Wrong Answer Box Flashcards

Question

For how many days does the COBRA election period last? A. 30 days after termination B. 30 days after the actual notice of the event to the qualified beneficiary by the plan administrator C. 60 days after termination D. 60 days after the actual notice of the event to the qualified beneficiary by the plan administrator

Answer 1

D. 60 days after the actual notice of the event to the qualified beneficiary by the plan administrator The COBRA election period starts with the date of the notification and lasts for 60 days.

Answer 2

E. Both spouses should apply for additional individual disability policies with SIS benefits and guaranteed insurability options. Both spouses need additional policies. One cannot increase the benefits on an existing policy. Even with a guaranteed insurability rider, a new additional policy would need to be issued.

Answer 3

A. I, IV, V Otis can reduce the premium by electing a longer elimination period and/or choosing a policy with a guaranteed renewable rather than non-cancellable provision. The presumptive disability clause and the continuance provision clause are included in the policy. COLA is a rider (extra cost).

Answer 4

C. I, II, V Participating policy dividends from MECs become subject to current-year income tax when they are received in cash or used like cash to reduce upcoming premiums or to pay back policy loans. The policy dividends aren't taxable when they accumulate with interest. However, the interest paid on the dividends is taxable. The contract is a MEC.

Answer 5

B. $50,000 The non-key employees may exclude the premium that is attributable to the first $50,000 of coverage in a group-term life insurance program.

Answer 6

D. III, IV Life and health group insurance coverage provides conversion features. See end of Chapter 4 Insurance for group health convertibility. Group disability is not convertible.

Answer 7

B. Convert to a whole life policy Jack does not need much life insurance at age 50. Answer 14 does not indicate no need. The $60,000 of group term is not a large policy. Conversion to whole life seems to fit the question best. He cannot convert a group term policy to an annuity.

Answer 8

D. Benefits are subject to both a deductible and co-payments provisions for inpatient hospital care. Part A benefits are subject to a deductible and copayments. Disabled workers, for example, can be covered under age 65. Hospice care is covered under Part A. Medicare Part D is for drugs.

Answer 9

D. II, III If possible, Sam should supplement his current plan. The group plan definition of disability is his own occupation for 5 years. He doesn't have much spendable income. It makes sense to keep the group plan and build up his emergency fund. Answer IV is false. To exercise a guaranteed insurable option, he must show proof of higher earnings. Answer V is false. This defines the residual disability rider. The partial disability rider is normally free.

Answer 10

A. No While away at college, the daughter is still considered a resident of her parents' home (a dependent). After taking a job and residing in New York, she must license and insure the car in New York.

Answer 11

Question 35: A The replacement value of the home is $280,000. The insurance is $225,000. Sharon is insured for 80%. 80% of $280,000 is $224,000. The mortgage does not factor into this question.

Answer 12

B. They should use a cross-purchase type buy-sell. They should each purchase variable universal life on each other's lives. Some of Hy's premium rating (out-of-pocket cost) could be reduced by wise investment choices. In a cross-purchase arrangement, Sally would purchase Hy's policy (the higher premium.) She would pay the higher premium. With good investment performance the variable policy may be less costly. Answer C is wrong. Corporate ownership of policies makes them subject to the corporation's creditors. A cross-purchase agreement gives the survivor a tax advantage (step-up in basis). Hy has a shortened life expectancy, step-up in basis is more important to him than minimizing premiums.

Answer 13

Question 46: C Answer l is true because making an absolute assignment of a policy will remove the policy from his estate subject to the 3-year rule. Answer Il is false. The company owns the policy. Answer Ill is true. He is charged with income (W2) for the excess benefits (above $50,000), but he doesn't pay the premium. Answer V is false. John will be charged with the Table I cost on premiums attributable to benefits above $50,000 ($120,000 - 50,000 = $70,000). Because he is charged with the premium, the benefits received are income tax free. **NOTE:** Although the company owns the policy, because he named the beneficiary (Helen), according to the Internal Revenue Code he holds "incidents of ownership" in the policy for federal estate tax purposes.

Answer 14

B. II, III, IV, V COBRA is not an option because the business has only 10 employees. He has a conversion option under his father's policy. (No evidence of insurability is required.) HIPAA is an option. As long as he is a dependent of his father, Bob can continue under his father's plan until age 26. If Bob starts his own business, he can apply for group insurance. Under Affordable Care Act, Bob cannot be denied coverage due to a pre-existing condition.

Answer 15

Question 59: D The company is owned 50/50. Mark's children do not like Mary. Mark and Mary should choose a cross-purchase buy sell agreement. The business should buy a key-employee policy on Mark. The agency relies on Mark's selling ability. Split dollar and non-qualified deferred compensation reflect personal planning rather than business planning. Mark already has an existing split-dollar policy. Cross-purchase is a better choice than entity purchase for Mary. She can buy Mark's stock at his death. Otherwise, his children will get his stock.

Answer 16

A. The premium is not deductible, but the benefits are received tax- free. The corporation cannot deduct the premium, but it can exclude the benefits from its gross income.

Answer 17

D. II, IV, V Fringe benefits like a Section 125 plan, group life insurance up to $50,000 death benefit, and group dental are relatively inexpensive. NQDC is too expensive to implement.

Answer 18

D. S corporation Dr. Jeffrey needs the limited liability associated with the corporate form. With an S corporation, he can take losses up to his investment (basis).

Answer 19

B. $57,000 Salary ($75,000) - [Active participation (-10,000) + S-Corp loss (-8,000)] = AGI ($57,000). The exception to the passive rules is active participation in real estate. The S-Corp income is active. He manages the business.

Answer 20

B. I, IV Schedule E income from active participation in rental activities can be used to offset other passive losses. The non-publicly traded limited partnership losses may not offset income from a publicly traded partnership (the MLP) or portfolio income. All of the choices include Answer I. Knowing IV was right leads to the correct response to the question. **MLPs are publicly traded**

Answer 21

A. Subject to phaseout The AMT exemption is subject to phaseout rules.

Answer 22

B. If you are the owner of a small corporation, pay yourself a large bonus Increasing 1040 income tax decreases AMT exposure. Answer D should read: Buy public purpose municipal bonds (because the interest is not a preference item rather than private purpose bonds (because the interest is a preference item).

Answer 23

C. I, II, III Cost depletion is not a preference item. Property tax is not a deduction for the AMT. It is added back to calculate the AMT (an adjustment).

Answer 24

A. Gain $0; Basis: $12,000 This is NOT a 1031 exchange. The old basis and the cash become the new basis. 1031 exchanges are no longer available for equipment but only for real property.

Answer 25

B. There is no taxable gain; therefore, no tax forms need to be filed. The $350,000 realized gain is completely excluded by the $500,000 exclusion. No return needs to be filed because there is no recognized gain.

Answer 26

C. $175,000 Total value received minus new adjusted basis FMV of property acquired ($300,000) + Boot ($0) = $300,000 [Minus] Adjusted basis of property ($50,000 $75,000) = $125,000

Answer 27

A. During Lance's lifetime, the income of the trust will be taxable to Lance. This grantor trust is tainted because trust income will be used to pay life insurance premiums. Per the question only a portion of the trust income is being used to pay the premiums on the policy. The remainder is being paid to family members and will be taxable to them (DNI principle).

Answer 28

A. Mr. O'Toole If the trust income is used to satisfy a grantor's legal support obligation, the trust income will be taxed to the grantor.

Answer 29

D. IV, V The corporate tax rate is 21%. As an active participant (general partner) the limited partnership would not limit Pete's personal liability relative to the business. If Pete took a salary of $400,000, his marginal tax bracket is 35%. This way Pete could reduce his income tax liability. An S corporation could shift income.

Answer 30

D. At a flat 21%. HALE (Health) corporations are PSCs and taxed at 21%. A PSC with accumulated earnings exceeding $150,000 will be exposed to a 20% accumulated earnings tax.

Answer 31

Question 8: C Answers A, B and D are conduit entities. A regular corporation will provide the owner with a separate tax entity. Money left in a corporation is taxed at 21%.

Answer 32

D. $6,500 65% of the dividend received is excluded because OKA owns 20% or more of DEC. Otherwise, the deduction is limited to 50% of the dividend received when a company owns less than 20% of the paying company.

Answer 33

B. It will reflect current cost. The FIFO method of inventory valuation reflects current cost.

Answer 34

S corporations cannot utilize NOLs because they already pass-through annual losses.

