What benefits can be funded through a VEBA (Voluntary Employees’ Beneficiary Association)?
A VEBA can fund death, medical, and unemployment benefits. It cannot fund retirement benefits or deferred compensation.
Under ERISA, what legal recourse do employees have if plan fiduciaries make poor investment decisions that harm a qualified retirement plan?
Employees can sue plan fiduciaries for losses to the plan. Fiduciaries may be personally liable for plan losses, but punitive damages are not allowed under ERISA.
What education expenses qualify for tax-free withdrawals from a Coverdell Education Savings Account?
Qualified expenses include tuition, books, tutoring, special needs services, room and board, and required uniforms for elementary, secondary, and higher education.
Which education tax credit may apply to both undergraduate and graduate education?
None.
* American Opportunity Credit → undergraduate only
* Lifetime Learning Credit → available for graduate education but subject to AGI phaseouts, so it may not apply at higher incomes.
What happens if the grantor of a QPRT (Qualified Personal Residence Trust) dies during the retained interest term?
The full fair market value of the home is included in the grantor’s gross estate, effectively leaving the estate no worse off than if the QPRT had never been created.
How are gains taxed when surrendering a non-MEC life insurance policy?
The amount received above the policy’s cost basis is taxed as ordinary income. No 10% penalty applies if it is not a MEC.
Which IRA distributions are subject to the 10% early withdrawal penalty?
A distribution for purchase of a primary residence (if not a first-time home purchase) can trigger the penalty.
Exceptions include qualified education expenses, disability, death, and first-time home purchases (up to $10,000).
What is the correct answer when evaluating retirement income planning priorities if retirees expect to live on significantly less income than before retirement?
They should worry least about income taxes, since lower retirement income generally results in lower tax brackets.
How long does COBRA continuation coverage last after a divorce?
A former spouse receives up to 36 months of COBRA coverage after divorce.
Dependent children may remain covered under the employee’s family plan.
After a cross-purchase buy-sell agreement is no longer needed (business closes), how should life insurance policies be handled?
Each owner should purchase the policy on their own life from the other owner so they become owner and insured of their own policy.
What does Beta measure in investment analysis?
Beta measures the systematic (market) risk of a security relative to the market.
* Beta = 1 → same volatility as market
* > 1 → more volatile
* <1 → less volatile
How can exercising nonqualified stock options affect Alternative Minimum Tax (AMT)?
Exercising nonqualified stock options increases regular taxable income, which can reduce or eliminate AMT exposure.
When evaluating a mutual fund, what does a negative alpha indicate when R² is high?
A negative alpha with high R² means the fund underperformed its benchmark after adjusting for risk, suggesting poor manager performance.
What happens to alimony payments when the paying spouse dies?
Alimony payments generally stop upon the death of the payor, unless life insurance or other arrangements were required in the divorce decree.
Who pays the Generation-Skipping Transfer Tax (GSTT) in a taxable termination trust?
The trustee pays the GSTT from trust assets when property passes to skip persons (e.g., grandchildren).
What is the charitable deduction limit for donating long-term appreciated securities to a public charity?
The deduction is limited to 30% of the donor’s AGI when the securities are deducted at fair market value. Excess may be carried forward up to 5 years.
What transactions are exempt from the life insurance transfer-for-value rule?
Transfers to:
* The insured
* A partner of the insured
* A partnership in which the insured is a partner
* A corporation in which the insured is a shareholder
Which qualified retirement plans can be integrated with Social Security?
Plans that can be integrated:
* Defined benefit plans
* Money purchase pension plans
* Stock bonus plans
Plans that cannot:
* Pure 401(k) plans with no employer contributions
* ESOPs
What should a financial planner do if a client’s retirement plan assumptions suddenly change (e.g., early retirement due to job loss)?
Immediately reassess the client’s expenses and create a new budget based on current circumstances to stabilize the financial plan.
How are disability insurance premiums and benefits taxed depending on who pays the premium?
Employer pays premium (group plan) → benefits are taxable to the employee.
Employee pays premium with after-tax dollars → benefits are tax-free.
Executive bonus (Section 162) → employer deducts premium, employee reports bonus as income, benefits are tax-free.
S-corp owner disability benefits can also be tax-free depending on premium treatment.
What should a financial planner do when a client request creates a conflict of interest between joint clients?
The planner must not proceed without consent from both parties when the account is joint and the action could harm one client. The correct response is to disclose the conflict and refuse the request unless both clients consent.
Which risk is eliminated when investing in zero-coupon bonds?
Reinvestment rate risk is eliminated because zero-coupon bonds do not pay periodic interest that must be reinvested. However, they still have interest rate risk, market risk, inflation risk, and possibly default risk.
When does COBRA continuation coverage apply?
COBRA applies only when the employer has 20 or more employees. If the employer has fewer than 20 employees, federal COBRA does not apply, though state “mini-COBRA” laws might.
What happens to gifts and trust assets when a donor dies shortly after making transfers?
Taxable lifetime gifts are not included in the gross estate, but are added to the taxable estate for estate tax calculation.
GRAT assets are included in the estate if the grantor dies during the trust term.
Life insurance transferred within 3 years of death is included in the gross estate at face value.
