1
Q
Which defined benefit plans are exempt from PBGC insurance coverage?
A
Professional service employer DB plans (e.g., accounting, law, medical firms) with 25 or fewer employees
2
Q
When is income from an irrevocable trust taxed to the grantor?
A
When trust income is used for the grantor’s benefit, such as fulfilling a legal obligation (e.g., supporting a child).
Only the portion used for that purpose is taxable to the grantor.
3
Q
Which bond types provide fixed annual income and low default risk?
A
✅ High-rated municipal bonds — both general obligation and AAA-rated revenue bonds
❌ GNMAs – safe but no fixed income (subject to prepayment risk)
❌ High-yield corporates – higher return, but default risk too high
4
Q
Since 1982, how has the federal government employment growth rate changed?
A
📉 It has remained relatively flat, with an average growth rate near 0.04% per year (1982–2020).
✅ Federal jobs ≈ stable
✅ State/local jobs = growth
❌ Not steadily increasing or decreasing
5
Q
When a life insurance policy is transferred to the insured, are death benefits taxable under the Transfer-for-Value Rule?
A
❌ No — transfer to the insured is a TFV exception.
✅ Death benefit remains tax-free.
6
Q
What happens in a wash sale when an investor sells at a loss and repurchases the same stock within 30 days?
A
- Loss is disallowed (not recognized)
- But it’s added to the basis of the repurchased shares
- Holding period tacks on from the original purchase
Example:
Sold 500 shares → $10K realized loss → rebought 500 within 30 days →
Loss disallowed, new basis = cost + $10K disallowed loss
➡️ Realized $10K, Recognized $0, Total new basis = $65K
7
Q
In a concentrated portfolio (only cash + one stock), which factor has the largest impact on performance?
A
✅ Security selection – because returns depend almost entirely on the performance of that single holding.
❌ Asset allocation dominates only in diversified portfolios.
8
Q
Which executive or stock-based plan allows employees to benefit from stock growth without receiving ownership or control?
A
✅ Phantom Stock Plan
* Mirrors company stock value, pays cash bonus based on appreciation
* No ownership or voting rights
* Taxed as ordinary income when paid
* Ideal when company wants employees to share in growth but retain control
9
Q
What is constructive receipt, and how does it affect year-end income for a cash-basis taxpayer?
A
- Income is constructively received when it’s available without substantial restriction,
even if not physically accepted. - Once funds are offered (e.g., check written and accessible), income is taxable this year.
- Business accounting method doesn’t affect personal cash-basis reporting.
Example:
Friend offers check in December → taxable in current year.
10
Q
When can an estate use special use valuation and installment payment options for a closely held business?
A
Special use valuation (§2032A):
* Real property in business/farm ≥ 25% of gross estate
* Business/farm ≥ 50% of adjusted gross estate
Installment payment (§6166):
* Closely held business ≥ 35% of adjusted gross estate
11
Q
What happens when the IRS reclassifies excessive shareholder-employee salary in a C corporation as a dividend?
A
✅ Corporation: Loses deduction → taxable income increases by amount reclassified.
✅ Shareholder: Income total unchanged, but character shifts (salary → dividend).
-Salary (earned income) ↓
-Dividend (investment income) ↑
12
Q
When is standard deviation and beta each an appropriate measure of portfolio risk?
A
-Standard deviation: Always measures total risk (systematic + unsystematic).
-Beta: Measures only systematic (market) risk, and is useful only when portfolio is well diversified.
13
Q
Which rollover and conversion sources can fund a Roth IRA, and are they taxable?
A
✅ Conversions allowed from:
-Qualified plans (401(k), 403(b), 457, pensions, profit-sharing)
-Traditional IRAs
-SEP & SIMPLE IRAs (after 2 years)
✅ Roth-to-Roth rollovers are tax-free
14
Q
How is a QPRT gift calculated and when is the home included in the grantor’s estate?
A
✅ Gift value = FMV – PV of retained right to live there
✅ QPRT = qualified interest → exempt from zero-valuation rules
✅ Future interest → no annual exclusion
❌ If grantor dies before term ends → property re-included in gross estate (§2036)
✅ Survive term → remainder passes estate-tax free
15
Q
In liability cases, what do special damages represent
A
✅ Special damages = measurable, economic losses
16
Q
What are general damages?
A
✅ General damages compensate for non-economic, subjective losses that can’t be precisely measured in dollars.
Examples:
-Pain and suffering
-Emotional distress
-Loss of companionship
-Loss of reputation
17
Q
What are the key characteristics of Defined Benefit (DB) plans vs Defined Contribution (DC) plans?