Answer 35

C. II, III, IV The insurance diminishes the loss, but the loss is still deductible with limitations. The value is based on the lower of basis or FMV. The 10% of adjusted gross limitation is applied to all losses in one year.

Answer 36

B. $8,500 Investment interest expense is deductible up to the amount of that year's net investment income. Bob's net investment income is $8,500. The 2% of AGI limitation ($1,500) has been repealed under the TCJA.

Answer 37

D. $19,000 Margin interest is only deductible up to investment income [interest ($6,000 + $5,000), ordinary dividends ($8,000), and STCG ($4,000)]. Investment income totals $23,000. Margin interest paid was $19,000. Interest received is income. Credit card interest is consumer interest (not deductible) rather than investment (margin) interest paid.

Answer 38

B. II, III With a DB he can aggressively contribute through salary reduction and tax savings in 8 years. The uni-(k) would also allow him to contribute up to $73,500 (with the catch-up contribution) in 2023. The plan selection depends on how much of his net profit he is willing to contribute. He has no employees. Answers I and IV are incomplete answers.

Answer 39

Answer:A With a SEP there are no mandatory contributions, and it is easy to install. A defined benefit plan is complicated and can require large, unpredictable mandatory contributions. An ESOP means that Bill has to share stock with his employees. There is no indication he is willing do so. There is no indication that the employees would want to contribute to a SIMPLE. Employer contributions are very limited to 3% of compensation. The SEP will allow for higher employer contribution.

Answer 40

Answer: A Profit sharing and SIMPLE 401 (k)s are ERISA plans with the 500/1,000 hours per year service eligibility requirement. Group health insurance plan participation normally requires 30 hours per week. SEP eligibility requires the 3-year rule for which many of the part-time employees may already qualify.

Answer 41

Answer: B The company cannot change to a cash accounting system. They can wait another year, but why not save 21% in taxes? Answer D is not allowed, the cash must be contributed to the plan.

Answer 42

Answer: B With a fully funded whole life DB plan, the employer can use the actuarial assumptions of the whole life contract. The actuarial assumptions of the cash value insurance policy are normally lower than most other plan assumptions, allowing for additional contributions.

Answer 43

Answer: B Only profit-sharing plans can hold second-to-die insurance. Pension plans cannot. Cash balance plans and money purchase plans are pension plans.

Answer 44

D. She is eligible for the $255 lump sum death benefit. Surviving spouse railroad employees cannot get a Social Security widow's benefit and receive railroad retirement benefits. She is not entitled to Medicare until age 65

Answer 45

C. II, III For hardship withdrawals, employee's distributable amount is equal to the employee's total elective deferrals and vested profit-sharing contributions.

Answer 46

A. I, IV The IRA rollover of the entire account, which includes the employer stock and the 72(t) distribution eliminate phantom income. However, the NUA tax break is lost.

Answer 47

14. D - If the plan violates the top-heavy rules, the plan will continue to be qualified but subject to the top-heavy rules (not terminated).

Answer 48

16. B - He could do a fully funded whole life DB plan. The plan can use the actuarial assumptions of the whole life contracts. These assumptions are normally lower than the plan assumptions (more contributions). The insurance premium will be paid by the plan. If at Karl's death, the difference between the cash surrender value and the face amount is treated as death proceed of life insurance, and is generally excluded from income tax, but only if the insurance cost under Table 2001 (standard rate) has been paid with nondeductible contributions or has been taxable to the employee.

Answer 49

20. A - Yes, if there were no annual additions to the account for the prior year (contributions or forfeitures), she could fund a deductible IRA. Sue's W-2 would show she wasn't a participant.

Answer 50

22. A - Kate can't convert the whole IRA to a Roth without taking a RMD if she is 73 or older. The first dollars withdrawn from the IRA are deemed to be the RMD until that amount is distributed. Once the RMD is withdrawn, then the remaining balance can be converted. Her age is important. (Pre-study)

Answer 51

Question 14: C Answer C is also known as percentage-of-earnings-per-year of service. Answer D is nonsense.

Answer 52

Question 11: C Forfeitures in defined benefit plans and cash balance plans must reduce plan costs or contributions. Money purchase plan forfeitures may (not must) be allocated to employee account balances. Forfeitures in a profit-sharing plan normally are allocated to the plan participants.

Answer 53

Question 9: C A target benefit plan is a defined contribution plan. Although an actuarial calculation is made when a target benefit plan is first installed, the maximum deductible contribution is always limited by Answer C. This is true even if the actuarial calculation calls for a larger contribution (likely if there are many older highly compensated employees and relatively few lower-paid rank-and-file employees). Answer D is wrong. The contribution is not based on total payroll but eligible compensation or payroll.

Answer 54

Question 5: C Investment returns affect account balances, not contributions.

Answer 55

Question 4: B The key employee had a higher salary level than the clerical employee. The employer would be contributing less on behalf of a lower paid worker.

Answer 56

Question 1: A The employees will be eligible after one year, but unless they stay three years, the employees will forfeit all employer contributions made to the plan. The forfeitures will be allocated to the long-term employees (probably the HCEs) allowing them to potentially receive 2023 annual additions of up to 100% of compensation or $66,000. There is no indication the company wants to retain employees (2-6 year graded). The 100% vested plan (2-year eligibility) is not an advantage over the 3-year cliff vesting schedule.

Answer 57

Question 7: C The IRS **defines** this as an affiliate service group. I realize the 80% factor may lead you to answer this as brother-sister.

Answer 58

Question 2: E Interest paid on a plan loan for a principal residence may be deductible. If the plan is subject to QPSA/QJSA and if the loan is secured with plan assets, both spouses must consent to the loan. In all cases, the loans must be adequately secured (with plan assets or other collateral acceptable to the plan administrator).

Answer 59

Question 4: C 6% of the total of $110,000 = $6,600. The plan only allows for a 6% deferral. He cannot defer $22,500.

Answer 60

Question 5: D 401(k)s [and 403(b)s] plans do allow principal residence loans to key employees and non-key employees alike. However, interest paid on a plan loan for a principal residence is only deductible under two conditions. 1) The loan is secured by the residence for which the loan is made, and 2) The participant is **not** a key employee. Interest on plan loans (even if for a primary residence) will be considered consumer interest if secured by the employee's own elective deferrals. Home mortgage interest isn't **always** deductible. Consumer interest is not deductible.

Answer 61

Question 6: E Earnings must meet the five-year rule, and the Roth IRA owner must be 59½ for the distribution to be tax-free.

Answer 62

Question 3: A A SEP is easy to install. The SEP contribution would be $80,000 x .25 = $20,000. SIMPLE IRA and SIMPLE 401(k) contributions are $15,500 + $2,400 (3%) = $17,900. Keogh isn't a complete answer. Is the Keogh a defined benefit or money purchase plan?

Answer 63

Question 13: E With the uni-401(k) Mr. Pope can defer $22,500 plus add employer profit-sharing contributions to a cap of $66,000 plus a catch-up contribution of $7,500. The SIMPLE and SIMPLE 401(k) would only allow for $15,500 to be deferred plus 3% of compensation as a matching contribution. The profit-sharing and SEP would allow Mr. Pope to contribute $66,000 but no catch-up contribution is available.

Answer 64

Question 1: C The pure life insurance death benefit will be tax-free. The employee was charged with the cost of the pure death benefit of the life insurance. The cash value will be taxable. See Chapter 8 materials for more detailed explanation.

Answer 65

Question 3: C Equipment leasing programs are normally limited partnerships. Annual limited partnership income in excess of $1,000 is exposed to UBTI current taxation.

Answer 66

Question 4: B A defined benefit plan is subject to all the ERISA requirements for qualified plans (participation, funding, vesting, etc.) and the ERISA reporting and disclosure requirements. This information is disclosed to the plan participants and/or filed with the IRS or the Department of Labor. PBGC is not per se a reporting agency.

Answer 67

Question 5: B This option allows Apex to put money in the plan now and get a tax deduction now. Answer C is a good answer, but there is no indication in the question that Apex is interested in using company stock. This is the best answer though answer D could work as well (subjective).

Answer 68

Question 11: B Answer III would be more appropriate for a non-spouse beneficiary. Joe had not started his distributions so the "at least as rapidly" distribution would not apply in this situation.

Answer 69

Question 1: B A rabbi trust might trigger constructive receipt due to a merger or acquisition.

