Practice Quiz 9

Question 1

A local businessperson approaches a CFP practitioner for assistance with an investment-related tax problem. The client’s previous tax preparer had suggested the purchase of a variety of tax-advantaged investments to reduce the client’s current and future tax burden. Time passed, the client’s income dropped, and the tax laws changed. The client does not feel the tax preparer misrepresented the situation on the initial sale, but would still like to know what recourse is available with respect to the tax preparer. The CFP licensee should: (CFP® Certification Examination, released 01/99)

1. Explain to the client that this issue is beyond the scope of the CFP® practitioner’s professional expertise.
2. Advise the client that no recourse is available.
3. Advise the client to contact an attorney.
4. Contact the tax preparer.

Answer 1

1 and 3

Question 2

Which of the following statements concerning portfolio risk is (are) CORRECT?

1. In a portfolio of 100 securities, the contribution of each security’s own risk to the total portfolio risk will be extremely small.
2. One of Markowitz’s contributions to portfolio theory is his insight about the relative importance of the variances of a security.

Answer 2

both statements are correct

Question 3

Harvey recently purchased an annuity. He made a lump-sum premium payment, and income payments will begin immediately. The income payments will be $1,000 per month and are guaranteed never to decrease. The insurer bears all the investment risk under the contract. Harvey and his wife are the annuitants, and the income payments will continue until the death of the second annuitant. Which of the following best describes the annuity he purchased?
A)
Single premium immediate fixed annuity; joint and survivor payout option.
B)
Single premium immediate fixed annuity; fixed amount payout option.
C)
Single premium deferred fixed annuity; life annuity with period certain payout option.
D)
Flexible premium deferred variable annuity; fixed period payout option.

Answer 3

A

Question 4

Which of the following retirement plans allow unrestricted investment in employer securities?

1. Defined benefit pension plans.
2. Money purchase pension plans.
3. Cash balance pension plans.
4. Profit-sharing plans.

Answer 4

4 only

Question 5

Which of the following refers to the process of evaluating and classifying the risk level of applicants for insurance?
A)
underwriting.
 B)
adverse selection.
 C)
group insurance.
 D)
utilization review.

Answer 5

A

Question 6

Tom received a gift of bonds from his cousin. The bonds had a 10-year maturity and were selling at a premium because of their high 9% coupon rate. The cousin’s basis was $42,000, and the fair market value on the date of the gift was $60,000. The cousin paid gift tax of $4,500. The cousin did not have the annual exclusion available for this gift. What is Tom’s basis in the bonds?
A)
$50,000 for gains and $42,000 for losses.
B)
$48,000 for gains and $40,000 for losses.
C)
$0 for gains and $0 for losses.
D)
$43,350 for gains and $43,350 for losses.

Answer 6

D

Because the property was appreciated property as of the date of the gift, a portion of the gift tax paid is allocated to the donee’s basis in the property. Thus, Tom’s basis is calculated as follows: $42,000 + [(18,000 ÷ 60,000) × 4,500] = $43,350. $42,000 + $1,350 = $43,350. Gain basis and loss basis are the same when the FMV of the property exceeds the donor’s adjusted basis at the time of the gift.

Question 7

All of the following statements concerning the Markowitz portfolio selection model are correct EXCEPT:
A)
The Markowitz analysis generates an entire set, or frontier, of efficient portfolios, all of which are equally ‘good.’
B)
No portfolio on the efficient frontier, as generated, dominates any other portfolio.
C)
Allowing investors to purchase a risk-free asset increases investor utility and leads to a different efficient set under the capital asset pricing model (CAPM).
D)
One of the basic rules for choosing efficient portfolios states that for any two risky assets with the same expected return, choose the one with the higher risk.

