Wrong Answer Cards Flashcards
Universal Life
- low risk tolerance
- insurer controls investments
- premiums and the level of protection can be adjusted up or down
Markowitz Model
- uses SD as a risk measurement
- modern portfolio theory
- efficient frontier
- lowest risk for given expected return
Wealth Replacement Trust (ILIT)
FV of the policy can be less than or equal to the value of the property that is transferred to the charity
GRAT / GRUT
- PIGS Need Income
- Irrev trust that all grantor to make gifts of property
- At end of term corpus distribution to remainder beneficiary
- Value of gift discounted due to retained interest
- Owner must outlive or asset brought back into estate
- Appreciating assets
179 Deduction
- Business may expense up to $1.22 M of qualifying property in year of acquisition
- tangible personal property used in trade / business
- cannot create a loss
- deductible up to net income from business
Arbitrage pricing theory
- unanticipated shifts in risk premium will influence security prices
- the expected value of each factor is zero
Additional SD for child with earned income
$450
NIMCRUT
- noncharitable beneficiary receives lesser percentage of the trusts value or the net income earned by the trust that year
- excess is forfeited
- account accrues in years when the net income is less than the fixed percentage of the trusts value
Protective Put
Buying a stock (or owning it already) and buying a put for the stock serving as an insurance against a decline in the underlying stock
Installment Sale
- PIGS need income
- sale of property at FMV in exchange for payments
- pv of remaining payments is included in the gross estate
- property is secured
- gain is CG. Do not use if property is subject to recapture
IRS Penalties - Negligence
Penalty is 20% of the underpayment attributed to negligence
Charitable lead trust (CLAT/CLUT)
- upfront income tax deduction for pv of payment stream distributed to charities
- future income and gains will be taxable to grantor and grantor will not be entitled to additional charitable deductions for annual distribution
- no 5%
Pension plans
- Defined benefit
- Cash balance
- Money purchase
- Target benefit
Money purchase pension plan
- annual employer contribution is a flat % of each employees comp (up to 345k)
- employer can contribute up to 100% of each employees comp but can only deduct up to 25% of total plan comp
- section 415 - employee can max received contribution of of lesser of 100% of salary or $69k
- stable workforce, simple, younger, well paid
Collar
Sell a call (out of the money) at one XP and buy a put at a lower XP
Investor owns the stock
Deduction for ceiling for appreciated gifts of LTCG property
To 50% orgs is 30% of AGI unless the taxpayer elects to use the property’s basis rather than FMV
Roth IRA income phaseouts
Individuals $146-$161k
MFJ $230-240k
MFS $0-10k
Crummey Trust
- irrevocable trust with demand rights
- each time a new contribution is made to the trust, the beneficiary has a temporary right to withdrawal (30 days)
- equal to the lesser of the annual exclusion or the value of the current year contribution
Distributable net income (DNI)
Limits the amount that beneficiaries must report as gross income for income tax
Provides trust / estate with deduction
Limits portion that is taxable
Ensures character of distribution
1244 stock
- qualifies as a write off on a joint tax return up to $100k as ordinary losses
- any losses in excess would be treated as capital losses up to $3k/year
Phantom income - insurance
- Lapse of policy loan
- Section 162 life / disability
No load funds
- No SC
- Continuous offering / redemption
- Sell at NAV
- Redeemed at NAV
Financial enmeshment
Finances of parents / children are inappropriate/ commingled
SCIN
- PIGS need income
- no value in GE
- gain is CG
- assets can be depreciated
- interest can be deducted
- higher payout than installment
Limited partnership keys
- risky entity (needs limited liability)
- LPs cannot actively participate in business
- losses up to basis
Family limited partnership
- gift interest to limited partnership to reduce estate
- qualifies for various valuation discounts allowing for lower gross tax
- general partner maintains control
Active participation for real estate
- exception to passive loss rules
- regulates bona fife involvement in management decisions
- a limited partner may never be active
- must own at least 10% interest
Passive losses from real estate activity
May deduct up to $25k/ye of net losses from real estate to offset active / portfolio income
Phased out at $100–150k
ISO
- tax favored plan for compensating executive by granting options to buy company stock
- only the first $100k worth of ISOs that vest in one calendar year is entitled to favorable treatment. Over that is NSOs.
