TEST 2 Flashcards
Relative comparison
= anchoring
Neoclassical economics
full international knowledge to make choices that reflect preferences
GRAT beneficiaries
CANNOT change at all
GSTT exemption
= $22,360,000
High risk aversion
90% chance of winning or certain payment, choose certain payment
Representative bias
“past performance does not predict future results”
Longevity risk rule of thumb
30 years
Social security
CANNOT collect before retirement age or reduction in benefits
*no amount is entitled to everyone
Long-term capital gain
often 15% (but up to 28%)
No liquidity risk
stock
Completed gift
= remainder interest – all rights have to be given up (nothing stopping it)
** Revocable trust NOT a completed gift
Underperform mutual funds
return chasing, weight more recent information
Framing bias
o Gain frame = risk avoidant
o Loss frame = risk-seeking
Reference dependence
specific $ amount
Engagement letter changes?
only if client gives consent
“unified system” of gift/ estate tax
= same exemption for gift & estate (NOT GST)
- applicable credit amount = lifetime/ death transfers
GSTT
= grandchildren
Computation of federal estate tax
= deduction/ credit interchangeable
Not a taxable gift
= services (construction)
Market anomalies
o Low volatility anomaly
o Value effect
o Small stock effect
CAPM
= diversification
o Weak: technical, past performance
o Semi-strong: public information
o Strong: private information
TWO Systems do NOT explain
neoclassical theory
Behavioral finance
o Sunk cost
o Availability
o Confirmation
No monte carlo
in step 3
Converting retirement asset to retirement income
= NOT RMD
o Bucket approach
o Age-banded approach
o Essential vs. discretionary (flooring)
Sub-optimal decisions
o Framing
o Heuristics
o Bias
*NOT information
Disposition effect
= lock in gains on winning/ reference points, unwillingness to sell losing
Qualified distribution from a ROTH IRA
= prior to 59.5, taking out closing cost for first home up to $10,000
SSI/ Medicaid eligibility test
= all resources affect it (parents, gift, inheritance, trust, etc.)
Individuals can only have ONE ABLE account
ABLE account
o Funds can only be used for disability expenses not covered by gov. program
o Adjusted up to twice a year
Spousal support end
= payments end at payee’s death
Risk management
o Life insurance
o Health insurance
o Property & casualty
General partnership
= raise capital from others
o Does NOT have to file documents with the state
o Does NOT provide continuity of life of entity at death of owner
Section 6166 Installment payment of estate tax
first 10 are interest only
Child/ dependent care credit
limit $3,000 ($6,000 married)
o For child under 13 or incapacitated
o Dependent on AGI
o Reduced for upper-income
Corporation
= reinvest earnings & defer income on individual federal income tax returns
single-parent home
= life insurance
Comprehensive financial planning
= client-oriented
Education/ child tax credits
o American opportunity fund credit
o Lifetime learning fund credit
o Child tax credit
Limited partnership
= equal control, significant capital, compensate passive owners
S corporation
= minimize risk & taxes , equal control
Continuity of life after business
o S corp
o LLC
o Limited partnership
GRAT
= estate freezing
Springing power of attorney
= not in effect until special needs is disabled/ incompetent
Nonrecognition rule of Sec. 1041
= apply to sale to a former spouse (not taxable)
Unlimited liability for damages of business activity
= sole proprietorship & general partnership
LLC
= members choose to be taxed as partnership
o Treated as self-employed
Prescription drug coverage
= available to all Medicare participants
Living will
= pull plug
Medical POA
= make decisions
POLST
= doctor order for life sustaining treatment
QTIP
= unlimited marital deduction for property
o Decide what happens to assets
Annual gift exclusion
= $15,000 per BENE
Provisional income NOT taxed
= less than $25,000
Want to take social security early
= increases by 8%
Exemptions for inclusion in estate
o 5% or $5,000 o HEMS (not direct cash to them)
Disclaimer effective
= say you don’t want assets to estate & walk away
***in writing
2035
= add back into estate within 3 years (especially gift tax)
ILIT
= NO RIGHTS, CANNOT CHANGE
o Grantor cannot change it (IRREVOCABLE)
o Can only GIFT premiums
o Only annual exclusion if Crummery provision (present interest)
o Last for 3 years before moves out of estate
ROTH IRA
= low income/ tax bracket
*convert by Dec 31St of that year
Capital gain exclusion
= $250K or $500k couple for sale of home