Answer 7

D

Question 8

Arthur is a full-time employee of the ABC Company. ABC has 18 full-time and 8 part-time employees and provides a group health plan for its full-time employees. This year, Arthur turns 65 and voluntarily terminates his employment with ABC in order to retire. Assuming Arthur was covered by the ABC health plan when he retired, which of the following statements regarding Arthur’s eligibility for COBRA continuation coverage is CORRECT?
A)
Arthur is not eligible for continuation coverage because he voluntarily resigned.
B)
Arthur is not eligible for continuation coverage because ABC has fewer than 20 full-time employees.
C)
Arthur is not eligible for continuation coverage because he is eligible for Medicare.
D)
Arthur is eligible for up to 18 months of continuation coverage.

Answer 8

D

Arthur is eligible for up to 18 months of continuation coverage under COBRA. Termination of employment, including voluntary resignation and retirement, is a qualifying event for purposes of COBRA, as is becoming eligible for Medicare. Each of ABC’s 8 part-time employees counts as a 1/2 employee for purposes of the 20-employee rule, so ABC is subject to the COBRA requirements.

Question 9

Which of the following statements concerning term life insurance is (are) CORRECT?

1. The convertible feature of a term life insurance policy permits the policyowner to exchange the term contract for a contract of permanent life insurance within a specified time without evidence of insurability.
2. If the term life insurance policy is converted, the insured’s attained age may determine the premium rate.
3. Term life insurance provides life insurance protection for a limited period only - the face amount of the policy is payable if the insured dies during the specified period, and a reduced amount is paid if the insured survives.
4. The premium for term life insurance is initially relatively low because most term contracts do not cover the period of old age when death is most likely to occur and when the cost of insurance is high.

Answer 9

1, 2, and 4

Question 10

Which Financial Planning Practice Standard states, “a financial planning practitioner shall communicate the recommendation(s) in a manner and to an extent reasonably necessary to assist the client in making an informed decision”?
A)
400-3-Presenting the Financial Planning Recommendation(s).
B)
300-2-Analyzing and Evaluating the Client’s Financial Status.
C)
600-1-Defining Monitoring Responsibilities.
D)
200-1-Determining a Client’s Personal and Financial Goals, Needs and Priorities.

Answer 10

A

Question 11

The law of agency implies that a financial planner:
A)
represents the firm and the firm is responsible for any promises the financial planner makes to the client.
B)
can make recommendations to the client only after all members of the agency approve those recommendations.
C)
must be part of an agency in order to practice.
D)
does not work exclusively for any one firm, but represents several firms.

Answer 11

A

Question 12

Alex, a CFP® professional, is in the process of preparing a written financial plan for his client, Margaret. As he does this, Alex has which of the following obligations to Margaret?

1. A fiduciary duty of care
2. A duty to charge the lowest fees possible
3. A duty to put Margaret’s interests ahead of his own
4. A duty to act in a manner he believes is in Margaret’s best interests, which are dependent on her unique circumstances

Answer 12

1, 3, and 4

Question 13

Which of the following statements regarding availability of loans offered by retirement plans is(are) CORRECT?

1. If plan loans are made available, they must be available to all participants on a reasonably equivalent basis and must not be available to highly compensated employees in an amount greater than the amount made available to other employees.
2. If plan loans are made available, the loans must be made in accordance with specific plan provisions and bear a reasonable (market) rate of interest.

Answer 13

both statements are correct

Question 14

Which of the following statements regarding a traditional Section 401(k) plans is CORRECT?

A)
employers are required to provide a minimum matching contribution.
B)
employee contributions are subject to a vesting schedule.
C)
withdrawals cannot be made at any time.
D)
the plan must pass an actual deferral percentage (ADP) test.

Answer 14

D

Question 15

Mary Sue died during the current year. Which of the following would be included in Mary Sue’s gross estate at the full date-of-death value?