Answer 70

Question 3: A A salary continuation plan is funded entirely by employer contributions. Pure deferred compensation uses a portion of the employee's current compensation. Nothing indicates a need for life insurance (Answers D and E). A secular trust contribution would be currently taxable to John and limits his ability to use the funds until the end of the term of the agreement.

Answer 71

Question 4: A If more than $100,000 of ISOs that vest in the same year are granted, only the first $100,000 (worth) are treated as ISOs with the excess treated as NSOs

Answer 72

Question 4: D Individual employees can receive contributions in excess of 25% providing the contributions conform to the 415 limit (as long as company contributions do not exceed 25% of total eligible plan compensation).

Answer 73

Question 13: B SEP contribution rules are similar to those for a Keogh PS Plan. For self-employed individuals, the maximum contribution percentage is 18.59% (**Note:** $18,590/$100,000 is 18.59%) of earned income with a 25% plan, and for corporate employees (including owners) the contribution limit is 25%. The 1.0 rule has been repealed. **Note:** She works for two unrelated employers, so both contributions are allowed.

Answer 74

Question 14: B If she makes a direct rollover into her IRA, she will be subject to the IRA rules. If she makes a direct rollover into her own employer's qualified plan, she can use separation from service at age 55 (no 10% penalty) or wait until after retirement to take RMDs. This gives her greater flexibility considering her uncertainty as to when she will actually retire, plus with a qualified plan, the assets are fully creditor protected. See Chapter 9 for rationale.

Answer 75

Question 19: C Pledging the stock is like buying stock on the margin. It makes the most sense. The loan interest deduction is disallowed when municipal bonds are pledged for a loan. Municipal income is not investment income. If an IRA is pledged for a loan, the IRA will be disqualified.

Answer 76

Question 28: A No, Bill barely can pay himself enough to survive. Additional contributions (such as to a money purchase, defined benefit plan, or SEP) **would have to come from his personal income.**

Answer 77

Question 29: A $250,000 - Bill's income ^ ^ ^ -$1,500 - less capital losses ^ -$36,000 - less alimony -$4,000 - less alimony ^ ^ -$6,000 - less 100% health premium ^ ^ ($500x2) ———————- $202,500 - AGI ^ **Married filing separately** allows only ½ ($1,500) on capital losses. ^ ^ The life policy is paid separately from the monthly alimony ($4,000). The P.A. cannot deduct Bill and Martha's health premium (It becomes part of his income - S corporation rules). He can personally deduct 100%. The $3,000 of dividends and the $7,500 of capital gains come from her mutual fund (see question 46). ^ ^ ^ This includes disability and medical insurance payments— see footnote 1 of the financial statement.

Answer 78

Question 35: A The variable annuity is creditor protected. Removing assets from the P.A. makes the business less valuable. Bill could take more salary now and invest in annuities or life insurance. He can improve his malpractice per Answer IlI. Answers Il and V strip all the value out of his P.A. (PSC Corporation). He can then put the cash into an annuity or cash value life insurance policy. Go back to General Principles 10-6 for additional information.

Answer 79

Question 39: E As a young, new medical practitioner, Richard will probably be more attracted by cash than by longer-term benefits. Changing the eligibility and vesting requirements for the 401(k) might not impress his young son. There is no indication that his son has student loans to pay off. Bill is in poor health working alone. He needs his son to help him before he kills himself.

Answer 80

Question 41: C The allowable contribution for Bill into a 401(k) plan with a catch-up contribution would be $73,500 for 2023 ($66,000 + $7,500). This seems affordable and allows him to defer some income. The money purchase and target plans don't permit catch-up contributions. A tandem plan was used before 2001 to create 25% contribution. 15% was the maximum for profit sharing prior to 2001, so a money purchase plan had to be added (10%). **Note:** He may want to take more salary to make answers A, B, or C work (Rule 404 - 25%).

Answer 81

Question 44: C He cannot qualify for a hardship withdrawal. He is 58. He hasn't met the 10 year of reserves for in-service withdrawals.

Answer 82

C. Can you tell me more about your experience in covered call writing? Asking the client to explain more about an experience is an open-ended question. Although asking the client when he or she would like to retire is a question seeking a qualitative answer it is still a closed-end question. The name of the executor is a closed-end question seeking a quantitative fact (a name). Asking whether or not someone is satisfied with another professional is most likely to produce a "yes"/'no" response.

Answer 83

D. Endowment bias Endowment bias is a type of bias that causes individuals to value an owned object (such as a stock or piece of real estate) at a higher value than its market value. A, B and C are all possible answers, but endowment bias is clearly being exhibited in this question.

Answer 84

A. The $52,500 will be income tax free and no 10% early withdrawal penalty would apply. Harry's regular Roth IRA contributions are distributed first and are tax-free. Additionally, he qualified under the five-year holding period to withdraw $10,000 for a first home purchase. The $10,000 is tax-free and no penalty applies.

Answer 85

C. The value of the common stock for gift tax purposes will be based on the total FMV of the business. The preferred share value will be determined based on the stated dividends. The common stock value would then be the difference between the FMV of the corporation and the aggregate value of the preferred shares.

Answer 86

B. Yes, in the second post-separation year To determine excess alimony, note the difference in the payment between years 2 and 3. Under the Internal Revenue Code, the excess alimony payment for the second year is the amount that exceeds the payment in the third year by more than $15,000. The excess is $5,000; [$30,000 - $10,000 + 15,000)]. Doubtful this will be tested.

Answer 87

Feedback: Answer C is the definition of NPV. NPV, while not a perfect valuation tool provides the planner with a reasonably reliable model from which to make assessments and projections. The calculation should factor both positive and negative entries.

Answer 88

C. Up to any amount with which she feels comfortable Feedback: Mrs. Parker does not need Patrick's assets. The portability will only allow $12,920,000 to pass tax-free from Patrick's estate. What happens if his assets triple by the time she dies.

Answer 89

A. A rental apartment building Feedback: Investing in the rental apartment building enables depreciation deduction to offset rental income on an asset that can appreciate in value over time. The single premium annuity shown does not indicate if it is immediate or deferred. Municipal bond interest is tax exempt rather than tax deferred. Interest on Certificates of Deposit is currently taxable. D. A Certificate of deposit

Answer 90

B. You can terminate the relationship with Spike if he makes you uncomfortable. Feedback: Under the CFP® Board Code of Ethics, the scope of the client relationship must be mutually acceptable to both client and planner. When it is no longer so either party can terminate the relationship. While the 1940 Investment Advisors Act does prohibit assignment of the relationship (Answer A) terminating the relationship is not assigning it to another. As an ethical planner, you have already made your best recommendations to Spike.

Answer 91

A. Long-term care insurance/Life Insurance with LTC rider Feedback: If Mrs. Tillman needs long-term care, Mr. Tillman may have to use their assets for the expenses relating to her care. He needs to protect their assets in case he needs long-term care. The question asks about insurance for Mr. Tillman rather than for Mrs. Tillman. He is 65, and after working for 40+ years should qualify for Medicare.

Answer 92

B. "Mr. Boyd, you should consider the opportunity cost of investing the money and lease the car." Feedback: The decision as to whether it is best to buy versus lease a car is often based on opportunity cost. First, determine the break even return on the investment. If investing can outperform the breakeven return, it makes sense to the car.

Answer 93

B. They should keep the home. Even if Alice works only part-time, the Fullers can still afford to keep the home and have room for children. Feedback: Presuming that the Fullers have children, they may need the bigger house. The home is usually an effective inflation hedge. One generally can't pay down a mortgage to reduce PITI. PITI remains relatively constant even as the mortgage is paid down. The loan will be paid off faster, but the mortgage agreement (PITI) would remain relatively unchanged. The $225,000 home does not seem extravagant.

Answer 94

E. Write to the compliance officer (registered principal) of the broker/dealer that handled the transaction and ask for his money back Feedback: A disgruntled client of a broker/dealer should generally begin the complaint process through that broker/dealer's compliance function. If the firm is unresponsive or disagrees with the customer's claim, arbitration should be pursued through FINRA. Mediation may also be available. the broker/dealer community is governed by FINRA directly under the supervision of the SEC. The CFP Board is not the regulator for broker/dealers.

