1
Q
What happens in cases of conduct that fall under “presumptive bar” (GP2)
A
They are reviewed by DEC before any final decision is made to deny or revoke the CFP marks. Disbarment is not automatic.
2
Q
Independent rule of thumb for PITI: 28% of net income or gross income?
A
I did not read the answers carefully enough here and simply jumped to 28%. Always have to distinguish carefully between GROSS income and NET income. PITI and Total Debt are calculated off of GROSS income, while Consumer Debt is calculated off of NET.
3
Q
Insured investments
A
Annuities and other investments are not in and of themselves insured. They must be held in a SIPC insured brokerage account to be so.
4
Q
The Investment Company Act of 1940 vs The Advisors Act of 1940 (GP 5-1)
A
Do not conflate these two.
5
Q
QTPs differ from UTMA accounts in all ways EXCEPT which of the following? (GP 6-2)
A
Didn’t read the question carefully here and overlooked “except”.
6
Q
Mistakenly choosing the Lifetime Learning Credit over the AOC. (GP 6-2)
A
The Lifetime Learning Credit maxes out at $2,000 (20% of first $10k), whereas the AOC maxes out at $2500 (100% of first $2k, 25% of next $2k). In the majority of cases, AOC will provide more tax credit than LLC.
7
Q
Which of the following qualifies for compensatory damages?
A. Auto Accident
B. Headaches
C. Age Discrimination
D. Stomach Disorders
(GP 7-1)
A
I put auto accident here, but that doesn’t in and of itself qualify (the person may be at fault). The event must qualify without presuming any other circumstances.
8
Q
Taxability of punitive damages (GP 7-1)
A
Punitive damages are taxable EXCEPT in the case of a wrongful death.
9
Q
Taxability of compensatory damages (GP 7-1)
A
Compensatory damages are generally tax free. However, interest received from a tax free damage award is taxable (if the money received is invested). BUT if the award is used to purchase an annuity and the annuitant has no constructive receipt of the lump sum, THEN any interest gained on the annuity is tax free.
10
Q
If you are not able to obtain sufficient quantitative information from a client, you shall restrict the scope of the engagement or terminate the engagement, or both? (GP-16)
A
I answered restrict the scope of the engagement, but the correct answer is both. My reasoning was that one shouldn’t terminate the engagement unless the client is rude or unlawful. However, it does make sense that the board always gives you the right terminate the engagement if the client is uncooperative.
11
Q
What to do with a client that is emotionally upset… (GP-17)
A
I thought maybe referring the client to a professional would be helpful here, but it is true that this is beyond the scope. Whenever something is amiss with the client, the CFP practitioner should decline them.
12
Q
After one year, can Sid appeal his CFP suspension? (GP-17)
A
I answered that he has 30 days to file an appeal, but this in fact DOES NOT ANSWER THE QUESTION. The answer is simply, no, he cannot.
13
Q
The CFP board has revoked Sid’s marks, can he appeal? (GP-17)
A
I answered that he could after a period of 5 years, but revocations are permanent and cannot be appealed.
14
Q
The case of the doctor who won’t pay for an estate planning attorney. (GP-17)
A
I answered that you should disclose that you are not a licensed attorney and volunteer to help find the necessary documents. This is a violation of the duty of competence. I didn’t answer “Refer your best friend, who is an attorney, and two other attorneys” because I thought that the answer already ruled out that the client would pay for an attorney. However, this answer turns out to be the least bad answer.
15
Q
How much of a HELOC can be taken against a home… (GP-18)
A
I answered incorrectly because I based my calculation on the difference between The current principle of the loan and the original principle. BUT, a HELOC can be taken up to the difference between the current FMV and the current indebtedness. (also remember for questions like these that the HELOC has to be used for the improvement of the home itself).
16
Q
Education need analysis… (GP-18)
A
I got this question wrong because I forgot which variables to solve for in the 2nd and 3rd step. In the 2nd step, solve for PV (and enter PMT as negative). In the 3rd step, enter the step 2 PV as FV and solve for PMT.
step 1: solve for FV
step 2: solve for PV
step 3: solve for PMT (or PV if asking for a lump sum)
17
Q
Tommy Tucker does a shit-ton of bad stuff. What duties has he violated? (GP-18)
A
I answered “none” of the ones listed, because they didn’t seem to be “Duties” that are explicitly listed in the handbook, but this is wrong. Use your common sense on a question like this. If it’s bad, just say that he broke all the rules.
18
Q
IRR question… (GP-19)
A
ALWAYS enter the initial investment as NEGATIVE, and the subsequent withdrawals as positive. ADD the capital withdrawal to the portfolio value in the last year (if they happen in the same year). These are two things I did not do.
19
Q
I assumed that the NPV question was using the same figures from the previous question, but it was asking a different question. (GP-20)
A
ALWAYS READ THE WHOLE FUCKING QUESTION.
20
Q
For age 65, with an annuity, wanting a death benefit.
A
I answered that they should exchange the fixed annuity for a variable annuity, because I ASSUMED that there would be some sort of death benefit attached to it, but that is incorrect. I also assumed that at 65, life insurance would be too expensive, but this is also incorrect. They should use the annuity to pay life insurance premiums.
21
Q
Besides LTC insurance, what else can provide over 100 days of nursing home care coverage.
A
I answered “Medigap”, because I assumed that there was some Medigap policy out there somewhere that would do this, but neither Medicare nor Medigap do this. Medicaid is the option to select here.
22
Q
May a business deduct interest from a loan against life insurance contracts of key persons.
A
This is a fact I didn’t know, but the answer is “yes” up to a $50,000 loan against each contract.
23
Q
Consumer debt percentage
A
less than or equal to 20% of NET income. While PITI and total monthly debt are calculated on GROSS income, consumer debt is calculated on NET income.
24
Q
Responses to difficult clients (IV-50)
A
It’s best to educate difficult clients rather than decline them, unless they ask you to do something illegal.