A
✅ DB Plan:
-Benefit is defined by formula
-Employer bears investment risk
-Can fund for past service
-Usually provides more retirement income
-Contributions vary based on actuarial requirements
❌ DC Plan:
-Contributions defined; benefit depends on investment performance
-Employee bears investment risk
-Contributions limited under §415(c)
18
Q
How are premiums and benefits taxed when a corporation owns and is the beneficiary of a disability policy on a key employee?
A
✅ Premiums: Nondeductible to the corporation
✅ Benefits: Received tax-free by the corporation
19
Q
What are the key ISO qualification rules (holding period, limit, expiration, and employment)?
A
✅ ISO Rules:
-Must hold 2 years from grant and 1 year from exercise → LTCG treatment
-Expire in 10 years (5 years if 10%+ owner)
-$100,000 max (FMV at grant) exercisable per year
-Must exercise within 3 months of leaving employment (1 year if disabled)
-AMT adjustment applies at exercise (spread = preference item)
20
Q
How are suspended passive activity losses allocated among multiple loss activities?
A
✅ If total passive losses exceed passive income, the nondeductible portion (suspended loss) is allocated proportionally to each activity’s share of total loss.
Example:
Activity 1: $40k loss
Activity 2: $20k loss
Passive income: $15k
→ $45k suspended =
$30k to Activity 1 (40/60)
$15k to Activity 2 (20/60)
21
Q
How does the 5-and-5 Rule affect inclusion of unexercised withdrawal rights in a beneficiary’s gross estate?
A
- A withdrawal right = general power of appointment.
- The greater of 5% or $5,000 can lapse each year without estate inclusion.
- Any lapse above 5-and-5 within 3 years of death → included in gross estate.
- Add any unexercised right at death (current year).
22
Q
Can a donor retain the right to revoke a charitable remainder trust and still get an income tax deduction?
A
❌ No — all charitable remainder trusts and gift annuities are irrevocable.
If the donor keeps the right to revoke, the transfer isn’t complete → no deduction allowed.
✅ CRUT allows future contributions but still must be irrevocable.
✅ CRAT and gift annuity also irrevocable and accept no further contributions.
23
Q
How does paying gift tax on appreciated property affect the donee’s basis?
A
✅ If the donor pays gift tax and the property is worth more than the donor’s basis,
add to the donee’s basis a portion of the gift tax tied to the property’s appreciation
23
Q
What advertising is allowed under the CFP Board’s Code of Ethics and Standards of Conduct?
A
✅ You may advertise factual, truthful info about your practice’s size, scope, and areas of competence.
❌ You may not:
* Claim to represent the CFP Board’s views
* Exaggerate benefits or make misleading claims
* Borrow credibility from an affiliated firm’s history or reputation
24
Which qualified plans can use the excess method of permitted disparity (Social Security integration)?
✅ Money purchase, Defined benefit, and SEP plans may use the excess method.
❌ ESOPs, SIMPLEs, and SARSEPs cannot integrate with Social Security.
Rules:
Excess method = DC or DB plans
Offset method = DB plans only
25
Christopher chooses an investment framed as gains over one framed as losses, even though both are equal. What bias does this show?
✅ Loss Aversion Theory:
People prefer avoiding losses to achieving equivalent gains.
Losses feel roughly twice as painful as gains feel good.
❌ Framing bias is about presentation of info, not the emotional reaction to loss.
26
How are withdrawals from a Traditional IRA taxed if the account is entirely deductible contributions + earnings?
✅ All distributions are taxed as ordinary income.
* No basis → no tax-free portion.
* IRA earnings + deductible contributions have never been taxed.
❌ Capital gains rates don’t apply.
❌ NUA treatment applies only to employer stock in qualified plans.
27
When do life insurance dividends become taxable to the policyowner?
✅ Tax-free until total dividends received exceed premiums paid (basis).
* Excess = taxable ordinary income.
* Applies even if dividends are reinvested or used for paid-up additions (constructive receipt).
28
How does Net Unrealized Appreciation (NUA) taxation work for employer stock distributed from a qualified plan?
✅ At distribution:
Cost basis (employer’s purchase price) → taxed as ordinary income.
NUA (growth in value) → not taxed until sold.
✅ At sale:
NUA portion → long-term capital gain, regardless of holding period.
Any appreciation after distribution → ST/LT depending on holding period.
29
During which step of the financial planning process would you not yet set up a review meeting?
✅ During Step 5 – Presenting Recommendations,
you discuss goals, findings, and alternatives — but no review schedule yet.
🔹 Setting up review meetings happens in Step 7 – Monitoring Progress
(after implementation).
30
Greg assumes clients are rational, focuses on data (cash flow, assets, debt), and sees himself as the “agent of change.” What counseling approach is this?
