Practice Quiz 1 (REVIEW MORE) Flashcards

1
Q

Justin, age 55, earns $50,000 annually working for Stone, Inc., an S corporation. He owns 10% of Stone, Inc.’s stock. Justin is a participant in the Stone, Inc., profit-sharing plan. His spouse, Meghan, is 50 years old and is employed by JP Co. She earns $40,000 annually and participates in JP’s Section 401(k) plan, under which JP will make matching contributions of up to 3% of covered salary. Assuming that both the Stone, Inc. plan and JP plan have loan provisions, which of the following statements is(are) NOT correct? 1. If Justin takes a loan from the Stone, Inc. plan, he will be assessed a 10% penalty tax because he is younger than age 59½. 2. Justin cannot take a loan from the Stone, Inc. plan because he is a greater than 5% shareholder of the company. 3. If Meghan’s Section 401(k) vested account balance is $10,000, she may borrow the entire amount. 4. Both qualified plans must limit participant loans to no more than 50% of the participant’s compensation.

A

1, 2, and 4

The IRS permits employer plans to allow loans but does not mandate that all plans offer them.

Allowed:

  1. Profit-sharing plans
  2. money purchase plans
  3. 401(k)
  4. 403(b)
  5. 457(b)

Not Allowed:

  1. IRA and IRA based plans (SEP, SIMPLE IRA and SARSEP Plans)

That leaves it to your employer’s discretion as to whether to allow the plan to offer loans. The IRS restricts your loan to the smaller of

  1. $50,000 or
  2. half your vested account balance.

You cannot borrow from any amounts not yet vested.

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2
Q

Assume a taxpayer is in the 35% marginal income tax bracket and has enough deductions to itemize. Calculate the equivalent tax credit that would provide the same tax benefit as a $3,000 itemized deduction.

A

$3,000 x 35% = $1,050

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3
Q

William Sanders, age 38, earns $250,000 a year and wants to establish a profit-sharing plan for his business. He has 3 employees, who each earn a salary of $20,000, are between ages 22 and 26, and have been employed with the company for approximately 4 years. Which of the following vesting schedules would be the best choice for the company? A)3-year cliff. B)2-to-6-year graded vesting. C)Immediate vesting. D)5-year cliff.

A

B

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4
Q

Which of the following statements concerning the Consumer Credit Protection Act are CORRECT? 1. Bait and switch advertising is prohibited. 2. Credit terms must be disclosed for evaluation purposes. 3. Interest must be reported in terms of annual percentage rate (APR). 4. Consumers must be made aware of any prepayment penalties.

EXAMPLE 2 - APY vs. APR

“I just heard an ad on the radio offering a 3.99% mortgage. That makes sense to me. Where I’m confused is when the ad then mentions a 4.22% APY immediately after that. What does it mean? What interest rate will I actually be charged?” - Mortagee

Let’s say you have a loan from a bank that has 3.99% with interest that is compounded quarterly. That means that every three months, your loan is charged 1/4 of the interest for the year, which would be 3.99% divided by 4, or 0.9975% interest.

  1. Let’s say your loan has a balance of $100,000 at the start of the year, to make the math more clear.
  2. At the first quarter, your $100,000 loan will be charged 0.9975% interest, or $997.50. This gives your loan a new balance of $100,997.50.
  3. At the second quarter, your loan has a balance of $100,997.50 and that balance will be charged 0.9975% interest, or $1,007.45. This gives your loan a new balance of $102,004.95.
  4. At the third quarter, your loan has a balance of $102,004.95 and that balance will be charged 0.9975% interest, or $1,017.50. This gives your loan a new balance of $103,022.45.
  5. At the fourth quarter, your loan has a balance of $103,022.45 and that balance will be charged 0.9975% interest, or $1,027.65. This gives your loan a new balance of $104,050.10.
A

2, 3, and 4

The consumer credit protection act of 1968 was important in that it made the terms of loans more transparent to borrowers who may not be well-versed in finance.

