
Homeowners coverage d
loss of use coverage
Homeowners E
comprehensive liability insurance
Homeowners F
Medical payments to others, not the insured’s family members
Basic form
WHARVES/FLT
Windstorm
hail
aircraft
riot
vandalism
vehicles
explosion
smoke
fire
lightenig
theft
broad
Basic plus RAF
Rupture of a system
artificially generated electricity
falling objects
freezing of plumbing
open perils
generally the answer on the exam
general exclusions for ALL homeowner forms
ordinance or law
earth movement
water damage
power failure
neglect
war
nuclear hazard
intentional loss
is sinkhole covered for the exam?
yes
replacement cost vs ACV
replacement cost provides that losses will be paid on a replacement cost basis
acv is replacement value less depreciation
property loss calculations
[(insurance carried/insurance required) x loss] - deductible
Auto insurance parts
A liability
B medical payments
C uninsured motorist
D Damage to your auto
—1. collision loss
—-2. other than collision
requirements for a vehicle to be eligible for a personal auto policy (PAP)
- owned by an individual or by spouses living in the same household
- be a private passenger auto
-not be used as a public or livery conveyance
-not be rented to others
what happens with auto insurance if a husband and wife separate
one of them will need his/her own policy
the second spouse listed on the declaration page will need his/her policy
malpractice vs E&O
malpractice is generally for bodily injury
E&O is generally for property damage (intangibles and money too)
what type of liability is workers compensation
absolute liability
taxation of workers comp benefits
tax free
taxation of unemployment insurance
included in recipient’s gross income and are generally taxable
medicare part b
voluntary
80/20
no stop loss
medicare part d
you MUST have part a and b
happens if you fail to enroll during the initial enrollment period for medicare?
may enroll during a general enrollment period (1/1 - 3/1)
coverage begins the next july
part b premium will be higher (10% for each 12 month delay
medicare-skilled nursing home care
pays all of the first 20 days of skilled care and EVERYTHING OVER a specified amount per day ($200) for the next 80 days of skilled care (max of 100 days)
COBRA requirement(s)
small companies (fewer than 20 employees for at least half of the prior year) are exempt from the federal legislation
COBRA Qualifying event:
voluntary or unvoluntary termination; change from full time to part time
up to 18 months
COBRA qualifying event:
employee death, divorce, legal separation or eligibility for medicare
up to 36 months for spouses and other dependents
COBRA qualifying event:
loss of coverage status (marriage, reaching age 26)
children of employees - up to 36 months
Health Reimbursement arrangement
HRA
only c corps can use
solely employer-funded
reimburses employee for substantiated medical expenses up to a max amount per coverage period
benefit amount for disability insurance
generally 50 to 60 percent
a pro making $400k or more may only be able to insure 30 to 50 percent of earnings
non cancellable
-continuous term policy guaranteeing the insured’s right to maintain the police at the stated premium
guaranteed renewable
continuous right to maintain the policy, but the insurer may increase the premium by class of insureds
social insurance substitute benefit
extra benefit until social security pays
monthly benefit will be equal to the social insurance substitute benefit shown on the policy schedule page less any social insurance benefit received in that month
taxation of disability insurance
individual owns the contract and pays the premium
premiums are not deductible
paid with after tax dollars
benefits are tax free to the individual
taxation of disability insurance
employee owns the contract and the employer pays the entire premium under a bonus arrangement like section 162 disabiliity insurance
premiums are deductible by the employer
employee recognizes premiums in income
benefits are tax free to the employee
disability taxation for partnership and s corporation shareholders
partnership or s corp CAN deduct the premiums paid for coverage for a partner or a gerer than 2% shareholder of an s corp
deduction is based on the premium cost
section 1035 exchanges
life to life/life to annuity/annuity to annuity
CANNNOT go annuity to life
ALSO a 1035 cannot be done if the insured changes.