✅ Economic and Resource Approach
Clients are rational decision-makers.
Change happens through logic, data, and analysis.
Planner acts as agent of change using quantitative info.
31
32
Which action does not cause loss of federal student aid eligibility?
Failing to pay on a subsidized Stafford Loan while enrolled at least half-time, because repayment hasn’t begun yet (loan is in deferment).
33
What are the key contribution rules for a Coverdell ESA?
* Cash-only contributions
* Beneficiary must be under 18 (unless special needs)
* $2,000 annual limit (not gift exclusion)
* Contributions allowed until April 15 of the following year
34
❓What defines an insurable interest in life insurance? Give an example that qualifies and one that does not.
💡Insurable interest exists when the policy owner would suffer a financial or emotional loss if the insured dies.
✅ Example – A mother purchasing life insurance on her adult child (recognized emotional tie).
❌ Not – A business insuring a non-key employee (no measurable economic loss).
35
❓Under an HO-2 homeowners policy, which personal property items require additional coverage (endorsements)?
💡Items with special limits of liability:
Jewelry (limit ≈ $1,500 theft)
Furs
Coin/stamp collections (limit ≈ $200)
👉 Need scheduled personal property coverage.
Computers used for school are fully covered under personal property limits.
36
❓What’s the best business succession plan when: the owner’s spouse/children can’t run the business, and one child is mentally incapacitated?
💡Use a C-corp with a funded buy-sell agreement (to transfer business to a capable key employee) and a Special Needs Trust (to hold sale proceeds for the incapacitated child).
37
❓A client worries LTC insurance premiums might rise so much she can’t afford them later. Which policy feature best addresses this concern?
💡Nonforfeiture option – keeps a reduced paid-up or shortened-benefit policy if premiums stop.
38
❓How much will Medicare pay for 105 days of skilled-nursing-facility care at $300/day (co-pay $185.50/day)?
💡Days 1–20 = 100% Medicare → 20×$300 = $6,000
Days 21–100 = Medicare pays $114.50/day → 80×$114.50 = $9,160
Days 101–105 = $0
39
How does a hybrid life insurance policy with long-term care benefits pay out LTC expenses, and how is it different from a stand-alone LTC policy?
* Hybrid LTC policies pay LTC benefits by accelerating the death benefit (reducing what’s left for heirs).
* They do not pay from cash value.
* Premiums are typically higher upfront but guaranteed, unlike traditional LTC policies that can raise rates.
* If LTC isn’t needed, beneficiaries still receive the remaining death benefit.
40
Who owns the policy, who pays the tax, and who gets the deduction under an executive bonus plan?
* Employee owns the policy.
* Employer pays the premium as a taxable bonus to the employee.
* Employee pays tax on the full premium amount as ordinary income.
* Employer receives a tax deduction for the bonus.
🧩 Hook: “Bonus = employee taxed, employer deducted.”
41
How are taxes and ownership handled under a split-dollar life insurance agreement between employer and employee?
* Employer and employee split the policy’s costs and benefits.
* Ownership depends on the plan:
* If employer owns, premiums are loans to employee.
* If employee owns, the economic benefit (term cost) is taxable each year.
* The employee is not taxed on the full premium, only on the economic benefit (usually term cost).
🧩 Hook: “Split = shared ownership, shared tax; only taxed on the benefit, not the bill.”
42
Who pays taxes and who benefits under a key-person life insurance policy?
* Employer owns, pays, and is beneficiary of the policy.
* Premiums are NOT tax-deductible.
* Death benefit is tax-free to the employer.
* Employee pays no tax (since no ownership or benefit).
🧩 Hook: “Key = company keeps it all (pays, owns, benefits).”
43
If information arrives randomly and independently, how will prices behave?
They’ll adjust quickly and unpredictably, fully reflecting new information. Price changes are independent and follow a random walk (supports the Efficient Market Hypothesis).
44
How do you calculate a portfolio’s beta?
Weight each security’s beta by its proportion of total market value, then sum.
45
What’s the max gain and max loss for a naked call seller?
✅ Max gain: Premium received.
❌ Max loss: Unlimited (because stock price can rise indefinitely).
⚙️ Break-even = Strike + Premium.
Buyer exercises when stock > strike.
46
What are the regulatory and investor access differences between hedge funds and mutual funds?
* Hedge funds: Private, for accredited investors, light regulation, less transparency, lock-up periods.
* Mutual funds: Public, heavily regulated, high transparency, daily liquidity.
47
Which investment does not provide tax-deferred growth?
✅ CDs, savings accounts, money markets — all interest is taxed annually as ordinary income.
* Tax-deferred = variable annuities, real estate appreciation, collectibles (until sold).
