Practice Quiz 15 Flashcards

1
Q

Which of the following statements regarding the application of mandatory death benefit rules concerning the status of a given participant is(are) CORRECT?

  1. If the participant’s death occurs before retirement, a qualified plan must provide a spousal benefit called a qualified preretirement survivor annuity (QPSA) (with the exception of certain profit-sharing plans).
  2. If the participant’s death occurs after retirement, a qualified plan must protect the plan participant’s spouse by requiring that the normal form of distribution from the retirement plan for a married participant must be a joint and survivor annuity (with the exception of certain profit-sharing plans).
A

1 and 2

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2
Q

Don established an irrevocable trust for his children to which he contributed $100,000 of stock. Don cannot alter or amend the terms of the trust. The trust will distribute income to the children for the next 10 years, after which the principal will be distributed to them. Which of the following statements regarding the gift tax effect of the transfer of stock to the trust is CORRECT?
A)
The transfer of stock to the trust represents a completed gift.
B)
The transfer of stock to the trust is not eligible for the annual exclusion.
C)
Any distributions made to his children from the trust will be subject to gift taxes.
D)
The transfer is not subject to gift taxes because it is not a completed gift.

A

A

This scenario represents a completed gift and the transfer is subject to gift taxation. Distributions to the children will not be subject to gift taxation, because the gift taxes were paid upon the transfer. The transfer of the income interest is a gift of a present interest so it is eligible for the annual exclusion.

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3
Q

Which of the following statements concerning the rules that relate to the Principle of Integrity in the CFP Board Code of Ethics is correct?

A)
A certificant shall not mislead parties about the potential benefits of the certificant’s service.
B)
A certificant shall not fail to disclose or otherwise omit facts where that disclosure is necessary to avoid misleading clients.
C)
A certificant shall not communicate, directly or indirectly, to clients or prospective clients any false or misleading information.
D)
All of these.

A

D

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4
Q

Stuart expects to receive $5,000 at the end of each of the next four years. His opportunity cost is 14% compounded annually. What is this sum worth to Stuart today?

A)
$16,608.16.
 B)
$19,568.56.
 C)
$14,568.56.
 D)
$17,165.41.
A

C

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5
Q

Which of the following statements concerning education tax credits and savings opportunities is CORRECT?

A)
The American Opportunity Tax Credit is only available for the first two years of postsecondary education.
B)
The contribution limit for Coverdell Education Savings Accounts (CESAs) is applied per year per donor.
C)
The Lifetime Learning Credit is equal to 100% of qualified education expenses up to a certain limit.
D)
The American Opportunity Tax Credit reduces a family’s tax dollar-for-dollar in an amount equal to 100% of the first $2,000 of qualified education expense and 25% of the next $2,000.

A

D

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6
Q

Ned, age 65 made the following transfers this year. Which of the transfers would be subject to generation-skipping transfer tax (GSTT)?
A)
Payment of $150,000 directly to a qualified institution to pay for granddaughter’s tuition.
B)
Gift of $40,000 to his son to buy a new car.
C)
Gift of $25,000 to a coworker’s son who is 25 years old.
D)
Gift of $15,000 to a 9-year-old niece.

A

C

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7
Q

The security market line (SML):
A)
shows a security’s expected return as a function of its systematic risk.
B)
plots diversifiable risk on the horizontal (X) axis.
C)
presents the relationship between a security’s return and the return of the market portfolio.
D)
indicates the market portfolio as the only optimal portfolio.

A

A

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8
Q

Laundry Helpers, Inc., a C corporation, is considering adopting a qualified retirement plan. The company has had fluctuating cash flows in recent years, and such fluctuations are expected to continue. The average age of nonowner employees is 24 and the average number of years of service is 3, with the high being 4 years and the low only 1 year. Approximately 25% of the 12-person labor force turns over each year. The 2 owners receive about 2/3 of the total of covered compensation. Which is the most appropriate vesting schedule for Laundry Helpers, Inc.?

A)
2-to-7-year graded vesting.
 B)
5-year cliff.
 C)
3-year cliff.
 D)
2-to-6-year graded vesting.
A

D

Because the 2 owners receive two-thirds of the compensation, the plan will most likely be top heavy. Only immediate vesting, 3-year cliff, and 2-to-6-year graded vesting schedules are available for top-heavy plans. From the perspective of the employer, 2-to-6-year vesting is the most preferable form of vesting because the longest serving worker to date is 4 years. Thus, the owners will wind up receiving a lot of the employer contributions originally made to the departing workers through reallocated forfeitures.

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9
Q

Grace owns 25% of the stock in an S corporation. The shareholders donate 50% of their profits to charity. Grace also makes charitable donations personally. She has come to her CFP® professional for clarification on the rules for deductible charitable contributions. Which of the following statements about charitable contributions are CORRECT?

