Missed Questions - 2nd exam Flashcards
Which of the following individuals would be skip persons for purposes of the GSTT? (Assume Bill is the transferor and is 82 years old at the time of all transfers.)
- Bill’s grandson, John. John’s mother, Donna, is living but his father, Frank, is deceased (Frank is Bill’s son).
- Bill’s great-grandchild, Mary. Mary’s parents and grandparents are all living.
- Hazel, the 21-year-old wife of Bill’s second son, Mike, age 65.
John is not a skip person because of the predeceased parent exception.
Hazel is not a skip person because her marriage to Bill’s son places her in the son’s generation (only one generation below that of Bill, the transferor).
Doug, a CFP® professional, has committed a violation of the Rules of Conduct. All of the following forms of discipline may be imposed against Doug EXCEPT:
A)
suspension of the right to use the CFP® marks for a specified period of up to 10 years.
B)
permanent revocation of the right to use the CFP® marks.
C)
additional continuing education hours in any subject matter.
D)
public letter of admonition.
The maximum period of suspension is 5 years, not 10.
William purchases a 20-year, AA rated corporate subordinated debenture for $1,025. This bond features a 5.75% coupon rate and may be called in 10 years for 105% of par. What is the bond’s yield to call (YTC)?
A)
5.55%
B)
5.68%
C)
5.25%
D)
5.79%
The bond’s YTC is 5.79%.
PV = −1,025
FV = 1,050
N = 20
PMT = 28.75
Solve for I/YR = 2.8966 × 2 = 5.7932%
Dana, CEO of One Last Time Fitness, has a salary of $100,000 and was awarded the following stock options from her company:
Stock Option / Grant Date / Type / Exercise Price / # of Shares
- A / 6/1/15 / ISO / $7 / 200
- B / 1/1/16 / ISO / $17 / 100
- C / 4/1/18 / ISO / $27 / 300
- D5 / /1/15 / ISO / $37 / 200
- E / 1/1/16 / ISO / $47 / 200
Consider the following transactions regarding the above stock options:
- A / 1/1/17 / Exercised / 200 / $17
- B / 4/2/18 / Exercised / 100 / $27
- A / 9/15/19 / Sold / 200 / $57
- D / 7/11/19 / Exercised / 200 / $77
- B / 12/8/19 / Sold / 100 / $37
- C / 12/15/19 / Exercised / 300 / $47
- C / 12/15/19 / Sold / 300 / $67
Dana satisfied the ISO requirements for receiving favorable tax treatment on the sale of position B on 12/8/19.
If the stock acquired by exercise of the ISO is not sold until after one year from the date of the option’s exercise and 2 years from the date of its grant, any gain in the value of the stock is treated as a long-term capital gain to the employee.
She will also have a negative AMT adjustment of $1,000. Whenever a position created from an ISO is sold, it will be subject to a negative AMT adjustment. Because the bargain element was $1,000 when B was exercised [100 shares × ($27 − $17) = $1,000], the adjustment will be negative $1,000 when the position is sold. Dana will also have a $2,000 long term capital gain [100 shares × ($37 − $17) = $2,000] as a result of liquidating position B. Because Dana’s salary is well below the Medicare contribution tax thresholds, her long term capital gain will not be subject to the additional tax.
Nelson is the beneficiary of a trust established last year (2018) by his Uncle Walter. The trust allows Nelson to withdraw 9% of the trust principal each year. Nelson made no withdrawals from the trust in 2018. Nelson died in 2019 before his right to withdraw for 2019 had lapsed. The balance of the trust in both years was $1 million. What amount must be included in Nelson’s gross estate?
A)
$130,000
B)
$0
C)
$1 million
D)
$90,000
A)
$130,000
Five or Five Power = withdraw the greater of $5,000 or 5% of the trust’s assets
$130,000 must be included in Nelson’s gross estate.
- 9% ($90,000) of the trust principal because of the unexercised withdrawal right at Nelson’s death in 2019, plus
- 4% ($40,000) for 2018 because the 9% withdrawal right exceeded the 5-and-5 power by 4%.