48
What inputs are required to calculate portfolio risk on the Efficient Frontier?
1️⃣ Standard deviation of each asset
2️⃣ Weight (allocation) of each asset
3️⃣ Correlation between assets
❌ Beta is not used — that’s CAPM’s domain.
49
What are the key advantages and drawbacks of a Fund of Funds (FoF)?
✅ Advantages: Diversification, professional manager selection, monitoring, economies of scale, access to exclusive hedge funds.
❌ Drawbacks: Double layer of fees, less transparency, less control, potential overlap of holdings.
50
How do you calculate taxable capital gain or loss?
= Net sales proceeds – Adjusted basis
* Adjusted basis = purchase price + commissions/improvements
* Gain recognized only when sold
* Short-term → ordinary rates; Long-term → 0% / 15% / 20%
51
Which risk measure does each ratio use?
* Sharpe → Total risk (σ)
* Treynor → Systematic risk (β)
* Alpha → Excess return vs CAPM
52
When is a testamentary trust formed?
During probate
53
A Trust
Power of Appointment
-no strings attached
-long term marriage
-marital deduction
54
B Trust
Bypass Trust
-skips spouse
-HEMS provisions
-NO marital deduction
55
C Trust
QTIP
-controls from the grave
-strings attached
-marital deduction
56
What disqualifies court-ordered alimony from being deductible?
Even if it’s in cash and court-ordered, it’s not deductible if the ex-spouses live together at the time of payment.
(For pre-2019 divorces only — post-2018 alimony is never deductible.)
57
How are losses treated when selling property to a related party?
* Seller’s loss = disallowed (cannot deduct).
* Buyer’s basis = purchase price (not increased by disallowed loss).
* If buyer later sells to unrelated party for a gain, that gain can be offset up to the amount of the seller’s disallowed loss.
* Any remaining disallowed loss is permanently lost.
58
Which business entity avoids phantom income for owners?
✅ C Corporation – income taxed at the corporate level; shareholders taxed only when they actually receive dividends.
❌ Pass-through entities (S Corp, partnership, LLP) → owners taxed even if profits are retained.
59
How do you determine vacation home deduction limits when rented and personally used?
1️⃣ If personal use > 14 days or 10% of rental days → treat as personal residence.
2️⃣ Allocate expenses between rental and personal days.
3️⃣ Deduct rental expenses up to rental income; excess carried forward or disallowed.
4️⃣ Personal portion of mortgage interest & taxes → Schedule A; other personal costs → disallowed.
60
When are suspended passive losses deductible?
When the taxpayer disposes of the entire passive activity in a fully taxable transaction to an unrelated party — all suspended losses are released and deductible against any income type (active, passive, or portfolio).
61
How is a nonbusiness bad debt treated for tax purposes?
-Always treated as a short-term capital loss, regardless of holding period.
-Maximum $3,000 deduction against ordinary income ($1,500 if MFS).
-Excess loss carries forward indefinitely.
-Only business bad debts (directly tied to a trade or employment) qualify as ordinary losses.
62
In a divorce situation, who can claim a child as a dependent?
-The custodial parent (child lives with them > 50% of nights).
-Support % doesn’t matter if both parents contribute >50% combined.
-The noncustodial parent can only claim the child if the custodial parent signs Form 8332 or a similar written release.
-Without that release → custodial parent wins every time.
63
What is the special $25,000 real estate loss allowance, and how does it phase out?
-Up to $25,000 of rental real estate losses (with active participation) can offset non-passive income.
-Phased out 50¢ per $1 of MAGI over $100,000 (MFJ).
-Fully gone at $150,000.
-Losses not deducted are suspended until income or property disposition.
64
What is the Built-In Gains (BIG) Tax for S corporations?
-Applies only to S corps that were formerly C corps.
-Covers appreciation that existed at conversion.
-If those assets are sold within 5 years → S corp pays a corporate-level tax (≈ 21%).
-Post-conversion appreciation → taxed only once to shareholders.
65
66
When calculating the deductible portion of investment interest expense, which types of income are excluded from investment income?
Tax-exempt interest (including muni bonds subject or not subject to AMT) and qualified dividends/LTCGs unless the taxpayer elects to treat them as ordinary.
➡️ Only taxable interest, ordinary dividends, and short-term gains count toward the limit.
66
A couple has $4,800 of investment interest expense and $4,000 of net investment income (taxable interest + ordinary dividends). How much is deductible on Schedule A?
$4,000.
Investment interest expense deduction = lesser of actual expense or net investment income.
Tax-exempt interest doesn’t count toward the limit.
67
How does using a 529 plan distribution affect eligibility for the American Opportunity Tax Credit (AOTC)?