Answer 95

E. I only A Series 6 limited securities representative licensed individual can sell mutual funds only. To sell variable products, the individual must also hold a state-issued insurance producer's license. The question does not indicate any insurance license. ETFs are Exchange traded funds. They are normally traded on a national exchange without a prospectus. To earn commission for sales of products not accompanied by a prospectus, one must hold the FINRA Series 7 general securities

Answer 96

B. I, III Feedback: Under ERISA rules, a profit sharing plan may exclude from participation employees working fewer than 1,000 hours per year. Eligibility to participate in an employer-provided group health insurance plan normally requires 32 hours per week. SEP eligibility falls under the 3-year rule which could force Sonia to cover certain returning part-time workers. The SIMPLE (401k) implies employee deferrals. At this point it is not clear as to whether the employees would want to make elective deferrals. Her own maximum contribution would be lower than that under the profit-sharing plan.

Answer 97

D. The interest on the home equity loan is not deductible because interest on home equity loans is generally nondeductible in tax year 2023. Feedback: Interest on home equity loans is generally nondeductible unless utilized for home improvement. While interest on a home equity loan was an itemized deduction, it was not classified as a "miscellaneous itemized deduction." However, interest on home mortgages up to $1M are grandfathered if taken out prior to December 15, 2017.

Answer 98

A. $0 The psychiatric practice is a "service related" business. The owner of a service business is ineligible to claim a deduction for qualified business income if that taxpayer's taxable income is over the eligible thresholds. At joint taxable income of $827,000, the Shrinks have exceeded the threshold of $464,200.

Answer 99

C. Under the Duty of Integrity, discuss your concerns with Andrew's personal physician. Feedback: At times the CFP® practitioner must weigh the Duty of Integrity against the Duty of Confidentiality. Integrity requires putting the client's interest first and it is important that Andrew not lose his Medicare Part B Coverage. Discussing Andrew's late premium payment with his daughter would blatantly violate the Duty of Confidentiality. However, discussing your concerns with Andrew's doctor is a reasonable choice because the doctor is required to maintain confidentiality under HIPAA and to serve the interest of patients under the Hippocratic Oath.

Answer 100

D. Under Section 199 A, Pete may claim a below-the-line deduction of $24,000 even if he claims the standard deduction. Feedback: Under Section 199-A, Pete may claim a below-the-line deduction of $24,000 even if he claims the standard deduction. A below-the-line deduction without requiring itemizing is an unusual tax treatment that is likely to be favorable to the taxpayer. The $24,000 represents 20 percent of his qualified business income generated through his pass-through business. A sole proprietorship is classified as a pass-through entity for purposes of claiming the 20 percent deduction.

Answer 101

A. Dasch can claim a QBI deduction of $30,000. Because the Hund's taxable income exceeds the phaseout threshold of $464,200, their deduction is now limited to the lesser of 20 percent of business income or 50 percent of W-2 wages. Thus, the QBI deduction is only $30,000.

Answer 102

D. Married couple (AGI 63,000) deferring $7,000 into a 401K plan to get the employer match Feedback: The Retirement Savings Contributions credit is designed for low to moderate income taxpayers and matches a percentage (based on AGI) of the taxpayers IRA, retirement plan or ABLE account contributions but not 529s. The maximum credit is $2,000 (single) and $4,000 (MFJ) and no credit is available for taxpayers over $33,000 (single) and $66,000 (MFJ) AGI.

Answer 103

B. SOFR Feedback: The Secured Overnight Financing Rate (SOFR) is the base rate used for many loans and financial derivatives (LIBOR was used in the past). One possible example could be a mortgage readjusting using the SOR on a specific date plus 300 basis points.

Answer 104

B. I, II, III Feedback: Retirement and deferred compensation benefits may not be funded through the vehicle.

Answer 105

B. He should see an attorney Feedback: You do not have a conflict of interest or an ethical obligation to involve his wife because she has never been your client. The dynamics of his personal life are complicated. An attorney can advise him on complicated strategies and help him execute documents as needed. You cannot help Terry with documents. There is no need to terminate the relationship. His wife is not your client and his assets appear to be individually owned

Answer 106

E. Sue the plan officials for losses to the plan Feedback: Errant plan officials can be held personally liable for losses to the plan as well as other factors. ERISA prohibits monetary punitive damages for claims.

Answer 107

B. Investigate long-term care policies for her, explain LTC and other alternatives to her, enabling her to make a decision Feedback: The question says you are a CFP® practitioner. Your client asked for advice on long-term care insurance policies. You should give her all the alternatives. CFP Board wants us to educate clients.

Answer 108

Response: A. $50,000 of the $110,000 will be income tax free; the remaining $60,000 will be subject to tax at ordinary income tax rates. Feedback: The policy is not a MEC; therefore, the cash value in excess of basis ($50,000) will be subject to tax at ordinary income tax rates, but not the 10% penalty. 2023-36 years in 1987. The policy was acquired before MEC rules took effect in 1988.

Answer 109

D. $43,500 Feedback: Section 415 of the Internal Revenue Code limits the annual addition to a maximum of 100% of compensation or $66,000. $66,000-$22,500=$43,500. The company may contribute and deduct more than 25% of salary in addition to the elective deferral of an individual employee/participant (not to exceed $66,000) providing that the plan deduction for total includible compensation does not exceed 25% (elective deferrals).

Answer 110

Question: C. Review Sally's current lifestyle and expenses and establish a budget until the second home sells. Feedback: Bill has all of Sally's data. He just completed a plan. Sally is upset. She needs advice now. Making her wait might make her more upset. In creating the plan, Bill did assess Sally's current lifestyle and expenses. Sally can't file for unemployment insurance benefits because she terminated voluntarily. Sally clearly does not want to take the newly offered position.

Answer 111

C. $120,000 Feedback: Under this endorsement method split dollar life insurance arrangement, if Sam wants to buy the policy under which he is the named insured, he will have to pay the higher of the cash value or premiums paid. The company will realize a gain representing the excess of the cash value over the premiums paid. The endorsement split dollar agreement typically precludes the employer charging interest to the insured employee.

Answer 112

C. Claim the Lifetime Learning Credit Feedback: Both the American Opportunity credit and Lifetime Credit programs specify certain exclusions. For the American Opportunity Credit only, an otherwise eligible student can be excluded if convicted of a felony (in this case distributing a controlled substance). This restriction does not apply to the Lifetime Learning Credit. The Hart's relatively low joint AGI qualifies them for a Lifetime Learning Credit. Answer D is unclear because it does not indicate whether the tuition is to be paid directly to the education provider. If it is paid to Robert, all or part of the gift may be exposed to federal gift tax. Regarding Answer D. No charitable gift deduction is available for tuition payments to a school.

Answer 113

B. I, III, V Feedback: A section 6166 election is available for deceased taxpayers who owned one or more sole-proprietorship business interests. The aggregate holdings in closely held business must represent 35% of the adjusted gross estate. The 2% interest rate only applies to a limited dollar amount of estate tax owed. While the remainder of the estate tax due also qualifies for interest only payments, the rate of interest may be higher than 2%

Answer 114

D. He cannot defer any compensation into Eggcellent Eggs 401(k) plan. Feedback: Robert can be a participant in Eggcellent Eggs plan for profit sharing contributions but not elect any more deferrals. Answer C is incorrect because his annual additions limit (for both plans combined) is the lesser of 100% of compensation or $66,000 in 2023 (Bacon and Eggs are related employers).

Answer 115

C. You should discuss Mr. Able's health because the return levels may have to continue for the next decade. Feedback: Mr. Able's health and life expectancy should factor into his investment plans. Given strong health and a family history of longevity, he might live for another 20 years. In light of historical returns in the decade from 2009 to 2022, the overall portfolio return is certainly acceptable. The advisor has not underperformed.

Answer 116

D. A gift is made before one spouse dies later in that calendar year. Feedback: Only married couples may split gifts. If one spouse dies in the year of the gift, the split is generally allowed if the gift was made before the decedent actually died.

Answer 117

C. $6,600 Feedback: 6% of $110,000 An employer plan document can put a limit on the Elective deferral. The plan limits elective deferrals to 6% of Bill's compensation. Thus, $22,500 is not a supportable answer because of the plan limitation of 6%

Answer 118

B. $1,250,000 Feedback: Using the higher rate 8% produces a lower number ($1,250,000). George would prefer to pay less to acquire the risky business. Using the 7% produces a maximum number. ($1,428,571) $100,000 = $1,250,000.08

Answer 119

B. The trustee can reposition the assets in the trust. Feedback: In general, trustees may reposition trust assets. If Dolores serves trustee, that she is controlling the beneficial enjoyment of the trust's assets will taint the trust for income and estate taxes. A family member can be a co-trustee with an independent trustee. Life insurance can be purchased. However, using income from the trust to pay the premiums will taint the trust for income tax purposes. Life insurance on the grantor of a special needs trust that is held within that trust is a typical occurrence.