25
Taking instructions from one client on a JTWROS (IV-51)
In a JTWROS account, if one person is a client then presume that they both are. Seek to consult both parties before decisions are made regarding joint accounts.
26
Buying bonds midyear and receiving 1099-INT for taxable interest on the bonds. (IV-51)
For these questions, you have to consider the accrued interest on the bond that was presumably included in the transaction price. The buyer pays a bit extra to cover the interest for the part of the year that they did not own the bond. The accrued interest is deducted from the 1099-INT amount.
27
Least expensive and risky choice for a bearish investor. (IV-52)
Here, I selected "Buy a straddle", not fully knowing how a straddle works. However, the straddle is not suitable for a wholly bearish bias. I associated buying a put with selling short and assumed that they both contained risk of a large loss, however, buying a put is much less risky than a short, because the most one can lose is the premium for the put.
28
Standard Deviation of Portfolio Shortcut:
You have 2 funds in your portfolio (45% Fund A and 55% Fund B). Their covariance is 0. Fund A has a return of 5.5% and a risk of 9.5%. Fund B has a return of 6% and a risk of 12.5%. What is the standard deviation of your portfolio?
Don't get overwhelmed by the details of this kind of question. All you need to do is average the risk (standard deviation) of Funds A and B. Select the next lowest number from the average.
(9.5 + 12.5) / 2 = 11
Select the next lowest answer below 11.
The reasoning behind the shortcut is that, unless the assets are perfectly correlated, the risk (standard deviation) must be less than the average standard deviation between the two funds.
29
Of the following stocks, which is riskier?
- Stock 1 with a mean of 8% and standard deviation of 10%.
- Stock 2 with a mean of 4% and a standard deviation of 6%.
I got this wrong because I divided the mean by the standard deviation. HOWEVER, this is a coefficient of variation question (CV = sd/r), so the standard deviation should be DIVIDED BY the mean. Then the higher number of the two calculations indicates the riskier stock.
30
Duration questions
First of all, do not be thrown off by "callable duration". It just means to treat the call provision as if it were the maturity. Two step shortcut for this:
Step 1: Look at the maturity or call provision. Rule out any answers above that, and unless it's a zero, rule out any answers equal to it.
Step 2: If it has a coupon, rule out any answers within a few decimal points of the maturity.
Step 3: Select the next lowest answer after all that.
31
Which of the following bonds presents the most interest rate risk? (IV-54)
Watch for the zero coupon bond!!! That will always be the answer. I missed that one. Otherwise, the lowest rate.
32
Time weighted / geometric return questions (IV-54)
I completed the first part of the shortcut by calculating the returns and doing, (1+r1) (1+r2) (1+r3), but stopped there. There's ANOTHER step, which I can never forget again. The TVM step.
- Take the result of the multiplication of returns and make it FV.
- Input -1 for PV
- Input number of years for N
- Solve for I
33
Ex-Dividend Date (IV-54)
The Ex-Dividend date and the date of record are the same. A purchase must be made ONE BUSINESS DAY before that date. (I assumed T+1 meant TWO days before, but this is incorrect.)
34
Which performance evaluation formula measures total risk?
- Alpha
- Treynor
- Sharpe
- Modern Portfolio Theory (IV-55)
Sharpe measures total risk (sigma), which is systematic and un-systematic risk. You can remember this because it is for non-diversified portfolios, thus, it includes DIVERSIFIABLE/un-systematic risk alongside undiversifiable risk. Most easy to remember is that sigma (total risk) is included in the formal.
Treynor uses Beta, which is systematic risk only.
Alpha measures excess return above CAPM-predicted return.
35
Do qualified dividends count when calculating margin interest deductibility? (T-37)
No they do not, UNLESS the question specifically states that they opted out of the qualified
36
Know the lettered tax schedules and what goes on each one. (T-37)
Schedule 1: Additional Income & Adjustments
Schedule A: Itemized Deductions (A.I.D. for reducing taxes)
Schedule B: Interest & Dividends (B for Banks [interest] and Berk [dividends])
Schedule C: Business Income (sole prop) (C for “See” what I can do all by myself!)
Schedule D: Capital Gains/Losses (D for Disposal of property)
Schedule E: Rental/Partnership/S-Corp income (E for REEL-estate and Ess-corp)
Schedule F: Farming Income (F for farm)
Schedule H: Household Employment (H for household)
37
How do you calculate the Augusta rule? (T-38)
14 day floor, or 10% of rental days if longer. (I just calculated 10% on a 120 day period and took that as the floor, which is incorrect).
38
Alimony Recapture
If alimony decreases too rapidly, the IRS deems it a disguised property transfer and the pre-2019 divorce alimony that has been deducted must be recaptured. The easiest calculation is no alimony in the 3rd year:
Year 1 alimony + Year 2 alimony - $37,500 = amount subject to recapture
39
"exemptions" in tax questions
This word is a trigger word. After 2017, there are NO personal exemptions. Do not confuse this word with "deductions".
40
Calculation of charitable deductions
I made the mistake of calculating the percentage deduction based on the property donated INSTEAD OF AGI. Calculate the percentage of AGI first, and then see how much each donation fills the percentage this year and in the years going forward.
41
What securities can be sold with a Series 6
Mutual Funds only UNLESS the question explicitly mentions that the person is also a holder of a state insurance license, then variable annuities and life insurance as well.
42
Eligibility for ERISA plans and group health insurance
ERISA - 1,000+ hours per year
Health Insurance - 32+ hours/week
43
Using the DDM formula.
Don't forget to calculate r if necessary. Use decimal points instead of percentages. Product of the formula is the ideal stock price value.
44
Dependency Exemption
Repealed with TCJA as with almost all exemptions.
45
Types of property that can be used in property exchange
Equipment exchanges are no longer eligible for like-kind exchange. Intangibles and copyright were never eligible.
46
How many hours of continuing ethics training?