Expenses paid with tax-free 529 dollars can’t also be used for AOTC.
No “double dipping.” Only out-of-pocket qualified expenses qualify for the credit.
68
When are life insurance policy dividends taxable?
They are non-taxable as a return of premium until cumulative dividends received exceed the owner’s basis (total premiums paid).
Any amount beyond basis is taxable as ordinary income, not dividend or capital gain income.
69
How do you determine the taxable portion of a trust distribution when part of DNI is tax-exempt?
Taxable portion = Distribution × (Taxable DNI ÷ Total DNI)
Example: If DNI = $20,000 (with $5,000 tax-exempt and $15,000 taxable) and $1,000 is distributed,
then $1,000 × 15,000 ÷ 20,000 = $750 taxable and $250 tax-exempt.
70
When is a corporation most likely to elect S corporation status?
When losses are expected, especially in the start-up years, so they can flow through to shareholders’ individual returns.
(S corps are pass-throughs; C corps are double-taxed. S corps can’t issue preferred stock and still provide limited liability.)
71
What is one similarity between a C corporation and a general partnership?
Both can have more than one owner, but only a C corp is taxed as a separate entity.
Partnerships are pass-through; C corps face double taxation.
72
When can you deduct medical expenses charged on a credit card or paid for a dependent’s prior-year expenses?
* Credit card charges count as paid when charged, not when the bill is later paid.
* Medical expenses for dependents (including deceased) qualify if they otherwise meet dependency rules (gross income and joint return tests waived).
73
Why does a real estate agent exchanging properties held for sale not qualify for §1031 like-kind exchange treatment?
Because property held primarily for sale (dealer property) is not eligible for §1031 deferral.
* Jenny’s building = inventory → must recognize full gain.
Gain = FMV received – basis given up → $300,000 – $100,000 = $200,000 recognized gain.
74
Can a cash-basis taxpayer deduct a bad debt for unpaid client invoices?
No. A cash-basis taxpayer can only deduct bad debts if the income was previously included in taxable income.
Because unpaid invoices were never recognized, there’s no deduction.
75
When a below-market loan is made between individuals, how is interest treated for tax purposes?
The IRS imputes interest at the Applicable Federal Rate (AFR).
* Lender reports the full AFR interest as income.
* Borrower is treated as having paid that interest.
* The difference between AFR interest and actual interest paid = gift from lender to borrower.
76
What are the key tax rules for long-term capital gains and basis recovery?
* Long-term capital gains require holding an asset more than one year.
* They are taxed at preferential rates (0%, 15%, or 20%).
* Qualified dividends are taxed at long-term rates, not short-term.
* A taxpayer’s basis is recovered tax-free when an asset is sold — only the gain is taxable.
77
How do you calculate AGI when a taxpayer has Schedule C income, sells depreciated business equipment, and has a capital loss carryforward?
1️⃣ Add Schedule C income
2️⃣ Add Section 1245 recapture gain (ordinary)
3️⃣ Subtract $3,000 max capital loss offset (if carryforward exceeds $3k)
✅ Example: $25k Schedule C + $2k recapture − $3k capital loss = $24k AGI
78
What integration (permitted disparity) methods are allowed for Defined Benefit vs Defined Contribution plans?
* Defined Benefit: Can use either excess or offset methods.
* Defined Contribution: Can use only excess method (no offset allowed).
💡 Mnemonic: DB can do both, DC just excess.
79
How is employer stock with NUA taxed when distributed and later sold?
At distribution:
* Cost basis → ordinary income.
* NUA → not taxed yet.
At sale:
* NUA → LTCG (regardless of holding period).
* Post-distribution gain → LTCG if held >1 yr.
💡 Formula: LTCG = NUA + (sale – FMV at dist).
80
What is fixed and what is variable in a target benefit plan?
* Fixed: Employer contribution (mandatory each year)
* Variable: Employee’s ultimate retirement benefit (depends on investment performance)
💡 Think: Defined Contribution plan, defined by contribution not benefit.
81
What are the key eligibility and setup rules for SIMPLE plans?
-Employer ≤100 employees
-Employee eligibility: $5k in any 2 prior years + expected $5k this year
-Self-employed can establish one
-Roth contributions now allowed (SECURE 2.0)
82
How do SEP plans compare to qualified plans in limits and rules?
-Same §415(c) contribution limit (≈ $70k in 2025).
-Same nondiscrimination & top-heavy rules.
-Same funding deadline (tax return + extensions).
-Same creditor protection.
💡 Difference = simpler admin, contributions to IRAs.
83
What taxes and vesting rules apply to employee elective deferrals under a CODA (401k)?
-Not subject to current income tax
-Subject to FICA when earned
-Immediately vested (nonforfeitable)
💡 Mnemonic: Income deferred, FICA incurred.