  • APR is the annual rate of interest that is paid on an investment, without taking into account the compounding of interest within that year.
  • APY does take into account the frequency with which the interest is applied—the effects of intra-year compounding.

EXAMPLE 2

  1. Over the course of a year, your $100,000 loan turned into $104,050.10, earning $4,050.10 in interest. That’s 4.05% of the balance of the loan, which is your APY.
  2. Thus, this loan has a 3.99% interest rate, but a 4.05% APY.
  3. In the United States, APY is legally defined as being the rate achieved when using daily compounding. In this case, that would give you an APY of 4.07%. So, where does the rest of that 4.22% come from?
    1. What the radio ad isn’t telling you is that in order to get that 3.99% interest rate, you’ll have to pay some fees and possibly a discount point or two.
    2. In this specific case, the fees and points will add enough to the balance of the loan to raise the APY from 4.07% to 4.22%. In other words, the total of the fees and points will be somewhere around $165 on a $100,000 loan, or about $817 on a $500,000 loan.

One key provision of the CCPA was called Title III, which restricts the amount of earnings that may be garnished to 25% of disposable weekly income after mandatory deductions for taxes or the amount by which disposable earnings are greater than 30 times the minimum wage. This ended the practice of creditors snatching a hgh percentage of wages to pay an outstanding debt.

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5
Q

John and Kate, ages 28 and 26 respectively, want to start to save for their retirement. They both are eligible for Section 401(k) plans through their employers. The plans offer a dollar for dollar match up to 3% of salary. If they consider themselves moderate to aggressive risk tolerant investor with a long-term time horizon, which of the following portfolios would be most suitable for their CFP® professional to recommend for their retirement plans? A) Portfolio 1 - 50% S&P 500 Index Fund, 30% Science Research Fund, 20% Corporate Bond Fund. B) Portfolio 4 - 40% S&P 500 Index Fund, 15% International Stock Fund, 15% International Bond Fund, 10% Science and Technology Stock Fund, 20% Money Market Fund. C) Portfolio 2 - 50% Corporate Bond, 25% U.S. Government Securities Fund, 25% Money Market Fund. D) Portfolio 3 - 80% S&P 500 Index Fund, 10% International Stock Fund, 10% Emerging Market Fund.

A

D

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6
Q

Mike exchanged an old machine in a like-kind exchange: adjusted basis of old machine, $5,000; fair market value (FMV) of new machine, $10,000; FMV of boot received, $4,000; FMV of boot given, $0. What gain must be recognized by Mike, and what is his adjusted tax basis in the new asset, respectively? A) $5,000 $5,000 B) $4,000 $5,000 C) $0 $5,000 D) $4,000 $10,000

A

B Calculation:

  • FMV New Property - Boot Given + Boot Received = FMV of Old Machine
    • $10,000 − 0 + 4,000 = $14,000
  • Potential Gain = FMV of Old Machine - Adjusted Bais of Old Machine
    • Potential Gain = $14,000 - $5,000
    • Potential Gain = $9,000
  • Remaining gain = Potential Gain - Boot Received
    • Remaining Gain = $9,000 - $4,000
    • Remaining Gain = $5,000
  • New Basis = FMV of New Machine − Unrecognized Gain
    • New Basis = $10,000 - $5,000
    • New Basis = $5,000
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7
Q

Jack would like to donate his collection of impressionist paintings to a private impressionist art museum. The museum, in turn, will sell the paintings to generate income. Jack’s original purchase price of the paintings was $50,000. The FMV of the paintings when he contributes them is $300,000. His adjusted gross income for the year is $1 million. Jack has come to you, a CFP® professional, for information regarding the tax effects of the proposed transaction. He has heard from friends that if the museum sells the collection, he will only be able to use basis to value the donation. After reviewing the documentation for the pending transfer, you tell Jack he will have a total deductible donation for the gift of: A) $0. B) $250,000. C) $300,000. D) $1 milliion

A

C

Capital Gain Property - Charitable Purposes:

  1. Property is capital gain property if you would have recognized long-term capital gain had you sold it at fair market value on the date of the contribution. The capital gain property includes capital assets held more than 1 year.
  2. Capital assets include most items of property you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes.

