Test Prep Flashcards
Which entity is also called an asset holding company and is a method of recapitalization. It is authorized to issue both voting preferred stock and non-voting common stock. The intention is to freeze the interest of the business owner in the operating corporation by subsequent gifts of the non-voting common stock to this entity.
family holding company
Your client is 55 years old, is planning on retiring in 2 years and will have an AGI of $500,000 until he retires. He believes his AGI in his first year of retirement will be $100,000. The client would like to make charitable gifts totaling $200,000 this year and 100,000 in each of the next two years to a qualified public charity. A list of potential gifts are: 1. $175,000 cash 2. $200,000 stock with a $10,000 short-term capital gain 3. $600,000 stock purchased 10 years ago with a long-term capital gain of $500,000 In order to maximize his income tax deductions, which asset(s) should he gift in the first year?
Because of his AGI, the client should contribute short term capital gain property in year one. In year two, the client can contribute either short-term capital gain property or long-term capital gain property and still deduct the gifts in full. In year three, the client should distribute short-term capital gain property or cash in order to maximize his deduction. In year three, the short-term capital gain stock becomes long-term stock, lowering the percentage deduction.
Ed has contributed $20,000 to his partnership in the first year of his business. He shares the business equally with his colleagues Allison and Aaron. His share of the business liabilities is $10,000. In the first year, the business has a 15,000 loss. What is Ed’s basis in the partnership at the end of the business’ first year?
Ed’s basis is equal to [$20,000 (Ed’s initial contribution) + $10,000 (Ed’s share of company liabilities)] - $5,000 (Ed’s share of the business loss) = $25,000. See reading: Basis, pp 245 - 246.
A company is examining its ability to self-insure against potential legal claims. The company is comparing its losses over the last five years to an insurance policy deductible. The company’s losses typically were less than $100,000. The insurance policy against this type of loss carries a deductible of $200,000. Which method of examining losses is better demonstrated by this comparison?
Loss Triangles
Projected expected losses
Simple loss range analysis
Maximum probable loss and max possible loss
Simple loss range analysis
A qualified annuity interest in a grantor retained annuity trust (GRAT) may be based on a fixed dollar amount or percentage of the value of the trust, and cannot vary except to the extent the amount or percentage in any year does not exceed ___% of the prior year’s payment:
100%
110%
120%
130%
120%
The “value function is s-shaped and asymmetrical in order to reflect loss aversion (i.e., the tendency to feel the impact of losses more than gains)” is a key tenet of which theory or study?
Adaptive market Hypothesis
Behavior Game Theory
Paradox of Choice
Prospect Theory
Prospect Theory
A split-dollar plan is funded with a $5 million death benefit life insurance policy on your clients, Bill Smith and Walt Disney . Bill is the 50% owner of a On Time Inc., closely held business. Walt passes away and the insurance company pays the two listed beneficiaries: On Time Inc., $2.5 million; and Bill Smith $2.5 million. What are the tax consequences of insurance proceeds?
The corporation does not pay income tax on the $2 million and $3 million is included in client’s estate. See reading: Business Planning Strategies, pp 470 - 471.
What percentage of families succeed in transitioning wealth into the hands of their heirs?
30%
Which style of investing most often uses “Negative Screening” ?
SRI
Socially responsible investing
What assets are optimal for transferring assets into a GRAT in a low interest environment?
GRATs are optimal for transferring assets with a high potential for appreciation and when interest rates are low. See reading: Estate Freeze Strategies, pp 426 - 427.
What is the maximum amount of debt that can be considered when itemizing deductions related to interest on primary residence?
Before Dec 2017: $1M
After Dec 2017: $750k
A qualified personal residence trust (QPRT) most resembles which of the following trust structures?
GRAT
GRIT
GRUT
NIMCRUT
GRIT
Your client is interested in taking a significant role in determining her asset allocation. As an investor, she is more of an “Individualist.” Based on what you know about the Individualist client as well as the brain structure, what part of your client’s brain might be at work in the process of creating a satisfactory asset allocation plan?
Result:
A) The amygdala or reptilian part of the brain
B) The limbic system or mammalian part of the brain
C) The pre-frontal cortex
D) The exocortex
Individualists are known for their careful analysis and rationality. These are processes of the pre-frontal cortex. Review the lecture by Devin Ekberg, “The Behavioral Wealth Advisor.”
Rule 16(b), also called the “short-swing profit rule” prohibits senior officers, directors or beneficial owners of >10% from profiting from the purchase or sale of company shares within any period of less than ___ months?
Result:
Incorrect
Option D is not correct
Feedback
The correct answer is less than 6 months. See the video on the screen titled Concentrated Stock Positions.
