1. How much money market fund income did the Mayfields earn during the year?
a. $0
b. $6,000
c. $6,325
d. $7,200
2. Which of the following statements is true?
I. Peter must report $110 in § 79 income for tax purposes.
II. Because Peter is over age 50, he does not need to report § 79 income.
III. § 79 income helps reduce a client's taxable income.
IV. § 79 income should be accounted for as a taxable expense on the income and expense statement.
a. II only
b. I and II only
c. I and IV only
d. II and III only
e. II, III, and IV only
3. How much of the Mayfields' gross income is considered total income for tax purposes on IRS Form 1040?
a. $96,110
b. $90,000
c. $86,510
d. $80,510
4. All of the following statements about the Mayfields' level of discretionary cash flow are incorrect except:2
a. After paying all dedicated and discretionary expenses, the Mayfields have a negative cash flow.
b. Total dedicated expenses are greater than discretionary expenses.
c. Savings expenses make up the largest dedicated/fixed expense item for the Mayfields.
d. The Mayfields' savings ratio, including employer matching contributions, exceeds 10%.
5. Which of the following are strengths related to the Mayfields' financial situation?
a. Their savings rate, as measured by the savings ratio, is acceptable at this time.
b. Their debt as a percentage of net worth is low as measured by industry ratios.
c. They could easily pay off all of their debt using monetary assets.
d. All of the above.
6. Which of the following is true?
a. The Mayfields should choose to itemize deductions on IRS Form Schedule A.
b. Given their age, they will receive enhanced personal exemptions for this year's taxes.
c. They can claim a tax credit for gifts made to their grandchild this year.
d. The Mayfields' standard deduction is greater than their itemized deduction.
e. Both a and b are correct.
7. During a benefits presentation for all city employees, the presenter talked about the need for those in attendance to think about long-term care needs. Peter was shocked to learn how much one year of nursing home care would cost. He is worried about depleting assets if he or his wife should need this type of care. He wants to know whether he and his wife should purchase long-term care insurance. Which of the following statements best represents the strategy that the Mayfields should consider?
a. Purchase long-term care insurance because their net worth, exclusive of home value, is less than $1.5 million.
b. They do not need long-term care insurance because they can afford to self-insure the costs of care.
c. They should expect to spend down assets to a point where they will become eligible for Medicaid, and as such, they do not need long-term care insurance.
d. They do not need long-term care insurance because they can use a combination of assets, Medicare funding, and Medicaid reimbursement to fund care needs.
8. Peter was recently approached by a financial adviser who wanted Peter to consider investing in a variable annuity for retirement. A few days later the adviser called Peter again and said that a variable universal life (VUL) insurance policy could also be used to fund retirement needs. Which of the following statement(s) is (are) true in relation to annuities and VULs?
I. Given their favorable tax treatment, variable annuities and VUL policies allow earnings to grow tax deferred until withdrawn.
II. Distributions from the annuity, after age 59½, will be taxed at the long-term capital gain rate if the annuity has been in existence for at least one year.
III. Distributions from the VUL policy, if made in the form of a loan, will be taxed at the Mayfields' marginal tax rate.
IV. Distributions in the form of a VUL loan need not be reported on IRS Form 1040 for tax purposes.
a. I and II only
b. III and IV only
c. I and IV only
d. II, III, and IV only
9. Reducing a client's life expectancy assumption will have which of the following effects?
a. Increase the amount of life insurance needed.
b. Decrease the amount of retirement assets needed.
c. Increase the amount of retirement assets needed.
d. Both a and c are correct.
10. Which of the following disability insurance statements is true?
a. All of the benefits received by Peter from his disability coverage will be taxable because his employer paid the premium.
b. None of the benefits received by Peter from his disability coverage will be taxable because his employer paid the premium.
c. If Ann becomes disabled, she is eligible for coverage under her state's workers' compensation program.
d. Both a and c are correct.
e. Both b and c are correct.
11. Peter and Ann have been discussing the possibility of retiring as early as age 60. What do the Mayfields need to consider as factors that will impact the costs, risks, and benefits of this objective when conducting their planning?
a. Distributions from their qualified retirement plans at that time will be subject to a 10% early withdrawal penalty.
b. They can deal with the loss of health insurance by extending their current health insurance coverage using both
COBRA and HIPAA benefits until age 65, at which time they will be eligible to enroll in Medicare.
c. The cost of Medicare will increase dramatically for each year that they postpone enrolling after age 60.
d. None of the above.
12. Which of the following strategies should the Mayfields consider to increase their level of discretionary cash flow?
a. Pay off credit card debt with monetary assets.
b. Open a home equity line of credit.
c. Increase contributions to Peter's 403(b).
d. Increase IRS W-4 withholdings on an annual basis.
e. A and b only.
13. If Peter and Ann want to pay off their credit card debt, which of the following assets should they use first?
a. Money market fund
b. Proceeds from a 403(b) loan
c. I-bonds
d. Home equity
14. Suppose that the Mayfields decide to retire at age 60. How much do they need in assets at that time to fund income needs from ages 60-62, assuming that they still want $90,000 (in today's dollars) in annual income starting on their first day of retirement?
a. $114,009
b. $225,847
c. $228,018
d. $231,438
15. Peter and Ann are concerned about estate planning details. They have heard about income in respect of a decedent (IRD). They realize that their retirement plans could be subject to IRD taxation. Which of the following statements is true in relation to IRD property?
I. IRD property will be included in the Mayfields' estates at fair market value.
II. IRD property does not receive a step-up in basis.
III. IRD property is subject to income taxation when the heir or estate collects income from the property.
IV. IRD property will be included in the Mayfields' estates at a step-up in basis value.
a. I and III only
b. II and IV only
c. I, II, and III only
d. II, III, and IV only
16. Which of the following factors should help drive the Mayfields' decision to fund a capital preservation approach of retirement planning compared to a capital depletion method?
a. Their desire to leave a legacy at the death of the second spouse.
b. Their willingness to dedicate additional cash flow today to fund the higher retirement asset need in the future.
c. Their willingness to decrease their income replacement ratio assumption.
d. All of the above.
17. Calculating the future value of regular savings using a geometrically varying annuity assumption will tend to
a. reduce the future value of the asset.
b. reduce the tax liability of the asset.
c. increase the future value of the asset.
d. increase the interest rate used to calculate future value.
18. Peter and Ann would like to establish a gifting program for their grandchildren. They have two desires. First, they want to implement a strategy that does not allow the grandchildren to access principal prior to age 21, except to pay expenses for the welfare of the child. Second, they want to maintain the maximum flexibility in terms of the types of assets that they can gift. Which of the following alternatives meet(s) their desires?
a. A Uniform Gifts to Minors Act account
b. A § 2503(b) trust
c. A § 2503(c) trust
d. All of the above
e. B or c only
19. What is (are) the advantage(s) associated with suggesting prepaying the Mayfields' mortgage at this time?
a. The loss of the interest deduction will require them to claim the standard deduction.
b. Their annual level of discretionary cash flow will increase, which can be used to fund other financial goals and objectives.
c. They will have the satisfaction of knowing that they own their home outright.
d. All of the above.
e. B and c only.
20. The Mayfields should consider which of the following estate planning strategies to reduce the likelihood of owing federal estate taxes in the future?
a. Maximizing use of the marital deduction.
b. Gifting strategies to reduce the value of Peter's gross estate.
c. Using a credit equivalency or bypass trust arrangement.
d. A and b only.
e. B and c only.