General Rule:

  1. When figuring your deduction for a contribution of capital gain property, you generally can use the fair market value of the property.

Exceptions - However, in certain situations, you must reduce the fair market value by any amount that would have been long-term capital gain if you had sold the property for its fair market value. Generally, this means reducing the fair market value to the property’s cost or other basis. You must do this if:

  1. The property (other than qualified appreciated stock) is contributed to certain private nonoperating foundations,
  2. You choose the 50% limit instead of the 30% limit for capital gain property given to 50% limit organizations, discussed later,
  3. The contributed property is intellectual property (as defined earlier under Patents and Other Intellectual Property ),
  4. The contributed property is certain taxidermy property as explained earlier, or
  5. The contributed property is tangible personal property (defined earlier) that:
    1. Is put to an unrelated use (defined later) by the charity, or
    2. Has a claimed value of more than $5,000 and is sold, traded, or otherwise disposed of by the qualified organization during the year in which you made the contribution, and the qualified organization hasn’t made the required certification of exempt use
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8
Q

Bob is a fisherman with the local fish market. He and his wife Mary want to retire in 20 years. They expect to live approximately 25 years after retirement and need $40,000 (in today’s dollars) annually during retirement. Unfortunately, they have just spent their savings on refurbishing their boathouse and have only $12,000 in retirement savings. Inflation is currently 2% and is expected to continue indefinitely. Bob believes he can earn an 8% rate of return before retirement but expects to earn only 6% during retirement because of the change in his portfolio’s asset allocation at retirement. How much does Bob need to save at the end of each year to meet his retirement needs?

A

Real Interest Rate Discount Rate {[(1 + Nominal) ÷ (1 + Inflation Rate)] - 1} x 100

Step 1: Inflate needs to find FIRST Year of Retirement Payment by Solving for Future Value
BEG Mode
PV = −40,000
n = 20
i = 2
FV = 59,437.90

Step 2: Find the Sum that you need to fund Annual Payment found before while taking into account that Sum will increase by a real rate of return
BEG mode
PMT = 59,437.90
n = 25
i= [(1.06 ÷ 1.02) − 1} × 100 (inflation-adjusted discount rate)
PVAD = 973,006.62

Step 3: Determine the annual funding requirement. Don’t use real interest rate because the inflation rate has already been taken into account:
FV = $973,006.62
PV = −12,000
n = 20
i = 8
PMT = 20,040.11, or $20,040.11

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9
Q

Janet, a full-time student, is age 18 and claimed as a dependent on her parents’ tax return. She is a sophomore who is enrolled as a full-time student at State University. She has $20,000 in unearned income this tax year. Her education expenses are as follows: Tuition $10,000 Books 1,000 Laptop required by the university 1,500 Fees 650 Room and board 4,000 Transportation 1,000 What American Opportunity Tax Credits and Lifetime Learning Credits can she claim on her tax return this year for education expenses? A) She may claim a $2,000 Lifetime Learning Credit and a $2,500 American Opportunity Tax Credit. B) She can claim a $2,500 American Opportunity Tax Credit only. C) She can claim either the $2,000 Lifetime Learning Credit or the $2,500 American Opportunity Tax Credit but not both. D) None. She is a dependent and her parents must claim any education credits.