While the continuing education requirement for CFP® Certificants is 30 hours for each two-year reporting period, only two of the thirty hours must be in ethics training.
47
Review the details of QBI!
48
Who to report financial impropriety to: SEC, FINRA, or CFP board
Watchout for this as sometimes a CFP may not be registered with FINRA
49
Study the Retirement Savings Contributions credit.
Can be done with more than a Roth
50
Base rate used for resetting mortgage rates
SOFR (Secured Overnight Financing Rate)
51
What is the form number for an amended return?
1040X
52
IRA Deductibility
- There is no age limit
- No phaseout when both are non-participants. If someone is separated from service and receiving benefits from a plan, they are not an active participant.
WATCH OUT: the phaseout depends on whether or not they are on a plan at work. Got two questions wrong so far because I assumed they were subject to a phaseout, when they were not because they weren't on a work plan.
53
How is common stock valued when it has been converted from preferred stock?
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.
54
SS benefit of a widow already receiving SS which was less than the decedent.
A widowed spouse is entitled to the greater of their own benefit or 100% of the deceased spouse's benefit.
55
Roth IRA Triggering Events
5 year holding period
AND
59.5+
Home Purchase (first home up to 10k)
Death
Disability
Triggering event means no income tax and NO early withdrawal penalty on Roth earnings.
56
What kind of accounts are Prepaid Tuition accounts?
These are one type of 529 Plan.
57
What benefits can an employer self-fund through a VEBA?
Death, medical, and unemployment
NOT retirement or deferred comp. Review VEBAs
58
8. Pension contributions are based on compensation. Which of the following is generally considered to be compensation to an employee?
I. Salary
II. Bonus
III. Business expense reimbursement
IV. Incentive stock options
V. Contributions to a deferred compensation plan
Only salary and bonus are compensation. ISOs are not compensation, except maybe if they become disqualified. Deferred comp is not compensation because there is no constructive receipt.
59
What annuity payout option ALWAYS produces the highest payment?
(4 different names)
pure life
single life
straight life
life
60
14. Mrs. Elbert, your current client, has just turned 68 years old. She has $10,000 in the bank, modest yearly income of $20,000 from a plan sponsored by her former employer and her Social Security Retirement benefits. In a typical year, Mrs. Elbert spends $10,000 in medical and limited mobility-related expenses. She is generally opposed to living in a nursing home and wants advice on long-term care insurance policies. As a CFP® practitioner, what should you do?
I answered "explain medicaid and medicare options" because of her low income and low likelihood of being insured, but the correct answer:
B. Investigate long-term care policies for her, explain LTC and other alternatives to her, enabling her to make a decision
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.
61
What happens if a grantor dies before the end of a QPRT?
The whole FMV of the home is pulled back into the estate (not just the remaining value of the payments, which is what I answered).
62
23. Arthur, age 63, regrets retiring early. He’s single and bored. Arthur found a job at Walmart as a greeter. The job will pay $15,000 per year. Arthur doesn’t need the money because he is currently receiving $6,000 per month from his former employer's money purchase pension plan plus early Social Security retirement benefits of $1,000 per month. Arthur lives in a comfortable apartment, has full medical coverage and makes no charitable contributions. He normally claims the standard deduction. Which of the following is true if he takes the job with Walmart?
I answered that his SS benefits could be reduced, thinking that his pension put him over the earnings test, but this is incorrect. Pension and other retirement income does not count toward the test. Only EARNED income.
The correct answer was:
Arthur will be in the 22-24% bracket. Because his pay is less than $23,400 (2025), his Social Security benefits will not be reduced. If his pay increases above that threshold, his benefits will be reduced by $1 for every $2 above the threshold. If he increases his pay, his net income may not be much higher (after taxes and a potential reduction in benefits).
63
25. Charlie was granted an incentive stock option (ISO) four years ago when the FMV and option price was $20 per share. Charlie exercised the option two years ago when the stock was trading at $30 per share. If he sold the stock today for $35 per share, which statement(s) is/are true?
I. Charlie was taxed on the $10 per share gain at capital gains rates when he exercised the option (no substantial risk of forfeiture).
II. There are no regular income tax consequences when the ISO is granted or exercised; Charlie will pay capital gains presuming the stock is sold at a gain.
III. If Charlie sells the stock for $35 per share, he will be taxed at capital gains rates on the $15 gain per share.
IV. At the time of exercise, $10 per share may have been an add-back item for AMT purposes.
Answered II, IV, but the correct answer is II, III, IV.
The reason I got this wrong is because I assumed the LTCGs on the stock would be calculated based on the EXERCISE price ($30), but the gains are always calculated on the OPTION price ($20).
The EXERCISE price is only ever used to calculate the bargain element for AMT on an ISO.
ISO GAIN = Sale price - option price
Compare to NSOs:
If this were an NSO, the difference between the EXERCISE ($30) price and the OPTION ($20) price would be taxed as ordinary income. The new basis would be $30 and any gains thereafter would be taxed as capital gains.
64
27. Plant Parenthood is a landscaping company. It has 18 full-time employees participating in its group health plan, and 4 full-time employees who are not participating in the plan. Joe, a participating employee with family medical coverage under Plant Parenthood's group health insurance plan, just divorced Sara. How long will COBRA cover Sara and Debbie (Joe's 12-year-old daughter)?
I. Sara is entitled to 18 months of continuation in the group plan.
II. Sara is entitled to 36 months of continuation in the group plan.
III. Debbie is entitled to 18 months of continuation in the group plan.
IV. Debbie is entitled to 36 months of continuation in the group plan.
V. Debbie is still covered under the group medical insurance plan.
Answered II, IV, but the correct answer is II, V. This was an oversight on my part in not thinking through the divorce element of this. Debbie is still Joe's daughter and can remain on the plan.
65
What happens to the value of the dollar if interest rates decline?
The dollar will also decline.