84
How are Roth IRA and 529 withdrawals taxed when used for college?
Roth IRA:
-Contributions: tax/penalty-free
-Earnings: taxable (if not 59½), no 10% penalty (education exception)
529:
-Tax-free & penalty-free if used for qualified education expenses.
85
What’s the main tax benefit of a tax-advantaged retirement plan to the employer?
-Employer contributions = immediate tax deduction
-Plan avoids many ERISA compliance costs
-Still provides tax-deferred growth
86
What’s the maximum ISO term?
10 years from the date of grant.
87
What’s the key difference between FICA and income tax when it comes to 401(k) deferrals?
401(k) deferrals reduce income tax but not FICA/FUTA
88
What’s the maximum plan loan amount allowed from a qualified plan?
Lesser of $50,000 or ½ vested balance (minimum safe harbor: $10,000).
89
What happens if a plan loan defaults?
It’s a deemed distribution → income tax + 10% early withdrawal penalty if under 59½.
90
What does “integration with Social Security” mean?
Giving higher contributions/benefits to employees earning above the Social Security wage base.
91
Are dividends on employer stock or life insurance inside a 401(k) included in annual additions?
❌ No — dividends are excluded.
92
Which plan types can integrate with Social Security?
Qualified plans — Defined Benefit, Profit-Sharing, Money Purchase, Target Benefit, and SEP.
93
Which plans cannot integrate with Social Security?
SIMPLEs, IRAs (traditional/Roth), and ESOPs.
94
How is a Target Benefit Plan different from a Cash Balance Plan?
Target Benefit = DC plan with actuarial formula; Cash Balance = DB plan with hypothetical accounts.
95
Are SEP contributions mandatory?
❌ No — employer decides annually (discretionary).
96
Can SEPs be integrated with Social Security?
✅ Yes — they’re treated as qualified DC plans for this purpose.
97
When does the 5-year Roth IRA clock begin?
January 1 of the tax year for which the first Roth contribution is made.
98
If a 2022 Roth contribution is made on April 1, 2023, when does the 5-year period end?
December 31, 2026 — first qualified year = 2027.
99
What percentage of a qualified plan cash distribution is withheld for taxes?
20% mandatory withholding.
100
What do all qualified, SEP, and SIMPLE plans have in common?
They all provide for deferred compensation — income earned now, received later.
101
Does a 401(k) plan use a benefit formula?
❌ No — that’s a defined benefit plan feature.
102
ESPP — key CFP facts?
* §423 plan (not a retirement plan)
* Max 15% discount on stock
* No AMT on exercise
* Can exclude part-timers
* Doesn’t make you active for IRA
🧠 “Easy Stock Price Perk – 15% off, no AMT, not a plan”
103
Which plans can offer 401(k) salary deferrals?
✅ Profit-sharing
✅ ESOP
✅ Traditional DB (DB(k))
❌ Cash Balance
🧠 “DC and DB(k) = OK; Cash Balance = No Way”
104
When is a New Comparability Plan most appropriate?
* Large employer, different owner ages
* Desire to skew benefits to key owners
* Uses employee groups + cross-testing
🧠 “New Comp = New Groups, Older Owners Win.”
105
Who enforces fiduciary conduct under ERISA?
✅ DOL (Department of Labor)
* Enforces fiduciary standards
* Oversees reporting/disclosures
🧠 “DOL = Duty Of Loyalty watchdog”
106
403(b) – Age-55 separation rule?
✅ 10% penalty waived if separated from service in or after the year turning 55.
⚠️ Rule applies to 403(b) and 401(k), not IRAs.
🧠 “55 & gone = penalty gone. Don’t roll to IRA.”
107
Unfunded excess benefit plan — ERISA requirements?
❌ None (no reporting, disclosure, funding, vesting, or fiduciary).
🧠 “Excess = Exempt.”
108
Which retirement plans can a sole proprietorship sponsor?
✅ Defined Benefit
✅ Money Purchase
✅ Profit-Sharing
❌ 403(b)/TSA
🧠 “Sole prop = self-employed, not school.”
109
Target Benefit Plan — key CFP facts?
* Defined contribution plan 🎯
* Fixed contribution formula (actuarial, age-based)
* Not guaranteed benefit
* Older participants get higher contributions
🧠 “Target = Aim for benefit, not promise it.”
110
Client deferred 1st RMD to April 1. When is next RMD due?
* Next (current year) RMD due Dec 31 of same year.
* Planner should advise early withdrawal if client unavailable.
🧠 “April 1 first, Dec 31 the rest. Two in one year if you defer.”
111
How are Social Security credits earned in 2025?