A

D

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10
Q

Doug has a PAP covering his personal automobile. His Part A policy limits are 200/300/50, and his Part B coverage is $10,000 per person. He does not have Part D coverage. One winter night, Doug and his wife are driving home from dinner when Doug takes his eyes off the road and drives into an unoccupied parked car. The other car sustains $20,000 in damages as a result of the collision. Doug and his wife both suffer bodily injuries and incur medical bills of $15,000 each. Doug’s car suffers $10,000 in property damage. Which of the following statements regarding Doug’s coverage under his PAP for this accident is (are) CORRECT? 1. Doug’s PAP covers all of the $30,000 in medical bills. 2. Doug’s PAP covers the $20,000 in damages to the other car. 3. Doug’s PAP covers the $10,000 in property damage to his car. Second Example - For instance, suppose you injure 3 people and caused $25,000 damage to their car. One is severely injured with $125,000 worth of damages, one is moderately injured with $75,000 of damages, and the other is the least injured with $50,000 of damages. If your policy had a single limit of $300,000, then you would be entirely covered. With a 100/300/50 split policy….

A

2 only Statement 2 is correct because the $20,000 in property damage to the other car falls within Doug’s $50,000 policy limit for property damage under Part A - Liability Coverage. Statement 1 is incorrect because the coverage for the $30,000 is medical bills for Doug and his wife is limited to $10,000 per person under Part B - Medical Payments Coverage. Statement 3 is also incorrect; the damage to Doug’s car is not covered because he does not have coverage under Part D - Damage to Your Auto Coverage. Part A: Liability Coverage (1) The limit of liability can be a single limit or a split limit. (1)(a) The standard policy provides for a single limit that is the limit for all liability, no matter how it is apportioned. (1)(b) A split limit divides the limit of liability into 3 parts: the limit for each person, the total limit, and limit for property damage. The split limit is expressed in the format ###/###/### in thousands for liability limit per person/total liability limit/property damage limit. Second Example - $25,000 of damages to the severely injured person would not be covered. You would have to pay for that.

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11
Q

Roger, age 56, is the owner and president of ABC Widget Co. He has operated the firm successfully since he first established the business 15 years ago. His son, Brett, is the company vice president. Profits over the past 5 years have increased at an average 15% per year. Roger has been thinking about retirement and is concerned that he won’t have enough money to achieve his goal of retiring at age 65. He has asked your advice about setting up a retirement plan that would provide the most benefits for him. The employee census is as follows: EMPLOYEE AGE SALARY SERVICE Roger 56 $130,000 15 yrs. Brett 31 50,000 5 yrs. David 45 40,000 10 yrs. Chris 42 35,000 8 yrs. Beth 38 30,000 7 yrs. Robert 30 25,000 5 yrs. Margaret 36 28,000 6 yrs. Bill 26 25,000 5 yrs. James 23 23,000 2 yrs. Based on this information, which of the following plans would provide the maximum retirement benefit to Roger? A) Traditional defined benefit pension plan. B) Section 401(k) plan. C) Profit-sharing plan. D) Money purchase pension plan.

A

A Because Roger is the oldest, has the highest salary, and the fewest years remaining until retirement, he would receive the greatest benefit from a traditional defined benefit pension plan.

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12
Q

Penelope has qualified education expenses of $10,000 for the spring semester of college, but she wants an additional $2,000 for her spring break vacation. She takes a $12,000 distribution from her Section 529 plan. The distribution includes both contributions and earnings. Which of the following statement(s) regarding the tax treatment of the distribution is(are) CORRECT? 1. $2,000 of the distribution will be included in Penelope’s gross income. 2. An additional 10% tax penalty will be applied to an entire distribution made for nonqualified expenses. 3. Qualified expenses include tuition, fees, and books.

A

3 only

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13
Q

Bradley loaned his friend, Karl, $25,000 for a down payment on a home in a zero-interest loan early in the current year. Bradley had investment income of $750 and Karl had investment income of $1,200 in the same year. The Federal interest rate is 3.5%. Karl has been making payments each month. What recommendations do you,a CFP® professional, make for accounting for the loan made to Karl by Bradley? A) Because this is a gift loan greater than $10,000 but less than or equal to $100,000, no interest will be imputed to the loan. B) Because Bradley’s investment income is less than $1,000 this year, no interest is imputed to the loan. C) Imputed interest is calculated on the loan to Karl and is considered a gift to Karl from Bradley. D) Bradley must develop an amortization schedule using the Federal rate of 3.5% to account for Karl’s payments of principal and interest.