66
John Jay is dismayed at having his CFP® marks revoked. Upon investigation of the complaints, the disciplinary commission ruled he repeatedly placed clients’ property in the firm's accounts. John believes that he can disprove the charges. What can he do?
For some reason I thought that decisions of revocation could not be appealed, but any DEC ruling can be appealed within 30 days. I think I confused it with asking to be reinstated.
67
Which types of qualified plans do not allow for SS integration?
an ESOP
AND
a 401k with no match or company contribution (I new the first, but not the second)
68
Which of the following statements about disability payments and benefits are true?
I. Employer contributions to employee group disability insurance plans are generally tax deductible. Benefits will be taxable to the insured employee.
II. When an employee pays for an individual disability policy, or the plan is contributory, the employee pays for the plan with after-tax dollars. Tll or part (contributory) of the benefits will be tax-free to the employee.
III. The employer offers an executive bonus (Section 162) to purchase an individual disability policy for an employee. The premium is deductible by the employer, and the benefits are tax-free to the employee
IV. Insured S corporation owners always receive tax-free disability benefits.
All are true. I marked only III, IV as true.
69
Your client, Mrs. Cates, died 6 months ago. Her family inherited almost $5 million without shrinkage from federal estate tax. Mrs. Cates' property generally received a step up in basis. Mrs. Cates' son, Caleb, received $2 million from his mother's estate. Caleb deposited the money into a joint account that he and his wife have maintained for years. Caleb and his wife, Cindy, had been your clients before Mrs. Cates died. The account, which holds other assets in addition to the inheritance, is now worth $3.5 million. This morning, Caleb called to request $100,000 in cash, not a check from the account. This is a very unusual request, so you ask Caleb the reason for the withdrawal. He says he needs it to pay his mistress in exchange for her agreeing not to tell Cindy about the affair. What should you do?
70
Using the endorsement method, what must an employee pay if they want to buy the life insurance policy from the employer?
They must pay the higher of the premiums paid or the cash value.
71
Robert Zimmerman owns Smokey Bacon, Inc. Smokey Bacon provides a profit sharing 401(k). Robert makes the maximum elective deferral and with the company match and typical forfeitures, annual additions have ranged between $20,000 - $25,000. He has started another company, Eggcellent Eggs, Inc. with some good friends, and they are considering a profit sharing 401(k) plan for Eggcellent Eggs. Robert will be a controlling shareholder in Eggcellent Eggs. Given Robert's positions, which of the following statements is true?
I mistakenly thought that he could not participate in the plan because the employers are related entities.
Answer: D. He cannot defer any compensation into Eggcellent Eggs 401(k) plan.
He in fact CAN PARTICIPATE though. It's just that the deferrals and contributions will be aggregated. Since he's already maxed out his deferral at the one company, he can participate, but he can't defer any more.
72
Note that tax deferred accounts like annuities and retirement accounts do not receive step-up in basis, but muni bonds do.
73
What is the least important obligation when you, a CFP® practitioner, are about to begin the first step in the financial planning process?
I answered "Explaining the obligations and responsibilities of each party." since I thought this applied more to the implementation step of planning.
The correct answer: Disclosing the exact amount of conpensation that you will receive for performing the planning services.
I think I overlooked the "exact" portion of this. The code of ethics seems strict about how you represent compensation, so I think that's why I didn't select this as the answer.
74
Interpreting TEY
Remember that the equation is used for Muni bond itself. That's the yield that you plug in. The answer to the equation tells you the percentage that a non tax-advantaged bond would need to pay to equal it after paying taxes.
(I had thought that the equation required the calculation of the NON tax advantaged bonds)
So for a municipal revenue bond paying 5.2%, the taxable equivalent yield for the municipal bond is .052/.63 = 8.25% (tax rate of 37%).
75
Bill works for two related employers. Each employer provides a 401(k) plan. His compensation from his night job is $50,000 and his compensation from his day job is $60,000. If the plan for each company allows a 6% deferral and provides a 3% match, how much can Bill defer in the current tax year?
I overlooked the deferral percentage that the company allows for this one and just went straight to 23.5k as the answer. But the answer is $6600
76
George Able, age 60, enjoys working and has no wish to retire. He is researching businesses he could buy. Given that being an entrepreneur is risky, George’s required rate of return is 7% to 8%. If a business earned an annual net profit of $100,000, what should George pay for the business?
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 ÷ .08= $1,250,000
77
Corporation X, Corporation Y and Corporation Z are all members of the same controlled group. X and Y jointly sponsor a profit-sharing plan covering their eligible employees. Corporation Z does not participate in the profit-sharing plan nor does it have a plan of its own. Chris works for all three of the corporations and receives $40,000 in compensation from each (total $120,000). How much may be contributed for Chris in the current year?
The Section 404(a) limit on deductible contributions relative to Chris would be $20,000 ($80,000 x 25%). The $80,000 represents $40,000 in compensation from Corporation X and $40,000 from Corporation Y. You cannot consider the salary from Corporation Z because it does not provide a plan.
Got this wrong because I didn't aggregate his salary. I just counted one salary ($40k). The salary for each employer with which HE HAS A PLAN can be counted. I also looked at this from the perspective of 100%/70k rules, but it is from the perspective of the employer (25%)
78
Review Coverdell ESAs
79
Which of the following income items are generally not included in gross income?
A. Awards
B. Back pay
C. Bargain purchases of goods from the employer to the extent that the discount exceeds the employers gross profit percentage
D. Death benefits paid by the employer
E. Incentive stock options
Answer is E.
I eliminated E as an answer and answered D because I thought death benefits are usually tax free, and I though that it wasn't specific about when the ISO stock was sold, but should assume not, only exercised.
80
Chris Towns is self-employed. His business employs 10 workers. He is successful enough to fund various benefits for himself and for his employees. To determine AGI, which of the following benefits are either included in gross income or deducted on the front of Form 1040 to determine AGI?