- the corp doesn’t receive tax deduction with the exception of a disqualified disposition
ISO vs NSO
Exercise price $20
Share price time of exercise $100
Stock sold at $200
ISO
- option granted: no tax event
- vesting: per plan doc 1 yr but HP has no effect on taxation
- exercise at $100: no regular tax but bargain element ($80) is AMT add back item. Basis at $20
- holding period: sale at least 1 year from exercise and 2 years from grant
- sale at $200: excess above basis is LTCG ($180)
NSO
- option granted: no tax event
- vesting: none required
- exercise at $100: difference (100-20 =80) is taxable at ordinary income tax rate. Basis is $100
- holding period: > 1 year from exercise for sale to be LTCG
- sale at $200: excess above basis is capital gain ($100)
Section 303 stock election
Post Morten election for estate liquidity
- Business must be incorporated (closely held stock)
- Value of stock must exceed 35% of decedent’s AGE
- Amount of stock redeemed as CG cannot exceed the sum of estate taxes + admin expenses
Installment payment of estate taxes (6166)
Post mortem election for estate liquidity
- Property must be in a sole proprietorship, partnership, or corporation ( aggregation allowed if more than 20% interest in each business)
- Interest must be carried on as of the day of death
- Value of business(es) must exceed 35% of decedent’s AGE
- During first 4 years can pay interest only on taxes due to
- The interest rate will be 2% on the first $1M
- The 2% is not deductible
Special use valuation (2032A)
- Real estate used for farming or a closely held business
- Several rules to qualify:
- 50% of the gross estate must consist of real and personal property
- 25% of the gross estate must consist of real property
- $750k reduction in decedents gross estate must
- Must be qualified use: 5 out of 8 rule before death / 10 years after death
Current yield formula
Current yield = annual interest in dollars / bonds market price
Property’s intrinsic value calculation
Property’s IV = NOI / capitalization rate
Intrinsic value of a call option
call IV = MP - EP
Intrinsic value of a put option
Put IV = EP - MP
Taxable equivalent yield formula
TEY = tax exempt yield / 1 - marginal tax rate
Tax exempt yield
Tax exempt yield = tax equivalent yield * (1- marginal tax rate)
ROE
Roe = EPS / common equity (nw or book value)
Dividend payout ratio
Dividend payout ratio = common dividends paid / EPS
Stock yield
Stock yield = dividends per share / stock price per share
Margin call
Margin call = (1- initial margin % / 1 - maintenance margin % ) x purchase price
PE Ratio
PE Ratio = current market price / earnings
Exclusion Ratio for an annuity
Exclusion ratio = basis / expected payout = tax free percentage
Write down taxable percentage
Medicare Part A Benefits
- Hospital days - deductible first 60 then second deductible next 30 then third deductible another 60. Inpatient hospital care limited to 150 days for one stay
- Post hospital extended care in a skilled nursing home up to 100 days
- Unlimited number of post hospital home health services
- Hospice care for terminally ill
- Patient pays for first 3 pints of blood or donates them. a covers additional
Medicare Part B Benefits
- Doctors services including house calls, office visits, and doctors services in a hospital or nursing home
- Diagnostic tests, radiology, treatment for mental illness, blood transfusion, PT, drugs that cannot be self administered
- Outpatient services from a participating hospital for diagnosis or treatment
- Unlimited number of home health services
- Free preventative care services and free annual wellness checkup
- Depression screening, AA, obesity, behavioral therapy for cardiovascular disease
Excluded
1. Routine dentures and dental care
2. Exams for eyeglasses and hearing aids
3. Most immunizations one free flu shot
4. Prescription drugs
HO-1
Dwelling
A (dwelling): basic
B ( other structures): basic
C (personal property): basic
D (loss of use): basic
Ho-2
Home
A (dwelling): broad
B ( other structures): broad
C (personal property): broad
D (loss of use): broad
Ho-3
Home
A (dwelling): open
B ( other structures): open 10% A
C (personal property): broad 50% A
D (loss of use): open 30% A
Ho-5
Home
A (dwelling): open
B ( other structures): open
C (personal property): open
D (loss of use): open
Ho-8
Older home
A (dwelling): basic
B ( other structures): basic
C (personal property): basic
D (loss of use): basic
Ho-4
Renters
A (dwelling):