A

C

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14
Q

The Watsons are recently retired and are ready to take a European vacation to celebrate their 40th wedding anniversary. When they return, they would like to meet with their financial planner to discuss setting up a family foundation to continue their lifelong philanthropic endeavors. The Watsons are currently in which life cycle phase? A) Distribution phase B) Conservation phase C) Protection phase D) Asset accumulation phase

A

A

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15
Q

Joe and Cathy are married and are active participants in rental real estate. They have earned income of $125,000, $5,000 of unearned income, $30,000 in deductions and exemptions, and $20,000 in losses related to their real estate holdings. How much will the couple claim as taxable income? A) $80,000. B) $90,000. C) $85,000. D) $95,000.

A

B Rental and real estate passive losses are allowed up to $25,000 for taxpayers not filing as MFS, which can be used to offset non-passive income. The $25,000 is reduced (but not below zero) by 50% of the amount by which the taxpayer’s AGI exceeds $100,000. Joe and Cathy have income of $130,000. The passive real estate maximum allowable loss deduction must be reduced by $15,000 to $10,000 or [(130,000 − 100,000) × .5]; therefore, the maximum rental activity passive loss they can claim is $10,000 ($25,000 − $15,000). The couple’s taxable income is $130,000 less deductions and allowable losses of $40,000 ($30,000 + $10,000), which leaves a taxable income of $90,000. Note that any unused loss may be carried forward. Note here that if the loss was $9,000, it would have been entirely deductible because it is below the adjusted allowable maximum. The allowable maximum deduction is calculated before considering how much of the loss is deductible. Previous Next Check for Review

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16
Q

Brett buys a 30-year convertible term life insurance policy when he is 25 years old. The face amount is $100,000 with annual premiums of $500. At age 40, he exercises the conversion provision. Which of the following statements regarding the conversion is (are) CORRECT? 1. Brett must provide evidence of insurability to exercise the conversion provision. 2. Brett’s premium for the new policy will be based on his current age of 40. 3. Brett’s new policy will be a permanent policy.

A

2 and 3

17
Q

Sheldon is a successful real estate investor. His net worth is approximately $20 million. He has one son, Marcus. Sheldon has made numerous taxable gifts to Marcus over the years and has fully utilized his applicable credit amount. Sheldon wants to transfer additional parcels of investment real estate to Marcus as long he does not incur any gift tax. Which of the following recommendations is most suitable for meeting Sheldon’s objective of avoiding taxable gifts? A) Transfer investment property to Marcus under a self-canceling installment note (SCIN) charging a premium over FMV B) Transfer investment property to a qualified personal residence trust (QPRT) naming Marcus as the remainder beneficiary C) Retitle investment property as JTWROS naming Marcus as a joint tenant D) Transfer investment property to a family limited partnership (FLP) and give limited partnership interests valued at $50,000 to Marcus each year

A

A The use of a SCIN is treated as a sale and not a gift as long as the seller charges an appropriate premium over FMV or an above-market interest rate. All of the other types of transfer are treated as gifts and will result in taxable gifts if they exceed the gift tax annual exclusion amount ($14,000 in 2017).

To use a SCIN in estate planning, you sell your business or other assets to your children or other loved ones (or to a trust for their benefit) in exchange for an interest-bearing installment note. As long as the purchase price and interest rate are reasonable, there’s no taxable gift involved. So you can take advantage of a SCIN without having to use up any of your annual gift tax exclusions or lifetime gift tax exemption.

The “self-canceling” feature means that if you die during the note’s term — which must be no longer than your actuarial life expectancy at the time of the transaction — the buyer (that is, your children or other family members) is relieved of any future payment obligations.