I. The premium for the group life insurance benefit of $220,000 for Chris
II. The annual SEP contribution for Chris
III. Net profit from the sole proprietorship business of $250,000
IV. The IRA contribution by Chris
V. The group health insurance plan premium for Chris
The face value of the group life insurance for Chris is in excess of $50,000. The employer-provided premium that funds the excess is deemed to be compensation. The SEP contribution and the self-employed health insurance premiums are deductions for AGI. The net profit is taxable income. Chris’s IRA contribution is non-deductible because he is an active participant in the SEP and AGI is above the IRA contribution deductibility phaseout.
Answer is all of the above. I missed that he is above the IRA deductibility phaseout on account of the SEP plan.
81
Mr. and Mrs. Couch have been referred to you. You find out that another financial planner told them that they could retire at age 60. Now at age 55 Mr. Couch realizes that the investment advisor did not get them out of the market in the 2008 decline. Then in 2009 until now the advisor tried make up for the negative year with aggressive decisions that produced both positive and negative returns for specific years. After reviewing the Couch’s data, it is clear to you that retirement at age 60 is no longer a realistic goal. As a CFP® professional, how should you proceed?
Right answer:
Discuss various financial alternatives that could be acceptable to increase returns and savings to figure out the best course of action.
Wrong answer:
Suggest that Mr. Couch extend his intended retirement date and ask for the client’s thoughts.
A CFP® professional should explore all possible alternatives in order to help the client identify and achieve reasonable retirement objectives. This analysis might include a budget, comparing alternative investment vehicles, extending the retirement date and more. Pursuing arbitration is a long shot in increasing the Couch’s retirement income.
82
Terry owns a vacant lot next to the church he attends. He permits worshipers to park on the lot while they attend church services. The church wants to expand and wants to purchase Terry's land. A certified appraiser reported that the land has an FMV of $1,000,000. Terry is willing to sell the land for $750,000 to the church and claim a $250,000 charitable income-tax deduction. If the basis of the land is $200,000, how much gain will Terry be required to report on the sale of the land?
Answer: $600,000
($750,000 proceeds / $1,000,000 FMV) x $200,000 basis = $150,000
The $750,000 in sales proceeds less $150,000 adjusted basis equals $600,000. However, under a bargain sale to charity the basis is adjusted because the difference between the FMV of the property ($250,000) represents a charitable gift rather than a sale.
83
With the uncertainty of investments, which of the following married couples would you recommend purchase LTC insurance?
Mr. and Mrs. Able, ages 52 and 51, respectively have a combined net worth of $600,000. Mrs. Able suffers from severe rheumatoid arthritis and Mr. Able from end stage emphysema.
Mr. and Mrs. Banker, ages 65 and 60, respectively have a combined net worth of $1,000,000.
Mr. and Mrs. Carefree, ages 59 and 57, respectively have a combined net worth of $5,000,000.
Mr. and Mrs. Doubtful, ages 41 and 39, respectively have a combined net worth of $500,000.
The Bankers need to acquire the insurance while they are insurable. The Ables appear not to be insurable. The Carefrees can probably self-insure. At this point the Doubtfuls are too young to buy long-term care insurance.
I chose Mr. and Mrs. Carefree incorrectly.
84
Corporate AMT questions
Just know that it has been repealed.
85
Lamar and Abby Sanford, who have three teenage and pre-teen children, are confused about the difference between the American Opportunity Credit (AOC) and the Lifetime Learning Credit. How would you answer the Sanfords?
I selected "The maximum amount of AOC is $2,000 plus 25% of the next $2,000 for a total of $2,500 per tax year. The maximum amount of the Lifetime Learning Credit is $2,000 per year."
But this is incorrect, because the question states that they have three teenage sons, so $2500 is not the maximum, it's the maximum PER student.
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.
86
1040 EZ was eliminated by TCJA
87
Your client, Bob, made an investment in a commercial property. Given the risk this investment carries, he had a required rate of return of 10%. He recently sold the property and has asked you whether the investment was profitable. Was it?
I selected, "No, the investment would not be profitable if its NPV was negative"
But the correct answer is: Yes, the investment would meet Bob's required rate of return if the NPV was zero.
When, given the cash flows of an investment, its NPV is zero, the investment met the buyer's required rate of return. An investment can be profitable even if its NPV is negative. A positive or a negative NPV tells us whether the client achieved his required rate of return, but not the amount of the profit.
88
Which of the following are amounts received by the owner of a life insurance policy that would be treated as income-first distributions under a MEC contract?
I. Cash dividends
II. Interest accrued on a policy loan (added to the loan balance)
III. Dividends retained by the insurer to purchase “paid-up” additions
IV. Dividends retained by the insurer as principal or interest to pay off a policy loan
I, II, IV
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.
89
Both of Rusty Whitman's parents recently died in an auto accident. Rusty is 12 years old. Before their death, the Whitmans had established various trusts including revocable living trusts (each parent), an irrevocable life insurance trust, and a 2503(c) minor's trust. While Rusty is younger than age 21, the trust earnings will support his normal living needs. Into which of the following trusts will Rusty's parents' assets ultimately pass?
I answered a "standby trust", but the answer is "family trust"
The revocable trust will become irrevocable and will turn operate as a family trust for Rusty's benefit thereafter. It is rare that a revocable trust would name its beneficary as a 2503(c) children's trust. 2503(c) trusts generally terminate when the minor beneficiary turns age 21.
90
A FICA covered worker will be entitled to Social Security disability benefits if which of the following conditions apply?
I. The worker has been disabled for 12 months or is expected to be disabled for at least 12 months or has a disability that is expected to result in death
II. The worker has attained FRA or is older
III. The worker is insured for disability benefits
IV. The worker has filed an application for disability benefits
V. The worker has completed a 5-month waiting period or is exempted from this requirement
I chose: IV, V, but the answer is
I, III, IV, V
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.