* 1 credit = $1,810 of covered earnings
* Max 4 credits per year
* Based on earnings, not time worked
🧠 “$1,810 per credit, max 4.”
112
Key limits & tax rules for 403(b) (TSA) plans?
* Only annuities or mutual funds allowed
* Employer contributions optional, tax-deferred
* 501(c)(3)s don’t deduct — they’re tax-exempt
113
Nondeductible Traditional IRA vs Roth IRA — withdrawal order?
* Traditional: Pro-rata (mix of basis + earnings)
* Roth: FIFO — contributions out first, always tax-free
114
SIMPLE 401(k) — key CFP facts?
✅ 3% mandatory match
✅ Immediate vesting
✅ No 25% penalty (10% normal)
✅ Roth allowed, no non-Roth after-tax
🧠 “SIMPLE 401(k) = 401(k) rules, SIMPLE limits.”
115
Best plan for young, growing company with variable profits?
✅ Profit-sharing plan — contributions discretionary, flexible, low cost.
❌ Age-weighted/Target → for older owners
❌ Money purchase → fixed contributions
🧠 “When profits swing, pick profit-sharing.”
116
TSA vs 457(b) — key CFP difference?
✅ Both can be 100% employee-funded
❌ Only 403(b) = active participant
❌ No NUA for either
✅ Both require RMDs
🧠 “403(b) = active plan; 457(b) = deferral plan.”
116
Top-heavy profit-sharing plan — minimum non-key contribution?
✅ 3 % of compensation (or highest % to key, if less)
117
What are examples of premortem techniques to increase estate liquidity?
Actions taken before death—selling illiquid assets, purchasing life insurance, or creating buy-sell agreements.
118
What does §6166 allow for estates with closely held businesses?
Payment of estate tax in installments (up to 15 years) if the business >35% of AGE.
119
What is the percentage threshold for §2032A special use valuation?
Real property used in the business must be ≥50% of the AGE.
120
What is overqualification in estate planning?
When too many assets qualify for the marital deduction, wasting the decedent’s exclusion.
121
What tool prevents overqualification?
A B trust (credit shelter trust) that uses the decedent’s exemption amount.
122
What is portability in estate planning?
The ability of a surviving spouse to use the deceased spouse’s unused estate tax exemption (DSUE) if elected on Form 706.
123
What is one advantage of probate?
It provides heirs with clear title to property.
124
Are completed gifts made within 3 years of death included in the gross estate?
No — only gift taxes paid are included; the gift itself is not.
125
Are charitable bequests included in the gross estate?
Yes, but the estate gets an offsetting deduction.
126
Is a personal residence countable for Medicaid eligibility if one spouse remains living there?
No — it’s a noncountable asset
127
Is a single-life annuity included in the gross estate?
No — it terminates at death, leaving no value to transfer.
128
What is a survivorship clause?
A clause in a will or trust requiring a beneficiary to outlive the decedent by a set number of days to inherit.
129
Why use a survivorship clause?
To prevent property from being taxed twice if deaths occur close together.
130
Does portability apply to siblings or non-spouses?
No — only to married spouses.
131
What is a net gift, and why would a donor choose to make one?
A net gift is a taxable gift where the donee agrees to pay the gift tax instead of the donor.
* Because the donee assumes a liability, the taxable value of the gift is reduced by the amount of the gift tax paid.
* It’s often used when the donor is asset-rich but cash-poor, wants to reduce their taxable estate, and can’t afford to pay gift tax out-of-pocket.
* The arrangement lowers the donor’s taxable gift, keeps gift tax out of the donor’s estate, and helps shift wealth efficiently.
🧠 Hook: “You pay the tax, I shrink my estate.”
132
In a stock redemption (entity purchase) agreement, who owns and pays for the life insurance policies, and for how much coverage per owner?
* The company owns and pays for one policy on each shareholder.
* Each policy’s face value equals that shareholder’s ownership interest (in this case, $250,000 each).
* Upon death, the company uses the death benefit to redeem the deceased owner’s shares from their estate.
133
Is the annual exclusion available for a gifted life insurance policy?
✅ Yes — if the transfer gives the donee a present interest (immediate ownership rights).
134
What is the Interpolated Terminal Reserve (ITR), and when is it used?
It’s an IRS-approved estimate of a life insurance policy’s fair market value when the policy is already in force and being gifted.
Calculated as the average reserve value between two policy anniversaries, plus any unearned premium.
Used to determine gift tax value for existing policies with ongoing premiums.
135
Why are Crummey powers often added to §2503(c) trusts but not §2503(b) trusts?
Because §2503(b) trusts already provide a present interest (income must be distributed annually), so they automatically qualify for the annual exclusion.