1. A gift of property worth $80,000 given by Mary Sue to her cousin 4 years ago. Mary Sue retained a life estate in the gifted property.
2. A residence Mary Sue purchased and titled as joint tenants with rights of survivorship (JTWROS) with her daughter several years ago.
3. A gift of $30,000 cash from Mary Sue to her son, given last year.
4. Death benefits from a life insurance policy on Mary Sue’s life that Mary Sue transferred to an irrevocable life insurance trust (ILIT) 2 years ago.

Answer 15

1, 2, and 4

Statement 1 is correct. Mary Sue retained a life estate in the gifted property; therefore, the full fair market value of the gift is included in her gross estate. Statement 2 is correct. When property is held as JTWROS, the amount included in the gross estate is based on the parties’ relative contributions to the purchase price of the property. Because Mary Sue purchased the residence, the entire value of the residence is included in her gross estate. Statement 3 is incorrect because the gift is not included in the gross estate, even if made within 3 years of death. Note that any gift tax paid resulting from the gift would have been included in the gross estate. Statement 4 is correct because the policy was transferred to an ILIT within 3 years of death. Therefore, the proceeds would be included in the decedent’s gross estate.

Question 16

Laura owns a home with a FMV of $200,000. Laura's adjusted basis for the home is $90,000. She sells the home to her daughter for $150,000. Following the sale, what is her daughter's basis in the house?
A)
$150,000, unless gift taxes exceed $60,000.
 B)
$60,000 plus any gift taxes.
 C)
$200,000.
 D)
$40,000.

Answer 16

A

The basis of the property is the higher of the amount the daughter paid or the basis carried over from Laura after adjustments are made for any gift taxes paid. The daughter’s basis is $150,000, unless gift taxes paid plus Laura’s basis ($90,000) exceed the purchase price of $150,000. A gift might be implied by the sale at a price below FMV.

Question 17

An investor considering investing in a particular security is more concerned with:
A)
expected return.
 B)
historical return.
 C)
trailing P/E ratio of the stock.
 D)
actual return.

Answer 17

A

Question 18

Which of the following statements regarding the American Opportunity Tax Credit are CORRECT?

1. A student must be enrolled no less than half time to be eligible.
2. The credit is only available for expenses paid on behalf of a taxpayer, spouse, or dependent.
3. A student may claim both an American Opportunity Tax Credit and the Lifetime Learning Credit in the same tax year.

Answer 18

1 and 2

Question 19

Which of the following is (are) considered to be covered autos under a personal auto policy?

1. Any vehicle listed in the policy.
2. Newly-acquired vehicles.
3. Boats owned by the insured.
4. Automobiles used as delivery vehicles.

Answer 19

1 and 2

Four classes of vehicles are considered to be covered autos. They are any vehicle listed in the policy, a newly-acquired vehicle, a trailer owned by the insured, and a temporary substitute auto. Automobiles used as delivery vehicles are specifically excluded.

Question 20

What relationship does the interest rate assumption used in the actuarial calculation have on the employer’s annual contribution to a defined benefit plan?
A)
The lower the interest rate assumption, the lower the employer’s contribution.
B)
The higher the interest rate assumption, the higher the employer’s contribution.
C)
The higher the interest rate assumption, the lower the employer’s contribution.
D)
There is no relationship between the two factors.

Answer 20

C

Question 21

Which of the following statements regarding an S corporation is (are) CORRECT?

1. Shareholders of S corporations receive an IRS Schedule K-1 each year.
2. S corporation shareholders can establish a self-employed (Keogh) retirement plan as a result of the S corporation income.
3. One of the disadvantages of an S corporation is that the dividends paid to shareholders are subject to double taxation.
4. Capital losses incurred by an S corporation will flow through to the shareholders and will be reported on the shareholder’s personal income tax return.

Answer 21

1 and 4

The income from an S corporation is not considered self-employment income. Therefore, the shareholders cannot establish a self-employed retirement plan. Note that a shareholder with self-employment income from another source can establish a self-employed (Keogh) retirement plan. Dividends from a C (not S) corporation are subject to double taxation.