But the premium also comes with some risk. In fact, SCINs present the opposite of mortality risk: The tax benefits are lost if you live longerthan expected. If you survive the note’s term, the buyers will have paid a premium for the assets, and your estate may end up larger rather than smaller than before.

18
Q

Debra was seriously ill, so she and her husband decided to hire a financial planner to perform some final planning before she died. They wanted to establish a will and a living will; however, before the documents were drafted and signed, Debra died. Fortunately, before her death, she gave her CFP® professional the power of attorney to sign the documents for her. What should the CFP® professional do now that he has power of attorney? A) The CFP® professional should sign the will on Debra’s behalf and carry out the plans that had been established. B) The CFP® professional should withdraw from the engagement because the client is no longer alive. C) The CFP® professional cannot sign on Debra’s behalf but should continue to carry out the plan to the best of his ability. D) The CFP® professional should disregard the previous agreement now that Debra is dead and not do anything.

A

C The CFP® professional cannot sign on Debra’s behalf because she is no longer alive, and the power of attorney does not survive her death. Both the husband and wife were clients. Because the husband is still living, the CFP® professional still has a client.

19
Q

Jane died 6 months ago. At her death, she owned 90% of the stock in a closely-held C corporation. Jane’s stock was valued at $3.5 million on her date of death and has a value of $3.6 million today. Other than her personal effects, Jane’s only other assets are several copyrights and patents that have declined significantly in value since she died. Jane’s adjusted gross estate is $9 million. Because of the estate’s lack of liquid assets, Jane’s executor wants to make any available postmortem elections that will reduce or defer the amount of estate tax payable by the estate. Which of the following provisions can Jane’s executor elect? 1. Section 303 stock redemption 2. Special use valuation (Section 2032A) 3. Alternate valuation date (AVD) 4. Deferred payment of estate tax (Section 6166)

A

1 and 4 only

A Section 303 stock redemption (Statement 1) is available because the value of Jane’s stock is more than 35% of the value of her adjusted gross estate.

  • IRC §303 provides that, in certain cases, a redemption of stock, the value of which has been included in the gross estate of a decedent for federal estate tax purposes, shall be treated as a sale of the stock, even though it would, but for §303, be taxed as a dividend under §301

Section 2032A special use valuation (Statement 2) is not available because there is no indication that Jane owned real estate that was used as a farm or in connection with her closely-held business.

  • An election of the special use valuation of Section 2032A of the Internal Revenue Code can save estate taxes by reducing the value of specific real property included in the gross estates of a decedents. Qualified real property typically is a farm or real property used in a business of trade, and the property generally is valued at fair market value based on its best and highest use. The property will be valued at a reduced rate based on actual, special use value it meets certain conditions: the property must be located in the US and have been used by the decedent or a family member in a trade or business; the decedent must have been a citizen and resident of the US; the property must be inherited by a qualified heir; and the adjusted value of the property must be a minimum of 50% of the estate’s adjusted gross value

The alternate valuation date (Statement 3) is not available because the only assets that have declined in value since Jane’s death are the patents and copyrights, which are not eligible for the alternate valuation date election.

  • The estate must be subject to federal estate tax
  • The use of the alternate date must reduce the value of the gross estate and the amount of federal estate tax due
  • If the alternate date is elected, all estate assets are valued six months after the date of death. The exception to this is if an asset is sold, exchanged, distributed to a beneficiary, or otherwise disposed of within six months of death. In this case, the asset is valued as of the date of disposition.
  • DOWNSIDE = Lowering the value of the gross estate (a requirement for the election) lowers the resulting estate tax. Seems automatic, right? In fact, electing the alternate date is not always the clear answer. If the election is made, the basis in the assets that are transferred to the beneficiaries is set at the lower, alternate value.

Jane’s executor can elect to pay the estate tax in installments (Statement 4) because the value of Jane’s closely-held business interest exceeds 35% of the value of her adjusted gross estate.