Reference(s)
Question 44 of 135
Each of the following are appropriate reasons for a citizen of the United States to establish a foreign trust EXCEPT for:
Result:
Correct Answer 44 is D
Feedback
A foreign trust will not help the US citizen minimize or avoid taxes. See reading: Asset Protection: Problems, Issues, and Opportunities, pg. 1.
Test Review Report
A) 3 month
B) 6 months
C) 9 months
D) 12 months
6 months
The following type of nonqualified deferred compensation plan is a funded or unfunded plan maintained by an employer solely for the purpose of providing benefits for employees in addition to the benefits that may be funded through a qualified plan, but not in excess of the Section 401(a)(17) limitation of $280,000 (for 2019).
A) top-hat plan (SERP)
B) excess benefit plan
C) stock-appreciation rights (SARs)
D) phantom stock
Excess benefit plan
Under rule 144, the number of shares that can be sold for any 3-month period is limited to the greater of: ___% of outstanding share class and the average weekly trading volume of the shares during the previous ___ calendar weeks.
1% and 4 calendar weeks
Your client would like to name her trusted brother as an attorney-in-fact in making virtually all legal decisions on her behalf in case she ever becomes incapacitated. Which of the following “powers of attorney” should she execute?
Your client should execute a durable power of attorney. See reading: Incapacity Planning, pp 103 - 104.
The concept that rationality among investors and irrationality among investors co-exist such that investors can behave more irrationally during market volatility fits best with which of the theories presented in this course?
Adaptive Market Hypothesis
Which theory applies the probability of an outcome multiplied by the value of each outcome?
Expected value theory
For qualified dividends the shareholder must hold stock for period greater then _____ days during _____ day period beginning ______ days before the ex-div date
60,121, 60
What is the collectibles tax rate?
28%
Time period held does not matter- all same
What are 1256 gains?
60% LTCG/ 40% STCG
Used for e.g. futures, foreign currency, etc
When does the holding period begin?
The day after the asset is purchased
How is the cap gains rate determined on inherited property?
always L-T regardless of how long held
Can you recognize a loss on personal residence or personal property?
No
What is a wash sale?
Occurs when taxpayer sells stock or securities at a loss and invests in substantially identical stock within 30 days before or after date of sale
Wash sale is NOT deductible
You simply adjust the basis of new holding which will reduce the gain on future sale, effectively deferring the benefit
What is the wash sale window?
Re-acquisitions that could trigger wash sale rule within 61-day window of the loss
-purchase of same stock- same account or not
-purchase option
-being granted a stock option
-exercising stock option
-dividend reinvestment
How is a worthless stock recognized?
Must be able to determine the year stock becomes worthless- treated as worthless as of the last day of the year the stock goes worthless- if selling for even a penny better to sell to realize loss
What is section 1202 stock?
Founders Stock
No corporate investors can exclude up to 100% of gain, up to the greater of $10M or 10X basis realized on the disposition
Gain above it taxed at 28%
Investor must have purchased stock at issuance
Corp total assets can not exceed $50M at issuance
Must be a C Corp and not be a service business PSC
What is a 1244 stock?
Lost Money
Reclassification of loss- allowed to deduct up to $50k single/$100kMFJ annually as OI loss
Requirements: S or C corp whose total capitalization does not exceed $1M at the time stock is issued, only available to individuals who are original holders of the stock
How much of the sale of a personal residence is excluded from gain?
$250k single
$500k MFJ
Excess is taxed as cap gain plus 3.8% surtax if applicable
Must be owned and used as personal residence at least two of last five years preceding sale
How is the loss on a personal residence recognized?
No loss allowed
What is related to 1031 Exchanges?
real estate- losses are not recognized
Is the standard deduction allowed for AMT purposes?
no
How are medical expenses deducted?
7.5% of agi
AMT: 10% of agi
How are the following categories of interest Deducted for tax purposes:
Trade or business
Passive Activity
Mortgage
Investment
Student Loan
Personal
Trade or Biz: fully deductible as biz expense
Passive: deductible to extent of gains
Mortgage: qualified personal residence or second rez up to $750k or indebtness (home equity only for improvements)
Investment: to extent of buying taxable income (no tax free)
Student Loan: up to $2,500 subject to agi thresholds
Personal: NONE
What are the qualifications to adjust mortgage interest on personal residence?
$750k limit
Must be secured by personal rez
Debt incurred within 90 days after rez is purchased or constructed (tracing requirements)
Debt incurred before 12/2017 up to $1M
Home equity debt interest nolonger allowed unless incurred to improve property
May be claimed on one primary and one other residence
Describe 1244 stock
How to calculate AMT
Exemption: $111,700 (2019)
1st $194,800 taxed at 26%
Remaining is taxed at 28%
You pay the higher calculation- Ordinary tax or AMT