91
At age 55, Harry started taking substantially equal payments from his IRA. For three consecutive years, he took the required amount. Then, in year four, due to a qualified hardship (to prevent foreclosure on his home), he withdrew $50,000 more than the normal substantial equal payment under the annuity method of distribution he had selected. What, if any, amount of penalty did Harry have to pay on the $50,000?
I answered, 10% of the distributions received in years 1, 2, and 3, and the $50,000 excess distribution in year 4
but the answer is:
10% of the $50,000 excess distribution. RTFQ:
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.
92
Within how many days of the end of their fiscal year must an SEC registered advisor file annual updates to their ADV?
90
93
How often may the section 121 home sale exclusion be elected?
The Section 121 exclusion may be elected every two years. The Iversons only owned their second home for a year and a half. Since the question did not indicate that the Iversons sold their second home because of a job change, divorce, or unforseen circumstance they could not prorate the exclusion amount.
94
Which of the following statements is (are) true about profit-sharing plans?
I. They may be integrated with Social Security.
II. They may receive contributions for individual employees in excess of 25% of that participant's eligible compensation.
III. They generally permit the employer to make flexible contributions.
IV. They may be age weighted.
I answer I, III
Answer: I, II, III, IV
Qualified profit sharing plans feature flexible employer contributions. They may be age weighted and integrated with Social Security. While the employer may contribute and deduct up to 25% of its overall payroll, the contribution for an individual participant may exceed that percentage.
95
What is a section 125 plan?
A Section 125 plan is a flexible spending account (FSA) into which contributions are elected before the employee compensation is actually earned. One of the few plans that is not subject to FICA and FUTA (HSAs too, when contributed through a cafeteria plan)
96
Former college roommates, Barbara and Kathy, are 50/50 owners of BK, Inc. When they started BK, the corporation acquired two $1,000,000 face value key-person term life insurance policies. Barbara is the named insured in one policy and Kathy in the other. Over the years, the company has paid $5,000 in premium on Barbara’s policy and $4,000 in premium on Kathy’s policy. Barbara and Kathy have decided to use the policies to back a new cross purchase buy-sell agreement. If Barbara buys the policy in which Kathy is the named insured paid by BK, what will be the tax outcome if Kathy dies within one year following Barbara's acquisition of the policy?
I answered, "Barbara will receive $1,000,000 income tax-free (term insurance exclusion)." thinking that because they were business partners, transfer for value did not apply, but in fact, the exception is for "PARTNERSHIPS":
The policy will be subject to the transfer for value rules making the death benefit net of basis subject to federal income tax.
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.
97
Note that K-1 income from an S-corp is investment income, NOT earned income, even if the payee is an active participant.
98
For Medicare LTC, note that the SPECIFIED AMOUNT COVERAGE (often 209.50) is what Medicare requires the patient to pay first, and then they cover the rest. (It's essentially a deductible).
99
100
Your client, Mr. Smith, purchased and sold the following stocks during a two-year period. Which situation or situations below created a "wash" sale? NOTE: All transactions are 100 share round lots.
I. March 1st purchased ABC @ $15; December 1st purchased ABC @ $10; December 31st sold ABC @ $10
II. November 30th purchased LMN @ $50; December 15th purchased LMN @ $52; December 29th sold LMN @ $54
III. January 1st purchased XYZ @ $60; February 15th sold XYZ @ $50; March 16th purchased XYZ at $52
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.
101
Tom, age 49, works for a not-for-profit organization. He contributes $23,500 annually to a 403(b) provided by his employer. Tom's wife, Melinda (age 48), works for another not-for-profit organization. She contributes $5,000 annually to her employers 457 plan. If he earns $120,000 and Melinda earns $50,000 in the current year, how much can they contribute to a traditional IRA that would be deductible on their 2025 tax return?
I answered $14k but the answer is $7k.
The 403(b) retirement plan makes Tom an active participant for the purposes of deducting an IRA contribution. Given that Tom is an active participant and the amount of Tom and Melinda's AGI, Tom's IRA contribution is not deductible. Contributing to the nongovernmental 457 does not classify Melinda as an active participant for purposes of deducting her IRA contribution. Their combined AGI is $170,000. Under the "tainted spouse rules," Melinda can make a deductible IRA contribution because the joint AGI is less than $236,000.
My thinking was wrong here, because I was applying the spousal IRA phaseout ($236k) to both of them, but it only applies to the non-participating spouse. The MFJ phaseout is the one that applies to the participating spouse (126k-146k)
102
Taking SS early calculation
number of months early / 180
103
Corporate annual reports would generally not include which of the following?
Profitability projections (could mislead investors)
104
Prepaid tuition program details
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.
105
HO-15 details
Because a HO-15 endorsement provides increased limits on property and higher sub-limits on jewelry and furs, the items shown would be covered without additional endorsement. For example, under a HO 15 endorsement coverage for collectible coins carries a $5,000 limit.
106
Alex Hamilton, now age 57, quit his job 2 years ago. After being married for 30 years. Alex and his wife decided to split when he quit his middle management job and started developing websites for the handicapped. His now ex-wife took half of their money and moved to France. Alex’s websites went viral and his annual income went from around $90,000 in a typical year to $300,000. He has no formal employees but some of his fraternity brothers help him and are paid under a 1099 arrangement. Alex wants to establish a retirement plan. You ask him about his lifestyle and his expenses. He says he is now dating the lovely Fifi, who is age 39. To compete with her other boyfriends, he leased a Mercedes-Benz and takes Fifi to fine restaurants and the theater where he buys main floor seats. From the choices below, which type of retirement plan would you suggest?
A. A SEP
B. A Uni-(k)
The catch-up provision available with the Uni (Solo) 401(k) allows Alex to contribute a total of $77,500 for the current tax year. Given that they do not offer a catch-up contribution opportunity, the SEP and target benefit only allow $70,000. The Uni-(k) will be an ERISA plan. Fully funding actuarially determined contributions to a defined benefit plan will require more money than his current expenses allow.