Answer 120

C. A cross-purchase buy-sell agreement funded with whole life insurance policies Feedback: The only way the surviving owner will receive a step-up in basis is to implement the cross-purchase buy-sell arrangement. Whole life insurance has a level premium which will build the cash value for one owner to buy the stock of the (other) retiring or departing owner. Joan and Judy are both in good health. They indicate no immediate plans to retire or leave the business, so the policy may have to last until they reach age 80 or 90.

Answer 121

A. Mark should consult with an attorney and have the trust amended to remove himself as trustee. Feedback: If Mark continues as trustee of the trust into which he has transferred his own the 2503(c) is a tainted trust for both estate and income tax purposes. The notion of minimizing income and subsequent tax is important, but the trustee situation is more worrisome. The trust document needs to be amended or voided. This is a 2503(c) trust.

Answer 122

C. $20,000 will be subject to ordinary income tax plus a 10% penalty, and $10,000 will be a tax-free return of basis. Feedback: A single premium policy purchased after 1988 is a MEC. Current CV $50,000 - basis $30,000 = $20,000 gain. Dividends in a MEC become taxable when borrowed or withdrawn. Joan's gain is $20,000; $10,000 is her true basis in the policy. Dividends under a MEC are generally taxed. Only the gain is subject to the 10% penalty in addition to tax at ordinary rates.

Answer 123

Response: A. If you elect a full Lifetime Learning Credit, you cannot claim an AOC for the same expense in the same year. Feedback: Answer B is incorrect. The AOC is per eligible student per year. If a family has three children in college in the same year, each is eligible for the full AOC. Lifetime is maximum per year. The AOC is available only for the first four years of post-secondary education. No age limitation applies to the Lifetime Learning Credit.

Answer 124

No, the TCJA eliminated the 1040 EZ

Answer 125

B. I, II, V Feedback: When policy dividends from modified endowment contracts (MECs) are used like cash, they are distributed under FIFO rules such as those applicable to annuity distributions. Cash distributions and dividends used to pay off policy loans are considered to be income first distributions. The interest accruing from a policy loan on a MEC is treated the same way for federal tax purposes. Dividends used to buy paid up (permanent) additions are not treated as income-first distributions. The loan interest was not distributed. It was added to the outstandting loan balance.

Answer 126

A family trust - irrevocable

Answer 127

D. Interview then hire an investment manager to manage their plan's portfolio Feedback: If a suitable investment manager has been appointed, generally the trustee will not be liable for the acts or omissions of that investment manager. However, this relief does not totally excuse from liability the named fiduciary who appointed the investment manager.

Answer 128

B. I, III, IV, V Feedback: To be eligible to claim Social Security disability income benefits, the FICA covered worker must be younger than full retirement age (FRA). At and after FRA, only retirement benefits are available.

Answer 129

C. 10% of the $50,000 excess distribution Feedback: The question specifically addresses the $50,000 excess withdrawals rather than the compliant withdrawals from years 1-3 (which will also incur penalty). Hardship withdrawals are never available from IRAs as they are from 401(k) plans and certain 403(b) arrangements. The question says Harry is 59, not 59 ½.

Answer 130

A. Ask for a meeting with both Alan and Tiffany Feedback: Some dialogue about finances between Alan and his daughter would make sense and you can facilitate the discussion. Answer B makes better sense after the joint meeting. Is being silent about your concerns serving the needs of your client, Alan? Your concern is Alan. Tiffany is not your client.

Answer 131

Response: A. $0 Feedback: A gift of cash to an irrevocable living trust is irrevocable. The gift is removed from their gross estates for federal estate tax purposes. While both George and Linda will have made a taxable gift of $21,000, that is not reflected in their gross estate(s). Rather, it is added to their taxable estate(s) to arrive at the tax base. ($110,000 - [68,000 (17,000 x 4)] = $42,000 42,000 / 2 = 21,000 each

Answer 132

B. The policy will be subject to the transfer for value rules making the death benefit net of basis subject to federal income tax. Feedback: The policy was sold to someone other than the insured or to a business in which the buyer is an owner or partner. Whether the policy is term or permanent insurance is immaterial to the rule. Transfer for value rules makes the policy's death benefits income taxable to the beneficiary to the extent that it exceeds basis. The 3-year rule doesn't apply when a sale (transfer for value) occurs.

Answer 133

E. IV, V Feedback: Answers I and Il will trigger "transfer for value" rules and make the policy's death benefit subject to income tax. If Dr. Perkins gifts the policy to his wife, it will be includible it in her gross estate for federal estate tax purposes thus increasing potential estate tax at the second death. Answer E is the best answer to get the policies out of his wife's estate. The exact amount of taxable gift less exclusion is not part of the answer. Since his wife is a beneficiary, it is unlikely that gift splitting is permissible. But, his estate tax applicable amount remains available.

Answer 134

B. The transfer of $1,000,000 reduced by one annual gift tax exclusion from Mrs. Tilden to Bill Widner will be a taxable gift. Feedback: It appears that the gift will not qualify for the marital deduction. To qualify for the deduction, the done spouse must be given the property outright or must have at least a right to the income from the property and a general power of appointment over the principal. The IRS would consider this to be a step transaction and thus a fraudulent transfer.

Answer 135

B. I, III Feedback: The ABC and the XYZ transactions violate the wash sale rules. --ABC's basis is $10 cost plus $5 recognized loss. (December 1st and December 31st) --XYZ's basis is $52 cost plus $10 recognized loss. (February 15 and March 16). There are only 28/29 days in Feburary -- LMN was sold for a gain.

Answer 136

C. Whether she can keep the vacation home on the lake for summer outings to spend with her children and grandchildren. Feedback: Although Mrs. Teal will be disappointed if she can't maintain the summer vacation home, the other issues are more pressing. Her cash flow (income) must consider whether she can continue to live in her current home. Her risk tolerance will affect the amount of income her investments would generate.

Answer 137

B. $383,000 Feedback: Because this is not loss property, the son's basis will be Sam's adjusted basis ($1,117,000). (The basis is lower than original due to the CRDs not the market value of the property) The son's gain is $383,000. The annual gift exclusion never affects basis. The gift taxes paid would only adjust basis if the property had appreciated. This is depreciated property. The gift taxes paid only increase the basis when the FMV of the property as of the date of the gift exceeds the donor's original cost basis.

Answer 138

C. Profitability projections Feedback: Profitability projections should not be included in corporate annual reports. The SEC believes that such projections could mislead shareholders and others.

Answer 139

A. Prepaid tuition plans may only pay for tuition and mandatory fees. Feedback: If the beneficiary of a prepaid tuition (529) plan attends a private or out-of-state college, the program will determine the value of the contract. If the QHEEs are equal to, or greater than, the total distribution, they are tax-free. Prepaid tuition plans pay for tuition and mandatory fees. They do not cover room and board. Prepaid tuition plans do affect the expected family contributions.

Answer 140

C. The employee must elect in writing the amount of the salary reduction in the calendar year prior to the year in which that reduction is to take effect. Feedback: A participant in an FSA plan must elect in writing the amount of the salary reduction in the calendar year prior to the year in which that reduction is to take effect. Unused funds in medical expense FSAs cannot be used for dependent care. An FSA must not discriminate in favor of HCEs. However, there is no 70% participation testing. Forfeited funds in an FSA may not go directly to the employee for general operations but they can be used to defray future administrative expenses of the FSA itself.

Answer 141

A. All the above Feedback: Presuming a deemed violation of the CFP® Code of Ethics and Professional Responsibility, the Disciplinary and Ethics Committee may impose all the forms of discipline that are shown.

Answer 142

B. I, III Feedback: Under the HO forms, coins are covered for no more than $200. While the question does not indicate the coins are collectible, given that they are gold the $200 limit applies. Silver has an internal (sub) limit of $2,500 in coverage for theft only. The personal property in a separate structure ("The Shack") is covered. Artwork bought on the internet would be covered as normal personal property rather than collectibles.