  1. Deductible contributions to religious, public, and educational institutions and private operating foundations may not exceed 30% of AGI.
  2. For contributions of long-term, unrelated-use tangible property the taxpayer must use FMV to calculate the deductible contribution.
  3. Ordinary-income property is valued at the lesser of adjusted basis or FMV for purposes of calculating the deductible contribution.
  4. Charitable contributions by S corporations are a component of the net income reported on the shareholder’s K-1.
A

3 and 4

Deductible contributions to religious, public, and educational institutions and private operating foundations may not exceed 50% of AGI. Long-term unrelated-use tangible property must use the lesser of basis or FMV to calculate the deductible contribution. Ordinary-income property is valued at the lesser of adjusted basis or FMV. Charitable contributions by S corporations are a component of the net income reported on the shareholder’s K-1.

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10
Q

The purpose of forming an underwriting syndicate is to:
A)
list a stock on multiple exchanges.
B)
enter into a best efforts arrangement with investors.
C)
insure the existing bondholders of the firm.
D)
distribute the financial risk associated with underwriting a large issue of securities by forming a group of investment banks to collectively underwrite the issue.

A

D

Often several brokerage houses join to underwrite an issue of securities to the public. By forming a syndicate, the financial risk associated with underwriting a large issue is distributed among several investment bankers.

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11
Q

Under the required minimum distribution (RMD) rules for IRAs, a penalty tax of:
A)
50% is assessed on the amount of required minimum distribution not taken before the required date.
B)
10% is assessed on the amount of required minimum distribution not taken before the required beginning date.
C)
50% is assessed on excess distributions.
D)
10% is assessed on excess distributions.

A

A

The IRS requires the owner to take minimum distributions from a traditional IRA no later than April 1st of the year following the owner’s attaining age 70½. If the amount distributed is less than the required minimum, a 50% excise tax is assessed on the amount of the shortage. The minimum distribution is determined by dividing the IRA account balance (or aggregate account balances) on December 31 of the prior year by the owner’s remaining life expectancy (or joint life expectancy of the owner and beneficiary) shown in the table. The required distribution may be taken from one IRA, but the calculation must be based on the totals in all IRAs.

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12
Q

Which of the following is (are) covered under ‘Coverage B-Other Structures’ of the HO-2, HO-3, and HO-8 homeowners forms?

  1. Structures attached to the dwelling.
  2. Garages and other structures that are detached from the dwelling.
  3. Land.
  4. Structures used for business purposes or those rented to anyone other than a tenant of the residence.
A

2 only

Structures attached to the dwelling are covered under ‘Coverage A-Dwelling’ of the HO-2, HO-3, and HO-8 homeowners forms. Structures used for business purposes or those that are rented to anyone other than a tenant of the residence are not covered. An exception is made for the rental of a garage, which may be rented to anyone if used exclusively for garage purposes.

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13
Q

Grant is reviewing the benefits he wishes to provide his employees in his new company. He has asked his planner to clarify some of the tax effects of employer-provided insurance. Which of the following statements is NOT a tax effect of employer-provided insurance?

  1. Group term life insurance premium paid by an employer may cause an increase in the employee’s W-2 income.
  2. If medical reimbursements exceed medical expenses under an employer-provided health plan, the employee may have taxable income.
  3. Disability insurance premiums paid by an employer are deductible by the employer and are not taxed to the employee.
  4. The portion of disability insurance premiums paid by an employee is a deductible medical expense.
A

4 only

Statement 4 is the incorrect statement. If an employee pays for disability income insurance premiums, the premiums are not deductible by the employee. Note that employer-paid premiums for disability insurance are deductible to the employer. Statement 1 is correct. If the employer provides more than $50,000 of group term life insurance protection to an employee, the employee will be taxed on the cost of the excess coverage. Statement 2 is correct. If a medical reimbursement exceeds the employee’s actual medical expenses, the excess reimbursement will be taxable to the employee. Statement 3 is correct. If the employer pays the premium, the employer will receive an income tax deduction and the premiums will not be taxed to the employee. Note that any disability benefit received by the employee will be taxed to the employee, if the employer paid the premiums.

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14
Q

Ronald has established a trust that pays out $1,000 each month to his mother, Martha. The trust department of Actual Bank acts as trustee. Ronald retains the right to revoke the trust and is the sole heir of his mother’s estate and the remainder beneficiary of the trust. Which of the following must pay the income tax on the $15,000 earned by the trust?
A)
Martha pays on $12,000; Ronald on $3,000.
B)
Martha pays on $12,000; the trust on $3,000.
C)
The trust pays on $15,000.
D)
Ronald pays on $15,000.

A

D

Because the trust is revocable, the trust is considered a grantor trust for income tax purposes. The grantor, Ronald, will pay taxes on all income earned by the trust.

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15
Q

Madelyn is meeting with Alex to review the recommendations he has made in her financial plan. During their discussion, Madelyn explains to Alex her concern about not having enough money saved for retirement if she follows his recommendations. Meanwhile, Alex is thinking about a call he received earlier in the day about his father’s declining health. After a minute or so, he realizes he did not hear everything Madelyn has said during the meeting. He would like to wrap up his meeting with Madelyn so he can call his father. What is the most appropriate action for Alex?