Lapses of general powers of appointment above the 5-and-5 power in the three years prior to the holder’s death are included in the holder’s gross estate (in addition to the full amount of any unused general power of appointment for the year of death).
ebbie can withdraw up to $10,000 from her SEP plan for the purchase of the new home without paying an early withdrawal penalty?
The exception to the early withdrawal penalty for first-time home buyers applies to all IRAs.
- A SEP plan is an employer-funded IRA.
Debbie, age 38, is contemplating the purchase of her first home in a new housing development. The builder, Badman Development, has offered to sell her one of the new homes for $250,000, which includes the lot valued at $50,000.
Although the minimum level of coverage to avoid a coinsurance situation is $160,000 (80% of the value of the home, excluding the lot), Debbie would be required to purchase $200,000 of coverage to cover a complete loss.
Steve purchased a house for $750,000. The house has a replacement cost of $1 million with an 80% coinsurance provision and a $2,000 deductible. What is the minimum amount of coverage Steve should have on the house in order to be fully covered for a partial loss up to the policy limit?
Under the coinsurance provision, the amount of coverage required to fully cover a partial loss up to the policy limit would be $800,000, or 80% of $1 million. Financial planners should always recommend that homes be insured for 100% of replacement cost in order to protect against a total loss. Homeowners insurance policies only cover damages up to the policy limit.
If Mr.Van Reham made a $1,000 investment four years ago that presently has a value of $3,150, the geometric mean return over the four-year investment period is:
A)
57.50%
B)
78.75%
C)
33.22%
D)
53.75%
An investment growing from $1,000 to $3,150 over a four-year period has a geometric mean return equal to 33.22%.
PV = −1,000
FV = 3,150
N = 4
Solve for I/YR = 33.2225, or 33.22%
In the world of finance, the arithmetic mean is not usually an appropriate method for calculating an average. Consider investment returns, for example. Suppose you’ve invested your savings in the financial markets for five years. If your portfolio returns each year were 90%, 10%, 20%, 30% and -90%, what would your average return be during this period?
With the arithmetic average, the average return would be 12%, which appears at first glance to be impressive—but it’s not entirely accurate. That’s because when it comes to annual investment returns, the numbers are not independent of each other. If you lose a substantial amount of money in a particular year, you have that much less capital to invest and generate returns in the following years.
Which of the following statements regarding Section 162 executive bonus plans is CORRECT?
A)
The plan cannot be discriminatory
B)
Employer does not receive an income tax deduction when the bonus is paid.
C)
Employee has taxable income in the year the bonus is paid, even if the bonus is paid directly to the insurance company to cover the premium on the cash value life insurance policy.
D)
The company is the policyowner
An executive bonus plan (Section 162) is a way for business owners or companies to provide additional supplemental benefits to key employees or executives of their choice. The benefits usually include life insurance policy death benefits as well as cash value accumulations that can be used as a retirement income supplement.
With an executive bonus plan, the business can use tax-deductible company funds to selectively provide valued benefits to key people.
An executive benefit plan, used effectively, can be a valuable tool to attract and retain key executives.
Jill is a financial planner. She believes that her clients’ attitudes, beliefs, and values influence their behavior. In her practice, she tries to replace negative beliefs that lead to poor financial decisions with positive attitudes that might yield better results. Jill’s approach to financial counseling is known as the
A)
cognitive-behavioral approach
B)
classical economics approach
C)
economic and resource approach
D)
strategic management approach
A)
cognitive-behavioral approach
Jill’s approach to financial counseling is known as the cognitive-behavioral approach. The economic and resource approach focuses on obtaining and analyzing quantitative data, such as cash flow, assets, and debt. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. In the strategic management approach, the client’s goals and values drive the client-planner relationship and the planner serves as a consultant.
You have a 35-year-old client with extremely conservative risk tolerance. He is an attorney specializing in entertainment law and his income for the next ten years will probably be the highest of his career. He wants a life insurance policy that has stability and is guaranteed to be in force until age 95. He is also concerned about the possibility of negligence liability in his business practice. Based on your client’s profile and insurance needs, which of the following statements are CORRECT?
- A whole life insurance policy may be appropriate for this client.
- This client may be a good candidate for malpractice insurance.
- Modified whole life insurance may be appropriate for this client.
- Errors and omissions insurance may be appropriate for this client.