Uni-k's allow discrimination and are generally permited when the only participants are the owner and spouse, or two partners.
C. A defined benefit Keogh
D. An age-weighted target benefit Keogh
107
Which of the following assets are liquid?
A S&P 500 ETF
A CMO
A GIC
A 1-year CD
I answered, the ETF, but it's the CD.
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.
108
Are ERISA plans subject to creditors?
Not during accumulation phase, but a portion of distribution CAN be attached once the account goes into pay status.
109
When does an irrevocable trust become a grantor trust?
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).
110
Can HSA distributions be used for LTC premiums?
How about FSA distributions?
Yes from an HSA. The covered premium amount is limited to age-based limitations.
No for FSA.
111
Low-Basis vs. High
Mrs. Lucy, age 80, is in reasonable health. Five years ago, her husband died leaving her $3 million and placing $3.5 miillion in a bypass trust for her benefit. In addition, their home was in JTWROS. The home, FMV value $500,000 and the $4 million of investments has a high basis of $3.5 million. Mrs. Lucy has two married children and 5 grandchildren to keep her estate under $5 million. What type of asset do you recommend she give and to whom?
I said that she should give low basis stock, thinking that it would receive a step-up in basis. But she is still alive and the question is asking about GIFTING. She should gift the high-basis stock (lower taxes for the recipients) and keep the low basis stock until she dies.
PAY ATTENTION to the difference between gifting and inheriting.
112
Strategy for subjective questions/client scenarios
Lean towards:
- Educating and explaing
- Allowing the client to decide for themselves
- Gathering more data/doing cash flow before investing decisions
- Term life insurance if offered as an option for clients with children
113
When dealing with a client’s estimated unequal cash flows from a potential investment, what is the major difficulty that you, as a financial planner, may encounter?
What discount rate to use
114
Deduction amount for donation of inventory
Generally limited to the cost of the inventory.
115
What is a SERP?
It is a supplemental executive retirement plan.
It is an informally funded plan to provide benefits that greatly exceed those provided by a normal retirement plan.
It is also called a "top hat" plan.
116
Taxation of the DB from a group life policy
Up to $50k is tax free. Outright DB from a company (not life insurance) is taxable.
117
Calculation of life settlement taxation
Subtract cost of insurance from premiums to arrive at basis.
Subtract basis from cash settlement to arrive at gain.
Difference between Cash Value and premiums paid is Ordinary Income.
Everything else is LTCG.
118
Another name for naked call writing
shorting calls
119
LTCG/qualified dividends & kiddie tax
They are taxed at 0% in the 10% kiddie tax bracket (but still count towards taxable unearned income).
120
Mary Tuttle, a single mother, has a dependent child, John. John tries to help out his mother. This year he netted $4,200 doing odd jobs receiving 1099s and also received $350 in interest on his savings account. No income tax was filed. Did John have to file an income tax return?
Even though his standard deduction covers his earned and unearned income, he will still have to pay SE taxes (for any income over $400).
121
A client has investment income of $50,000. The client takes a loan of $500,000 from a bank to buy 20 acres of land for investment purposes. The real estate will be the collateral for the loan. The loan cost for the year is 10% or $50,000. Is the interest tax deductible?
I thought the deduction was only for MARGIN interest.
Yes, up to investment income.
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.
122
What is the advantage between taking excessive income as a stockholder from a corporation or an S corporation if the corporation is very profitable?
A Taking earned income as compensation from a corporation will qualify the stockholder to ultimately get more Social Security benefits.
B Taking earned income as compensation from a corporation will qualify the stockholder for a large retirement contribution.
C Taking limited income from an S corporation will reduce FICA and FUTA taxes because the remainder of income will be unearned income.
D Taking limited earned income from an S corporation and the remainder as unearned income will reduce corporate taxes.
Taking limited income from an S corporation will reduce FICA and FUTA taxes because the remainder of income will be unearned income.
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.
(I answered D)
123
What is an MSA?
It's an HSA for self-employed. Contributions can only be made by the employer or the eligible person, but not in the same year.
124
For NPV variable cash flow questions, remember to always enter the first cash flow as 0.
125
Three years ago, Lori purchased a house in California. Lori married Bob this year. After their wedding, Lori sold her house because they moved to Florida. Her gain from selling the house was $300,000. Will her gain be taxable? Why or why not?
Yes, however she will only be allowed an exclusion of $250,000
The home is owned by Lori rather than by the couple. Under IRC Section 121, Lori would be entitled to exclude up to $250,000 in gain. The requirement is that Lori had to own the home for two years (which she did). That makes answers D and E incorrect.
I answered exclusion up to 500k, but the new spouse's name is not automatically on the home just because of the marriage. That would require re-titling.
126
Lenny was divorced. He has two daughters with his first wife. A few years before his death, he married Marilyn (second wife). Lennie established a trust for Marilyn. The trust provisions gave Marilyn the right to trust income limited to the ascertainable standards of health, education, maintenance, and support (HEMS). The trust agreement also provides Marilyn with a discretionary right to principal, limited to the same HEMS standard, but which had to be preceded by the exhaustion of Marilyn’s other resources. After Marilyn’s death, the remainder of the trust passes to Lenny’s children. What type of trust does it appear that Lenny established?
I answered QTIP, but it's a Bypass trust
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.
QTIP gives rights to the spouse for ALL income.
127
Martha’s husband, Alex died last month in February. Which of the following income tax filing statuses are available to Martha for the current year?
The return due in the year after death is the return for the year in which the husband died. Martha may file married, jointly or married, separately. She is not eligible to file as a qualifying widow until the year after Alex died (the next year), Martha may file as a qualifying widow if she meets one of the following four tests: 1.) She maintains a home 2.) Has a dependent child 3). Filed a joint return the prior year 4.) Did not remarry. Martha may also file as head of household, but she would have to have children actually living in the home.