A)
He should ask Madelyn closed-ended questions to understand her concerns, attempting to end the meeting as quickly as possible.
B)
He should apologize to Madelyn for being distracted and ask her to begin again, this time paying full attention to what she is saying.
C)
He should tell Madelyn he will adjust his recommendations based on what he’s already heard and end the meeting.
D)
He should try to pay some attention and call Madelyn later for clarification of anything he missed.

A

B

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16
Q

Frequently overlooked possible disadvantages of mutual fund investments include:

  1. Distribution of capital gains which were realized by the fund before the investor purchased her shares.
  2. Taxes which must be paid from other resources on reinvested dividends and capital gains.
  3. Unanticipated appreciation in fund shares due to an exceptionally strong market.
  4. Difficulty keeping track of costs per share for tax reporting of share sales.
A

1, 2, and 4

17
Q

Which of the following statements regarding interest rates is NOT correct?
A)
If interest rates are expected to increase, an investor should move to long-term debt instruments to lock in the higher rates.
B)
The capital loss to an investor that results from an increase in interest rates is partially offset by an increase in the reinvestment rate.
C)
When interest rates are expected to increase, the yield curve will shift upward.
D)
If interest rates are likely to decrease, an investor investing for capital appreciation should buy long-term bonds.

A

A

18
Q
A general risk component representing the variability of a stock's total return as it directly relates to overall movements in the general economy is known as:
A)
systematic risk.
 B)
business risk.
 C)
financial risk.
 D)
reinvestment rate risk.
A

A

19
Q

All of the following statements concerning certain industries’ behavior in relation to the business cycle are correct EXCEPT:
A)
growth industries are those whose earnings are expected to be significantly above the average of all industries.
B)
cyclical industries are most affected, both up and down, by the business cycle.
C)
countercyclical industries move counter to the prevailing economic trend.
D)
defensive industries are most affected by recessions and economic adversity.

A

D

20
Q

The purpose of CFP Board’s issuance of Practice Standards is to:

  1. ‘Increase the compensation of Investment Advisers.’
  2. ‘Enhance the value of the personal financial planning process.’
  3. ‘Assure that the practice of financial planning by CFP® certificants is based on agreed upon norms of practice.’
  4. ‘Advance professionalism in financial planning.’
A

2, 3, and 4

21
Q

Which of the following is the most attractive investment during periods of rising interest rates?
A)
Common stocks of cyclical firms that produce durable goods.
B)
Common stocks of public utilities.
C)
Previously issued long-term Treasury bonds.
D)
Previously issued Treasury bills.

A

D

22
Q

Which of the following statements regarding the capital asset pricing model (CAPM) is NOT correct?
A)
The CAPM is based on a market portfolio containing all possible assets.
B)
The CAPM assumes that the only pertinent risks are market risk and unsystematic risk.
C)
The CAPM can be used to find the required rate of return of an investment.
D)
The CAPM assumes capital markets are in constant equilibrium establishing a baseline by which to evaluate the suitability of any investment.

A

B

23
Q

Which of the following is (are) characteristics of personal liability umbrella policies (PLUPs)?

  1. They provide excess liability insurance coverage over and above the basic underlying insurance contracts.
  2. Coverage is broad and includes protection against certain losses not covered by the underlying insurance contracts.
A

both statements are correct

24
Q

Ashley, a CFP® professional, is having an evening meeting with a prospective client, Kevin. As he enters her office, he promptly sits down on the edge of his seat at the conference table. She immediately notices that Kevin seems disengaged from the meeting. He is looking around her office and fidgeting in his seat. She can sense that he is tired from a long work day. How should Ashley proceed?
A)
Provide Kevin with a cup of coffee to help him better focus on the meeting.
B)
Reschedule the meeting with Kevin during a more productive time of day.
C)
Ask Kevin open-ended questions to ascertain his goals and needs.
D)
Engage in small-talk to break the ice with Kevin.

A

B

25
Q

All of the following statements regarding insurance arrangements for corporate cross-purchase buy-sell agreements are correct EXCEPT:
A)
each individual shareholder becomes owner, beneficiary, and premium payer for the life insurance policies covering the lives of the other shareholders.
B)
the formula for determining the number of policies needed is n × (n − 1), where n = the number of shareholders.
C)
at a shareholder’s death the corporation receives the death benefits from the policy on the owner’s life and transfers the proceeds to the decedent-shareholder’s estate in exchange for the appropriate amount of his or her stock.
D)
each individual shareholder purchases adequate life insurance on the life of other shareholders.

A

C

At a shareholder’s death the shareholders receive the death benefits from the policies and transfer the proceeds to the decedent-shareholder’s estate in exchange for the appropriate amount of his stock.