life insurance reinstatement
provides for a policy to be reinstated within a specified time period (with proof of insurability)
life insurance conversion
exchange term for a permanent type plan without having to prove evidence of insurability
dividend options
- cash
- reduce premium
- accumulated with interest
- paid up additions
5 one year term (5th dividend)
nonforfeiture options
cash
paid up reduced amount
extended term/paid up term
dividend options
cash
reduce premium
accumulate with interest
paid up additions
one year term/5th dividedn
settlement options
cash
pure life
refund
period certain and life
specified period/income
interest only
life settlements
transaction involving an insured who is not terminally or chronically ill and generally over 65
LOOK FOR the LTCG answer
key employee life insurance
business should be the owner and beneficiary
premiums are nondeductible
benefits are tax free
employee has no incidents of ownership
annuity taxation
after 8/13/1982 - LIFO
withdrawals prior to age 59.5 are subject to ordinary income PLUS 10% premature withdrawal penalty
income tax for group disability
employer generally pays 100% OF PREMIUM
taxable income (benefits) to the employee
taxation is based on the ratio of employee contributions to total premium paid
when to use “beg” mode on the calculator
college tuition
retirement benefits
family needs
when to use “end” mode on the calculator
bond interest
retirement plan contibutions
mortgage payments
public disciplinary actions
In order of severity
a public letter of admonition
suspension for up to five years
permanent revocation of the marks
home equity loan limits
can’t exceed the difference between the current FMV and current indebtedness
who controls monetary policy?
Federal open market committee (FOMC)
general power of appointment
think outright ownership because the holder can appoint the property to themselves
estate tax and gift tax can occur
when must you fill out a form709
-gift more than $18k to any non spouse donee
-a gift of a future interest in any amount
- a gift from a noncommunity/individual account for which spouses elect gift spliting
holding period for property acquired from a decedent
long term regardless of the actual holding period
gifts of future interest that don’t qualify for the $18k annual exclusion
2503b trusts
remainder interest
a trust in which income will be accumulated for a period of years
MUST USE EXEMPTION
powers that cannot be given to another
-power to execute or revoke a will
-power to execute a living will (right to die)
required parities of a trust
property itself
grantor (aka trustor)
trustee
beneficiary
Simple trust examples
2503b
qtip
qdt
dynastye
complex trust most common example
2503c
what type of trust is a crummey trust?
irrevocable
general power of appointment is the same as what?
outright ownership
distributions for ascertainable standards
not subject to estate or gift tax
five or five
property subject to a general power will be included in the donee-decedent’s estate (or considered a taxable gift) only to the extent that the property exceeds the greater of $5,000 or 5% of the total value of the fund subject to the power
which spouse is in control for
A trust
b trust
q tip trust
second spouse to die
first spouse to die
first spouse to die
fully insured vs currently insured worker
fully insured if worker has 40 social security credits (covered for life)
currently insured if he/she has at least 6 quarters
under 18, not covered by social security
a child, under age 18, who is employed by a parent in an unincorporated business is NOT covered by social security
taxation of social security
if a person’s income (MAGI) plus half of their social security is more than 25k single or 32k MFJ, up to 50% of benefits are taxed
If more than $34k - single or
$44k MFJ
up to 85% of benefits are taxed
section 415
limits the amount of DB a person can receive
lesser of $275k or 100% of the comp averaged over highest earning consecutive years
DB/DC salary cap
$345k
PBGC insurance applies to
Defined benefit and cash balance plans
cash balance plan guarantees
annual employer contribution AND minimum rate of return on each participant’s account
what do you need to remember about hardship withdrawals and profit sharing plans?
the test might ask if hardship withdrawals can come from profit sharing plans.
NO, the plan has to have 401k provisions
taxation of NUA
always taxed at long term rates
it’s the subsequent sale after the distribution rate that can be subject to short term gains/losses
if you see ESOP, you should think what?
NUA