128
Under Medicare Part B, which, if any, of the following shots (vaccinations) are generally covered at no cost to the patient?
Under Medicare, Part B both annual flu shots and pneumococcal shots are covered at no cost to the patient.
129
Meaning of APL
automatic premium loan
130
IRR can simply refer to TVM calcs when used in comparison to HPR
131
What benefits from a scholarship are taxable?
Books, tuition, course-related fees, equipment and supplies required for courses are tax free.
Room, board, and incidental expenses are taxable
(also same for a graduate student paid a stipend for teaching)
132
A QDRO is generally a court order relative to which of the following types of payment or property?
I. An IRA account
II. Marital property rights
III. Child support
IV. Alimony payments
I answered "all", but QDROs only applied to qualified plans, not IRAs. An IRA break-up can be part of a divorce settlement, but it is not part of QDRO
133
When is a QDRO valid?
When the plan administrator has approved the QDRO that has been entered with court and signed by the judge.
(not when the divorce is finalized)
134
Clarice, while living, assigns the ownership of a whole life insurance policy to her niece, Clara. How would the Internal Revenue Code classify the policy's value for transfer tax purposes?
I answered, "As a gift", but that is incorrect.
As the interpolated terminal reserve plus the unearned premium.
This is purely a definition question. The gift is not necessarily a taxable gift. It is a gift of a present interest. Answer C doesn’t apply to the question.
135
Mrs. Pell, a widow who has always lived in a community property state, has found out that her deceased husband bequeathed all his community property to a charitable organization without her knowledge. She is quite upset. What sort of relief do community property states provide in this type of situation?
I answered: The 50% rule
correct answer: The widow’s right to elect against the will
This allows the surviving marital partner to choose whether to take half the property outright, or to take the benefits provided under the decedent’s will.
136
Marty and Libby Joseph are married and have no children. Marty is a Canadian citizen. He lives full-time in the U.S. and has no wish to become an American citizen. After Libby dies, he doesn’t plan on going back to Canada. Currently, Marty has about $4 million invested in real estate in Canada in his own name. Libby works as the Chief Financial Officer of a micro-cap corporation making $500,000 to $600,000 a year. Libby has completed her estate plan by establishing a QDT for Marty should she die first. If Libby dies with an estate of $18,990,000 how much should go into the trust?
5 million.
I got this wrong because I confused marital deduction with the estate tax exemption. Assets can still pass tax free to a spouse via the estate tax exemption. It's just that anything over that cannot pass via the marital deduction, so it thus needs to go into a QDOT.
$13,990,000 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.
137
Mr. Tate died owning a whole life insurance policy under which Mrs. Tate is the named insured. The death benefit of the policy was $250,000, and the cash value was $30,000. Relative to this policy owned by Mr. Tate, what amount will be included in Mr. Tate’s gross estate for federal estate tax purposes?
The interpolated terminal reserve plus the unearned premium
(I said "replacement value")
138
How many securities are necessary for a diversified portfolio?
Generally speaking, 10-15
139
Mr. and Mrs. Pell established a Charitable Lead Trust (CLUT) funding it with $2,000,000. The trust assets increased by 7% this year. What percent of the annually revalued principal must the trust pay out to the charitable beneficiary to avoid tax penalties?
I answered "Not less than 5% of the trust assets each year", but that's for CRTs.
Can be any percentage including skipping the distribution entirely. 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%.
140
When can a corporation receive a tax deduction for issued ISOs
If the ISO is disposed of in a disqualifying manner.
141
IRA contributions are deductible for an active participant if no annual additions are made to the plan that year.
142
Land, by nature, is a use-related donation.
143
What does it mean that a charitable gift has to be "substantiated"?
For gifts over $250, it must be substantiated by a written acknowledgement from the charity
144
Sidney is very displeased with a particular CFP® practitioner's recommendations. He strongly believes that they were unsuitable and resulted in unnecessary losses. Further, Sidney later learned that the planner did not provide him with adequate disclosure of conflicts of interest and other matters. To which the following parties should Sidney send his letter of complaint?
A. CFP® Board
B. The planner's supervisor
C. FINRA
D. The SEC
We know that the planner is a CFP® professional. Nothing in the question indicates FINRA registration. Nor does the question indicate that the planner is a federal covered advisor regulated by the SEC. The planner may or may not have a direct supervisor. The culture of the exam is that CFP® Board wants to know of the complaints, then they can investigate them.
145
AMT paid on an ISO increases basis
146
The written disclosures under that are required under CFP® Code of Ethics can be made in which of the following ways?
I. Disclosure using the Form ADV
II. Disclosure under the rules and requirement of any self-regulatory organization.
III. Disclosure using multiple written documents
IV. Disclosure used in compliance with state or federal laws.
Under the CFP® Code of Ethics, written disclosure to prospective clients may be provided through any of the means shown.
147
Doc Holiday owns a dude ranch that operates as an S corporation. He employs about 5-6 full-time and 6-7 part-time employees. His business includes a bed-and-breakfast operation. He operates as Holiday, Inc. as S corporation. One employee, Jesse, not only breaks in the wild horses but is a wiz at picking the right horse for each dude ranch guest. He cannot afford to lose Jesse as an employee. Other than health insurance Doc provides no other benefits for employees. Doc only takes $2,000 a month as salary and the profit comes out to him as K-1 income. He wants a recommendation from you as to what kind of benefit should he offer to Jesse. What would you suggest?
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.
Did not answer with the 162, because I was thinking about phantom income. But the "double bonus" addresses this.
148
Jack and Jill Jones are divorcing. In exchange for her release of all marital rights that she has or may have in his estate, Jack understands that he will, under the terms of the divorce decree, give Jill $1,000,000 as a lump-sum settlement. Under this circumstance, is the $1,000,000 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 subject to federal gift tax.
Nathan’s CFP
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Decks in class (5)
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