Answer 143

B. Buy term life insurance on Tommy's life with a death benefit of at least $500,000. Feedback: This growing family will need life insurance. This is especially true because Leslie and Tommy can't rely on Mrs. Andrews for financial help. With term coverage they should be able to obtain a reasonably high death benefit. With two months before the baby comes and limited wages a six-month emergency fund does not seem reasonable. Further, they will have extra cash needs for baby-related expenses. Answer C is incorrect because Mrs. Andrews is not the client for whom the recommendation in the question is to be made.

Answer 144

D. A 1-year CD Feedback: In the absence of early withdrawal, the CD would not be expected to lose principal. The S&P ETF and CMO are marketable but there could be a substantial change in price. The GIC isn't liquid.

Answer 145

B. Reduce federal income taxes Feedback: represent monetary policy. The question asks what the federal government would do and not the activities of the FRB. This represents fiscal, rather than monetary policy. The other answers which are incorrect

Answer 146

B. Yes, based on the DDM, the stock appears to be undervalued. Feedback: By factoring the DDM, we know that the current market price of $100 is less than $108.00. V = $2 (1 + .08). = $2.16 = $108.00 .10 -08 .02 In the formula above, the 2nd growth rate is used to calculate the intrinsic value with an adjustment upward or downward relative to whether the early years' dividend is lower or higher than the later years' dividend

Answer 147

C. Yes, but only for a portion of the distributions Feedback: The "anti-alienation" provision only applies during the accumulation period, not after the account goes into pay status. Once the distributions are paid out, they become an asset of the participant, subject to any creditor's claims that may be pending when the benefits are received.

Answer 148

D. Mark because of the grantor rules Feedback: If any portion of the trust income is, or may be, used to purchase insurance on the life of the grantor or grantor's spouse, then the trust is a grantor trust. The trust is/was also used to benefit his dependent children (support). 25% is to purchase insurance and the remainder is used for support.

Answer 149

B. With a proper provision in Scott's will, if Clarisse disclaims ownership of the home, it can be transferred to a disclaimer trust, the terms of which permit Clarisse to live in the home for her lifetime. This would be a family trust. Feedback: Many well written wills include disclaimer trust provisions which give the surviving spouse the ability to put specific disclaimed assets into the trust by disclaiming ownership of a portion of the estate. Disclaimed property interests are transferred to the trust, without being taxed. Provisions can be written into the trust that provide for regular payouts from the trust to support survivors, or in the case of the Hardings, the right to occupy (but not own) property. The trust can also be written so that surviving minor children can also be provided for, as long as the surviving spouse elects to disclaim inherited assets, passing them on to the trust. To keep the assets from being included in Clarisse's estate, the trust would have to be a family trust rather than a marital trust. If a disclaimer trust is used, the full extent of the tax planning occurs upon the death of the first spouse. At that point, the surviving spouse can either accept the trust assets or disclaim them. If he or she disclaims them into the disclaimer trust, the trust will function like a credit shelter trust that will "shelter" the assets from inclusion in the surviving spouse's estate. But if there is no tax reason to use credit shelter planning, the spouse can simply receive the assets outright. This allows tax-planning flexibility without creating unnecessary complication. Using answer D will mean for the life of the QPRT it could be brought back into her estate. It is not a bad answer. With Answer B, the house uses the exemption.

Answer 150

C. Yes, the HSA can pay for qualified LTC premiums (age-based). Feedback: This is the best answer. The amount of qualified long-term care insurance premiums that constitute qualified expenses is allowed. However, the LTC premiums are still limited to age-based limitations (as adjusted annually). Answer B does not specifically answer the question. This is an HSA not an FSA. Premium payments are not allowed in FSAs but are allowed in HSAs

Answer 151

B. High basis, high dividend paying investments to both children and grandchildren. Feedback: Think ages. The grandchildren have to be age 30 maybe age 40. With high basis, they can sell the investment with little or no tax or keep it and get big dividends. They could be taxed a 0% or at most 15%. Low basis investments would be subject to capital gains. If she keeps the low basis stocks until death, her estate will get a full step-up in basis. She does not have an estate tax situation.

Answer 152

C. Review options for how the client may effectively reduce income and gift assets to qualify for the benefit. Feedback: In D, you never address her objective and discuss options on how to qualify: you only give recommendations apart from it. A is a good answer however you should let her determine if she is willing to go to lengths to qualify, you shouldn't be making the decision for her by dismissing the option. B would be a great answer but it is unclear if the attorney is competent in the subject. In this meeting, you should review the client's options as she requested, answer C. Once that is done you may then decide to advise a more suitable solution (Answer D). If you answered B I am not saying you are wrong. This is a practice question. (Subjective)

Answer 153

C. John may have breached the presentation step of the planning process because emailing a list of funds does not meet the necessary presentation guidelines. Feedback: Answers A and B, although possibly true, are not the root cause of the issue here. The main problem John has created here is that in doing this favor for Annie, he has not met the guidelines of presenting a plan set forth by the CFP® Board which requires that the CFP® practitioner shall communicate the factors critical to the client's understanding of the recommendations. These factors may include but are not limited to material: personal and economic assumptions; interdependence of recommendations; advantages and disadvantages; risks; and/or time sensitivity. Sending a list only of the recommendations clearly does not explain these factors to Annie.

Answer 154

B. A red herring omits the selling price and the size of the issue. Feedback: Although Answer C is true, the major difference is Answer B. The SEC has to approve a red herring. Yes, questions come from material not covered.

Answer 155

Response: C. I, III Feedback: It is important that Carrie takes care of her three children. In the event of her untimely death, they could be left destitute. This question does not mention anything about a wealthy family or others that could take care of her children in the event she was to pass away. It is vital that Carrie obtain life insurance. Of the choices including life insurance Roman Numeral I, 20-year term life insurance, is a better choice than Roman Numeral IV, Variable Universal Life. Term life insurance will cost her less in monthly premiums and she should be concerned more about her children's wellbeing than tax deferral and supplemental savings. Providing maximum death benefits at a lower overall premium is a better option than cash value life insurance, at this point in her life. Carrie's gross income is $75,000 per year. Considering her situation single with three children her income tax liability is minimal. Her monthly net income will be roughly $5,500 per month. Considering her essential expenses are $4,500 per month, she does have a little bit of room to save. It is more important for her to save for her retirement than for her children's education. Both saving for retirement and education are goals of hers, however, saving for retirement is more important at this stage in her life, especially considering the generous 401(k) match. Thus, Roman Numeral Ill is a better choice than Roman Numeral II. Plus, saving 12% of her salary in a 401(k) is $5,400, or a ~$400 net monthly loss of income. Since her essential expenses are $4,500, this still gives her an extra ~$600 per month on discretionary expenses. Finally, her children can always get loans for college. There has yet to be a retirement loan created... yet. Lastly, Carrie had $30,000 in her personal checking account. Even though she is a single income earner, she does have a second source of income, the 20-year period certain annuity. An adequate emergency fund would be at least three months of her essential expenses (3 months x $4,500 = $13,500). The best answer is C. **Suggestion: I would have read the answers first. This is a very long question.**

Answer 156

C. $436.835 Feedback: The amount of the gift ($1,000,000 gift - 563,165 retained interest) is $436,835. This is a gift of a future interest, not a gift of a present interest. This is why Answer A is wrong ($17,000). The taxable gift is $436,835

Answer 157

Yes. Enrollment in Medicare A or B will disqualify you.

Answer 158

C. II, III, IV Feedback: Items I and V are expenses. The others are improvements even though Il says replace and IV says install. There is no list of what are expenses and what are improvements.

Answer 159

B. The coverage on the ring is limited to dollar amount ($1,000 - 1,500) if the loss is due to theft. Feedback: The ring is only covered if its disappearance is due to theft. The dollar amount shown is not important. See Insurance prestudy lesson 3. It is a concept question (theft). There is no coverage unless a theft occurred. The theft must be reported to the police. It is a common sense question/answer. Some policies cover jewelry up to $5,000.

Answer 160

. D. Require Tubby to come in to complete a cash flow analysis and risk questionnaire before you can open the account do any investments. Feedback: You cannot do a Roth. Tubby has no earned income. Answer C is not bad. Answer D is the first step in the financial planning process. Should T.T. be involved in the process since he is making the gift. Tubby will be the client.

Answer 161

C.I, II, IV, V Feedback: Rotary is a non-profit (not-for-profit). It isn't a public or private charity. The Rotary Club would have to obtain IRS approval to receive tax deductible contributions.