§2503(c) trusts involve future interests (principal locked until age 21), so a Crummey withdrawal right temporarily gives the beneficiary a present interest, making the contribution eligible for the annual exclusion.
136
What are the estate-tax and qualification rules for a Charitable Remainder Annuity Trust (CRAT) where the spouse is the sole income beneficiary?
* The spouse’s annuity qualifies for the marital deduction because she is the only non-charitable beneficiary.
* The remainder interest to charity must have a present value ≥ 10% of the initial FMV of assets transferred.
* If the remainder value is <10%, the trust fails to qualify as a CRAT.
137
Which gifts trigger the generation-skipping transfer tax (GSTT)?
* GSTT applies to transfers made to skip persons, generally two or more generations below the donor.
* Spouse or former spouse of the donor → not a skip person.
* Spouse or former spouse of a lineal descendant → same generation as the descendant → not a skip person.
* Grandchild → skip person (unless the parent has predeceased).
138
What are the distribution rules for a simple trust?
* Must distribute all income annually.
* Cannot distribute corpus (principal).
* Cannot make charitable gifts.
If any of these rules are broken → the trust becomes a complex trust.
139
When is a QDOT required and what are its key rules?
* Required if surviving spouse is not a U.S. citizen (no automatic marital deduction otherwise).
* Must have ≥1 U.S. trustee (individual or corporate).
* All income must be distributed annually to the spouse.
* Executor makes the election on Form 706, not the decedent.
140
What are the requirements for married couples to elect gift splitting?
* Can be elected even if only one spouse owns the property gifted.
* Must file Form 709 to make the election, even if total gifts are within the annual exclusion.
* Both spouses must consent to the election (either by filing their own 709 or by signing one jointly).
141
Which charitable vehicles provide an inflation-adjusted income stream, a current deduction, and allow future contributions?
✅ Charitable Remainder Unitrust (CRUT)
✅ Pooled Income Fund (PIF)
Both:
* Pay variable income that can increase with inflation
* Allow additional contributions
* Give donor a current income tax deduction for the remainder value going to charity
142
If property is sold before the alternate valuation date, how is it valued for estate tax purposes?
When the Alternate Valuation Date (AVD) is elected,
Property sold, distributed, or exchanged within 6 months of death is valued on the date of disposition, not at 6 months or date of death.
Property still in the estate after 6 months is valued at 6 months after death.
143
What happens to assets in a revocable trust at the grantor’s death?
Included in the grantor’s gross estate (retained control under §2038).
Receive a stepped-up basis to FMV at date of death (or AVD).
Trust becomes irrevocable.
Assets avoid probate but not estate tax inclusion.
144
Which types of assets do not receive a step-up in basis at death?
❌ Income in Respect of a Decedent (IRD) assets, including:
IRAs & retirement plans
Variable annuities
Unpaid wages, interest, or dividends
✅ Step-up applies to:
Real estate
Securities
Tangible personal property (art, jewelry, etc.)
Decedent’s share of joint property
145
What are the key characteristics of an entity-redemption buy-sell agreement funded with life insurance?
* No gift tax consequences (entity owns policies).
* Death proceeds not directly included in the deceased owner’s estate.
* Policy proceeds increase the value of the business (and thus, the decedent’s stock).
* If properly drafted, the agreement fixes the value for estate tax purposes.
146
What is the purpose of Chapter 14 valuation rules for estate and gift tax?
* Prevents intrafamily undervaluation of business interests or retained rights.
* Applies to estate freezes, GRATs/GRUTs, buy-sell agreements, and preferred stock recapitalizations.
* Retained interests often valued at zero, causing immediate gift of the entire transferred value.
* Can apply to nonfamily transfers if not at FMV.
147
What happens when a Crummey power lapses above the 5-and-5 limit?
* The lapse is treated as a taxable gift by the beneficiary to the other trust beneficiaries.
* 5-and-5 Rule: No gift if lapse ≤ greater of $5,000 or 5% of trust value.
* Lapse > limit = gift → must file Form 709.
148
What happens when three different people occupy the roles of owner, insured, and beneficiary in a life insurance policy?
* The owner is treated as having made a taxable gift to the beneficiary when the insured dies.
* Known as the “Unholy Trinity” or “Goodman Triangle.”
* Death proceeds are income tax-free, but the transfer is subject to gift tax.
* Avoid by keeping only two people in the arrangement or using an ILIT.
149
When selling to a family member, how does a SCIN differ from a private annuity and bargain sale?
SCIN = Sale for FMV, secured, cancels at seller’s death → no gift.
Private annuity = Sale for FMV, unsecured, payments stop at death.
Bargain sale = Sale below FMV → part gift, triggers gift tax.
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