B ( other structures):
C (personal property): broad
D (loss of use): broad
Ho-6
Condo owner
A (dwelling):
B ( other structures):
C (personal property): open
D (loss of use): broad
Ho-7
Mobile home
Chapter 7 state law exemptions
- Homestead
- Limit amount of personal property
- Wages due to head of family including anyone providing over half support of child or dependent
- Limited amount of equity in a motor vehicle
- Pension and retirement plan rights
- Cash value of life insurance / proceeds of annuity contracts
- Disability benefits / unemployment/ workers comp
- Property held tenancy by entirety
Chapter 7 means test
- if the debtors average monthly net income for 60 months > $10,000 chapter 7 is not an option
- if average monthly net income for 60 months < $6000 it’s allowed
- if between 6000-10,000 can file under chapter 7 if net monthly income < 25% of all nonpriority unsecured debts
Everyone must complete consumer credit counseling within 6 months of filing
Dow theory
Purpose is to show the direction of the overall market
Alpha
Indicates how the portfolio manager performed relative to a benchmark
Sharpe ratio
The ratio of the excess return of the portfolio to its standard deviation.
Number calculated is meaningless unless it is compared to the market or to other mutual funds
Reverse split
Shares down price up
UBTI
If UBTI exceeds $1000, the QP’s UBTI is subject to income tax in the current year
Income from a LP or dividends from a margined account are considered UBTI income
Equipment leasing programs are normally LPs
Leading economic indicators
- Initial claims for unemployment insurance
- New manufacturing orders
- New private housing units
- Stock prices , 500 common stocks
- Index of consumer expectations
Industrial production = coincident
Stagflation
The combination of slow economic growth and high unemployment with rising prices
Monetary policy
Discount rate
Open market operations
Reserve requirement
Margin
Negligence per se
Standard of care is set by a statute
School zone, crosswalk
Absolute liability
Extra hazardous condition which results in losses to others
(Keeping of wild animals, etc)
Workers comp is absolute liability
Vicarious liability
One person is held liable for for the negligent behavior of another person
Self insurance
Formal program of risk retention
Business operates as an insurance company for its own risks
Primarily used by large companies
Waiver of premium
Whole life premium is waived, but with UL/VUL, there are two options
1. The disability income benefit pays either the charges for mortality and administrative expenses or
2. The full amount of premium
Voluntary employees beneficiary associations (VEBA)
Benefits can include:
- death benefits
- medical expenses
- child care
- education
- severance
- disability
- legal expenses
- unemployment
Does not cover deferred compensation
Participating policy
- pays annual dividend to policyholder
- charges larger premium. If not needed, returned to policyholder as a dividend tax free
- dividends based on higher than expected investment return and low than expected mortality and expenses
In nonparticipating the company returns profits for shareholders
Property loss calculations
When the insurance is less than 80% of the dwellings RC, the insurer will pay the greater of: ACV or RC formula
When the amount of dwelling insurance is more than 80% of the RC, ACV is not used
ACV = replacement cost - depreciation
UIT
-unmanaged security portfolio offered by a sponsor and handled by an independent trustee
- passive investment because assets are not traded but frozen
- no new securities are purchased
- trust is self liquidating because as the funds are received they are not reinvested but are distributed to unit holders
- the sponsor will redeem the units at NAV
Noi Calc
Gross rental income +
Nonrental income =
Potential gross income -
Vacancy and collection losses -
Operating expenses (excludes interest and depreciation)
= NOI
412(e)3 or 412(i)
Defined benefit plans that are insured retirement plans (fully funded). Funding for these plans is restricted to life insurance (100x rule)
Unrelated business taxable income (UBTI)
taxable income generated by a tax exempt entity by means of certain passive activities
Look for LP interest
Mandatory withholding
20% on the distribution of a qualified plan if it issues a check to the recipient except if
1. Sub equal payments
2. RMD
Retirement plans you can defer into
- 401k
- 403b
- Simple
- 457