Answer 162

C. Yes, up to investment income. Feedback: Investment interest ($50,000) is tax deductible up to investment income ($50,000). Investment interest is any interest incurred to purchase property that is held for investment, such as raw land.

Answer 163

B. I, II, IV Feedback: DNI is distributed net income. A simple trust uses the conduit principal (DNI). Answer V would have been correct if it said K-1 income. Dividends from a corporation are after-tax distributions.

Answer 164

C. Taking limited income from an S corporation will reduce FICA and FUTA taxes because the remainder of income will be unearned income. Feedback: In answer A and B there are salary caps that limit what qualifies for Social Security benefits and retirement contributions. But compensation is subject to unlimited Medicare taxes (disadvantages). That is why Answer C is a better answer. Unearned is not subject to Medicare. Answer D is incorrect, an S corporation does not pay corporate taxes (conduit entity). You may have chosen Answer D because it is an advantage for an S corporation owner. Yes, S owners reduce their wages to pay less FICA taxes by taking the maximum unearned income. This is why many people do an S corporation - avoid FICA taxes. But that is not what Answer D says. You have to answer the question as written.

Answer 165

C. The present value of the remaining periodic payments would be included in Suzanna's gross estate for federal estate tax purposes. Feedback: Although Suzanna's applicable credit would probably exceed any tentative tax, the present value of the yet unsatisfied payments would be included in her gross estate for federal estate tax purposes. Nothing indicates the settlement ceases at death (Answer A).

Answer 166

B. Edwin's attorney Feedback: Edwin's attorney enjoys "client privilege" and cannot be forced to discuss Edwin's condition with third parties. The question does not indicate that his investments are with your broker-dealer. Edwin's children are not your clients. You do not want to violate Confidentiality in that way. Discussing Edwin's condition with the investment advisor also breaches Confidentiality. You could also speak with Edwin's physician but that is not among the answer choices.

Answer 167

C. A Bypass trust Feedback: The provisions for Marilyn reflect a bypass trust (B trust). The right to income limited to HEMS is not a right to all income from the trust as would apply with a QTIP trust. Also, the QTIP cannot use the lifetime exclusion.

Answer 168

A. No Question 3: A Taxable Gifts are not part of the Taxable Estate. Instead, Taxable Gifts are added to the Taxable Estate to get to the Tax Base.

Answer 169

Question 10: A Well-being is not an ascertainable standard; therefore, it is a general power of appointment. A general power is included in the gross estate.

Answer 170

Question 2: B A pour-over will normally passes the decedent's separately owned assets into a trust. A gift at death is included in the gross estate even if it is made to a charity or to a spouse. The CRAT is included in the gross estate because the spouse has an interest. Then it ultimately passes tax-free to the spouse by the marital deduction. When she dies it passes to charity. The annuity is included. Chapter 4 addresses how an annuity is included in the estate.

Answer 171

Question 5: B DNI accounts for the income to the beneficiary as well as the corresponding deduction for the trust.

Answer 172

B. A 5-year CD ($30,000) with a 6% rate The $1,800 is under the level of unearned income where the kiddie tax starts ($2,500). Also consider the investment time horizon. His daughter will be going to school in approximately 5 years when the CD will mature for face value. John should not wait until his daughter is age 24. This is a favorable tax situation. The corporate bond ($2,100) and the preferred stock are exposed to interest rate risk.

Answer 173

Question 13: D With a 2503(b) trust, principal is not required to be distributed. However, income distributions are **mandatory.** The gifts to the trust will mainly be gifts of a future interest. The irrevocable trust can solve all the concerns, but the son will have to waive his Crummey rights.

Answer 174

Question 4: C Pooled income funds and gift annuities do not allow distributions of income as a term certain other than the actual life of the beneficiary.

Answer 175

B. Make a net gift and have the son pay the gift tax of $142,857 The normal gift tax would be $200,000 ($500,000 x 40%). However, when the son pays the gift tax for this net gift, the amount will be $142,857 ($200,000 ÷ 1.40). The 1.40 is 1 plus the gift tax bracket (40%).

Answer 176

Question 4: B Transfers with retained interest are brought back into the gross estate. Ill would not cause the date-of-death value of the gifted property to be included in the donor's gross estate. It is added to the taxable estate. IV is debatable. For example, life insurance would be included at date-of-death value if given within 3 years of death. IV is too broad an answer to be correct. Except for 529 plans, transferred property where the transferor holds a retained interest of any kind is included in the gross estate.

Answer 177

Question 5: D Rather than leaving the policies in trust, when one spouse dies, the survivor should get all the assets (Answer D). Answer D is arguably the more practical answer with the current $12,920,000 exemption or $25,840,000 together. Answers A and B won't work because the children are minors. The Reeds have limited assets except for life insurance. If the revocable trust is the named beneficiary, the life insurance ($2,000,000) and all other separate assets could go into the applicable credit amount trust at the first death. These assets could remain there for 40-50 years.

Answer 178

Question 4: A With a GRAT and A QPRT, the value of the transferred assets are frozen when transfer is made and a taxable gift occurs. To keep the property out of the grantor's gross estate, the donor must outlive the term. A recap is a freezing technique using preferred stock. With a private annuity or a SCIN, the property is transferred for a stream of income, and if the owner dies, no value is included in the estate.

Answer 179

Question 8: A The GRAT has a fixed income for a number of years.

Answer 180

Question 15: D Trust Il is a QTIP(c) trust that may enable the widower) to receive principal per HEMS. Trust IV A Disclaimer Trust (like a non-marital) enables the surviving spouse to receive income, but distributions will be subject to an ascertainable standard (special could have HEMS)

Answer 181

Question 21: B A CRAT must pay out a fixed percentage of the initial FMV (at least 5%). The specified amount must be paid at least annually to the non-charitable beneficiary out of income and/or principal. With a CRAT, capital gains on the low basis stock will be avoided. With a charitable gift annuity, only part of the capital gains is avoided. With a CRUT, a fixed percentage of the net FMV, as revalued annually, must be payable. 7% return is not assured.

Answer 182

Question 24: D The gifts are of a future interest and don't qualify for the annual exclusion [not $455,000 - $85,000)]. NOTE: Just because it is an irrevocable trust does not mean it has Crummey provisions. This is not a gift to a 2503(c) trust nor did the irrevocable trust provide Crummey provisions.

Answer 183

Question 28: C Vans used in business cannot be covered by a personal auto policy; they have to be covered under a business policy

Answer 184

Question 29: C I is wrong because all gratuitous transfers are not subject to federal gift taxes. Examples include political contributions, payments of tuition directly to an educational institution, and direct payment of another person's medical and hospital bills. Il is false because spouses must file a gift tax return if one spouse consents to "gift splitting." IV is a direct payment of tuition. The exemption must be used if gifts exceed $12,920,000, then gift tax is payable at 40%.

Answer 185

Question 50: E Using $40,000 as a PV, an 5% return and 4 years, the payments (end), Tom needs to gift only a total of $15,000 per year to a 529 plan to fund the $100,000. The UTMA is partially funded by Cynthia's earnings. That should retain her money. Tom can recover money from the 529 plan, but it should be his money. The gift lease-back would be paid with tax deductible dollars. However, this is unearned income and would be subject to the kiddie tax.

Answer 186

Question 52: D If Tom transfers the current policy to his ex-wife, he will have to get his current wife to consent to gift-splitting and file two gift tax returns. In addition, the policy will remain exposed to inclusion in his gross estate for 3 years. Answer B will accomplish nothing. The 20-year term policy remains in his estate and the premium is not tax deductible. If his ex-wife purchases a policy on his life, it is not included in his estate, and the premium can qualify as alimony (income tax deductible).

Answer 187

Question 54: The 2503(c) trust is for minors. The 2503(b) will work, but yearly gifts would be gifts of a future interest and won't qualify for the annual exclusion. A support trust is established to discharge an obligation. R.J. doesn't have an obligation to a grown child. A grantor trust would cause the income to be taxed to R.J. With regard to an irrevocable trust, please go back to Chapter 6. Yes, she could demand under the Crummey provisions, but none of the other trusts work.

Answer 188

Question 51: C Because Tom owns the policy it is included in his estate. If the insured possessed any incidents of ownership at death, exercisable either alone OR IN CONJUCTION WITH ANY PERSON (such as the irrevocable beneficiary), then it's included in the insured's estate. With his ex-wife as beneficiary, he will have to use $250,000 of his exemption amount which will diminish the amount he can transfer into the bypass trust.