20
Q

Your client, a senior family member in ill health, wants to sell the family business to a junior family member and would like payments to cease on his death. Which of the following estate planning techniques might meet your client’s needs? 1. Installment sale. 2. Private annuity. 3. Family limited partnership. 4. Self-canceling installment note.

A

2 and 4 Both a private annuity and a self-canceling installment note (SCIN) will achieve the client’s goals. Payments would not stop at death with an installment sale. A family limited partnership is an appropriate gifting technique, but does not involve a sale.

21
Q

Andrew, age 79, wants to make a sizeable gift of most of his property to a local charity, but he would also like to retain an income interest from the property for the remainder of his life. He consults a CFP® professional for advice. After considering Andrew’s objectives and current financial status, the CFP® professional recommends that Andrew make a transfer to the charity’s pooled income fund. Assuming Andrew accepts this recommendation, which of the following steps are likely to be involved in implementing the recommendation? 1. The charity will establish a separate fund to hold Andrew’s donation. 2. Andrew will receive an annual income payment from the fund. 3. Andrew will claim an income tax charitable deduction. 4. The charity will invest Andrew’s donation in tax-free municipal bonds.

A

2 and 3 Statement 1 is incorrect because in a pooled income fund, a donor’s contribution is commingled with the property of other donors. Statements 2 and 3 are correct. Statement 4 is incorrect because a pooled income fund cannot invest in tax-free municipal bonds. (Domain 6-Implementing the Recommendation(s))

22
Q

John’s portfolio has $15,000 invested in Security A, $30,000 invested in Security B, and $45,000 invested in Security C. If Securities A, B, and C have betas of 1.5, 1.2, and 0.9, respectively, what is the weighted beta of John’s portfolio?

A

1.10 = .25 + .4 + .45

15/90 * 1.5 = .25

30/90 * 1.2 = .40

45/90 * 0.9 = .45

23
Q

Delbert is a single taxpayer and is an active participant in rental real estate. He has earned income of $75,000, $5,000 of unearned income, $10,500 in deductions and exemptions, and $5,000 in losses related to his real estate holdings. What is Delbert’s taxable income?

A

$64,500 Rental and real estate passive losses are allowed up to $25,000 ($12,500 for MFS), which can be used to offset nonpassive income. Delbert has income of $80,000 less deductions and allowable losses of $15,500 ($5,000 + $10,500), leaving a taxable income of $64,500.

24
Q

Which of the following statements regarding the Federal Reserve’s use of the discount rate is(are) CORRECT? 1. The Fed will lower the discount rate in order to increase the money supply. 2. To curb inflation, the Fed will raise the discount rate. 3. If the Fed lowers the discount rate, banks will be able to borrow funds at lower rates. 4. To contract the money supply, the Fed will raise the discount rate.

A

All of the statements are correct

25
Q

Gordon purchases an annual renewable term life insurance policy with a face amount of $100,000. His premium is $600 for the first year. If Gordon renews the policy at the end of the first year, which of the following statements is (are) CORRECT? 1. Gordon must provide evidence of insurability. 2. Gordon’s annual premium will still be $600. 3. The face amount of the policy will still be $100,000.

  • Premiums are the monthly or yearly fees paid to the provider to underwrite the insurance.
  • These payments continue on a one-year contract basis and may increase on the renewal of the insurance contract. As the insured ages, the premium will increase.
  • The policy pays a death benefit which remains the same with the contract’s extension
  • Annual renewable term insurance (ART) is a form of term life insurance which offers a guarantee of future insurability for a set period of years.
  • During the stated period, the policyholder will be able to renew each year without reapplying or taking another medical exam to reaffirm eligibility.
  • The design of an ART is to cover short-term insurance needs.
  • These policies are underwritten using the same mortality tables as other life insurance products.
  • Also, they are the least expensive form of life insurance concerning the premium charged
A

3 only

26
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A