Answer 189

B. The emerging market fund Feedback: The emerging market fund currently represents the smallest percentage of the portfolio allocation and likely has the lowest correlation coefficient relative to the other funds. Reducing correlation coefficient would reduce the portfolio's overall risk. The correlation coefficient is highly important for the exam. (Somewhat subjective)

Answer 190

C. Yes, if the ISO is disqualified Feedback: If the stock that was acquired under the option (right to buy) is sold before the two year /one year holding period, the excess of the fair market value of the shares at the time of exercise over the exercise price is treated as compensation to the option holder. That creates a corresponding deduction for the issuing corporation.

Answer 191

C. A reverse QTIP Feedback: The decedent can still use the GSTT exemption when the reverse QTIP is elected by the executor (after death). The dynasty trust is generally implemented before death.

Answer 192

Feedback: Who is the client? The presumption was that both Todd and Belinda would become your clients (not just Belinda). This is the initial interview (going to be clients). Regarding Answer D, Belinda makes clear that she does not want her compulsove gambler husband to know about the account. Further, without the disclosure of the value of the assets, including the money market account, the data is too vague for meaningful financial planning

Answer 193

C. Bob would be required to recapture $32,500 of what he has already paid to his ex-wife and report it as income at the end of the third year. His wife would probably file amended returns as well. Feedback: The alimony appears to be front-loaded and thus subject to recapture. Both Bob and his ex-wife will file ammended returns. Payment year #1 and Year #2 $70,000 minus constant =37,500 Recapture $32,500

Answer 194

C. Homer is 100% vested. Feedback: The 10% penalty will not be imposed on Homer because he is over 59½ and is a possible answer. The plan is fully funded at normal retirement age, not necessarily at a premature termination. Homer would get the account balance that is attributable to him and fully vested.

Answer 195

E. Trust income is accumulated for later distribution to the other trust beneficiary(s). Feedback: The income will be taxed to the trust. The grantor has no beneficial enjoyment. The other answers violate the grantor trust rules that make the income taxable to the grantor.

Answer 196

C. The deduction is the lesser of fair market value or the donor's basis (substantiated). Feedback: For charitible gifts less than $250, a dated receipt is proof for purposes of an income tax deduction. The receipt should include a description of the property. A written receipt would list the items donated with a corresponding value. Sally should keep records showing the fair market value and her cost basis. For charitable gifts of $250 or more, Sally must substantiate the deduction by written acknowledgement from the charity. Cash donations up to $300 single/$600 joint do not have to be documented for 2021 if you take the standard deduction

Answer 197

B. Help the clients to review and prioritize their goals. Feedback: The CFP®Board would feel that it is important to encourage the client to reassess priorities before making specific recommendations. Answer C is wrong because it assumes the client has established new goals. Answers A and D are arguable.

Answer 198

B. Understand that they may divorce. However, until they are divorced you may represent both of them. Feedback: At this point, you represent both spouses. After the divorce and the assets are split you could represent both of them with separate contracts.

Answer 199

C. Gather more data including a current and detailed Statement of Cash Flows. Design and implement uniform gifting allocation to all family members. Feedback: A gifting strategy should be proceeded by careful cash flow analysis. Clara may have health problems, where the excess cash flow would be needed. There is no indication of Clara's net worth or how long the patent rights will continue. Given her age, Clara may need some of her income for health related and other reasons.

Answer 200

D. Establish a cross-purchase buy sell agreement with Jane agreeing to purchase the stock on an installment basis over 10 years. Feedback: The cross-purchase arrangement enables Jane to enjoy stepped up basis. Her basis would not step up under the entity/stock redemption arrangement. In Answer B, Jane does not buy the stock, the corporation buys the stock. In Answer C, the corporation does not buy the stock, Jane buys the stock.

Answer 201

B. Establish a 162 "double bonus" arrangement using a fixed annuity or life insurance. Feedback: With the 162 double bonus arrangement, the first bonus would go into the annuity/life insurance and the second would pay Jesse's phantom tax. Due to its conduit taxation an S corporation cannot offer a non-qualified deferred compensation plan. Since we know little about how long other employees have worked for Doc, it is uncertain as to whether the SEP would eliminate most of the full and part-time employees. The deferred compensation arrangement through a secular trust would create undesirable phantom income for Jesse.

Answer 202

B. No, if the payment occurs within a 3-year period after the divorce Feedback: subject to federal gift tax. The $1,000,000 transfer is not subject to gift tax if the transfer of funds occurs within three years of the date of the divorce decree. It is still regarded as a marital gift and thus it is not

Answer 203

D. All the above Feedback: Participation eligibility in a qualified plan is contingent on employee status. (Sole-proprietors and partners may establish their own qualified plan.) An Independent contractor may participate in his own qualified plan but may not participate in another entity's qualified plan unless he is also deemed to be a regular or common law employee of that entity. It is possible to exclude commissions and bonuses from includable compensation provided that doing so does not discriminate against a non-highly compensated participant. For example, if commissions are not counted as includable compensation and the key employees never receive commissions, the non-key employees have been discriminated against because their includable compensation is being reduced (by the amount of commissions earned) while the key employees compensation is not reduced at all. Very involved question and answer

Answer 204

C. A SEP Feedback: Without knowing Harry's age or salary the SEP makes the most sense. ERISA only requires 1,000 hours to count as a year of service. But, SEP also says 3 out of the 5 years. No employee will ever make it to 3 years. SIMPLE (answers D and E) are too restrictive and require a match.

Answer 205

A. $5,000,000 Feedback: $12,920,000 will go to Marty tax free. He gets the exemption amount. The other $5,000,000 would by-pass estate taxes until he dies. If all goes into the QDT she would lose her exemption at her death. This is similar to a question in the Live Review book.

Answer 206

A. If the income is included in the gross estate, the estate tax attributable to that income item is generally deductible by the recipient of the income. Feedback: Answer B is incorrect because of Answer A. An income tax refund is not IRD.

Answer 207

C. The dividends are used to buy paid-up additions to the policy because Paul is concerned about loss of buying power on the death benefit. Feedback: Answer A will produce taxable interest. Answer B and D are taxable income under the MEC rules.

Answer 208

B. The maximum annual contribution to an ABLE account is pegged to the amount of the annual gift tax exclusion. Answer A is incorrect as amounts up to $100,000 do not affect government benefits. Answer D is wrong. The disability must have occurred before age 26

Answer 209

A. The forfeiture of the employee's benefits according to almost any vesting schedule The plan can have a vesting schedule or a provision for any contingency such as going to work for a competitor. This would bind the employee to the company (handcuff). Answer C is a good answer for the same reason. Answer A is more specific than Answer C as to why it is a "golden handcuff." Answers B and D would be other reasons for the employee to stay.

Answer 210

D. Both A and C Feedback: Both statements A and C are correct. A subscription warrant may be issued with a bond or preferred stock offering. A warrant is usually issued as a sweetener to make the issue more attractive. It entitles the holder to buy a proportionate amount of the issuer's common stock at a specific price. Presuming the corporation buying the preferred shares has no ownership in the distributing corporation, seventy percent of the dividends received are tax exempt. Preemptive rights are available to common, rather than to preferred shareholders. If the corporation wishes to issue more shares, common stockholders have the right to buy these shares before they are offered to the public.

Answer 211

D. Can be any percentage including skipping the distribution entirely Feedback: Unlike the CRT (which requires a 5% minimum annual income distribution to the grantor), there are no minimum or maximum required distribution percentages with a charitable lead trust. It is generally permissible to select any percentage, including less than 5%.

Answer 212

D. The transfer will still be presumed as a split gift. Feedback: Gifts made before one spouse dies may be split even if that spouse dies before signing the appropriate consent and election on Form 709. On behalf of the deceased spouse, his executor can make the appropriate election. This is not per se an incomplete gift. The check was written from a joint checking account and Pamela (the mother) is still living.

Answer 213

A. Ruth should roll his plan into an inherited IRA. Feedback: During his first marriage, Charles named Ruth as the beneficiary of his 401(k) account. Nothing indicates that he has changed the beneficiary. Ruth appears to need cash regularly. The Roth conversion would create a large tax bill she likely cannot afford at this time. Because the 401(k) is not a pension plan, there is no requirement that Charles's current wife be its beneficiary.