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Today's question concerns Estate Planning . The question/task is below: Describe the Charitable remainder annuity trusts (CRATs). Answer: In a charitable remainder annuity trust (CRAT), the income tax deduction equals the total value of the property less the present value of the retained interest income. As with the other CRTs, the income recipient will be a noncharitable beneficiary (the donor, typically). Either a fixed amount or a fixed percentage of the initial value of the trust must be paid to the noncharitable beneficiary the annuity percentage cannot be less than 5% or more than 50% of the initial fair market value of all the property transferred in trust. At inception, the remainder interest must be greater than or equal to 10% of the original value of the property transferred to the trust. The remainderman, again will be the charity, and additional contributions are not allowed.
Today's question concerns Income Tax Planning. The question/task is below: Describe the Tax accounting methods: cash method, accrual method, hybrid method. Answer: In the cash method of tax accounting, taxpayers recognize all income when it is received and recognize all expenses when they are paid. Taxpayers include all of the items of income that have been constructively received, and deduct all bills that have been paid. Any expenses paid in advance are deducted when they apply. This method is used most often by service businesses, or those with little or nonexistent inventory. In the accrual method, income is recognized when earned; expenses are recognized when incurred; income and expenses are matched for the current year; items of income are included when earned; and all the events that set the individual's right to receive income must have happened. This method is used in businesses that are constantly purchasing inventory. A hybrid method of tax accounting is any one that includes elements of the cash and accrual methods.
Today's question concerns General Principles of Financial Planning .
The question/task is below: Describe the Code of Ethics and Professional Responsibility terminology: Fee-only, financial planning engagement, personal financial planning. Answer: The Code of Ethics and Professional Responsibility defines a number of terms that are essential to the practice of financial planning. The terms fee-only refers to a method of compensation in which compensation is received only from the client, and there is not compensation for a financial planner that depends on the purchase or sale of any financial product. A financial planning engagement is said to exist when a client is relying on the information or services provided by a CFP Board designee using the financial planning process. Personal financial planning, also known just as financial planning, refers to the process of determining the proper means for an individual to achieve his or her financial goals through the financial planning process.
Today's question concerns Employee Benefits Planning. The question/task is below: Describe the Nonqualified deferred compensation: rabbi trust. Answer: A rabbi trust is an irrevocable trust set up by an employer for a nonqualified deferred compensation (NQDC) plan. These funds will be set aside prior to the employee's retirement, and secured against an unwillingness to pay. Funds contributed to the trust must be available to pay benefits to the employees; assets cannot revert back to the employer even after a hostile takeover. Funds are typically subject to the claims of all general creditors of the company in the event of a bankruptcy. A rabbi trust is not allowed to contain insolvency triggers that hasten payments to executives when the employer's net worth falls under a certain point. Typically, rabbi trusts are used to fund deferred compensation plans. These funds can be useful if the firm undergoes a merger or hostile takeover, but provide no benefit in the event of bankruptcy. Today's question concerns Investment Planning. The question/task is below: Describe the Mortgage pass-through securities. Answer: Mortgage pass-through securities represent a self-amortizing pool of mortgages. The payments for these are made on a monthly basis, and are composed of a scheduled principal and interest. If no prepayments are made, then monthly cash flows will be consistent. There are several benefits of mortgage passthrough securities, especially for fixed-income investors: they may have yields up to 200 basis points higher than comparable government and corporate fixed-income debt; they are also considered to have a higher quality of credit than AAA corporate bonds, because they are issued by federal agencies; they tend to be very liquid in the marketplace; and they are a good source for investors interested in receiving a monthly income. There is a bit of reinvestment rate and interest rate risk associated with these policies.
Today's question concerns Retirement planning. The question/task is below: Describe the Unrelated business taxable income.
Answer: Unrelated business taxable income is any gross income above $1000 generated by a qualified retirement plan trust that is carrying on a trade or business not related to the purpose of the trust. According to the IRS, qualified retirement plans in which funds are invested into a common trust have unrelated business taxable income in the same amount as it would have if it made the same investment directly. The income generated either by a common trust fund operating a business or an IRA purchasing a limited partnership interest will be considered UBTI when it is passed through to a qualified retirement plan or IRA. Passive income is not considered UBTI. Dividends from stocks purchased on the margins, as well as income from non-real-estate partnership interest are considered UBTI. Today's question concerns Insurance Planning and Risk Management. The question/task is below: Describe the Endowment policies. Answer: One less-common kind of life insurance policy is known as an endowment policy. In an endowment policy, the death benefit will be equal to the cash value at maturity. The purchaser of an endowment policy can specify the maturity date of the policy (these are usually terms of ten, fifteen, twenty, or more years). At age 100, while life insurance will be identical in design to an endowment, as cash value equals the death benefit. A change in federal income tax law made in 1984 eliminated the tax-advantaged buildup of an endowment's cash value. The current sale of endowment contracts is very limited in the United States. Today's question concerns Employee Benefits Planning. The question/task is below: Describe the Split-dollar policy. Answer: A split-dollar insurance policy, like executive-bonus life insurance, gives an employer the opportunity to provide life insurance for a selected employee. If the employee should die, the death benefit is split such that the corporation will receive a return of its contributions, called the cash surrender value; and the beneficiary will receive the net amount at risk. The premium is split between employer and employee: the employee pays the portion of the premium that is considered as the economic benefit (specifically, the lesser between the P.S. 58 cost or the "standard risk") of the insurance protection for that year; the employer pays the portion of the premium that is left over. Today's question concerns Estate Planning . The question/task is below: Describe the Powers of appointment: 5 or 5 power. Answer: The so-called five or five power is used to avoid both estate and gift taxes. Right of invasion will have to be made noncumulative. The property that is subject to the general power of appointment will be included in the estate of the holder only to the extent that the property could have been appointed by the exercise of the power (but has lapsed) goes over which ever is greater, $5000 or 5% of the total value of the funds subject to the power at the time of the lapse. The failure to exercise will result in gifts to the remainderment of the trust, with a yearly reduction by the amount of the holder's life estate in the lapsed amounts. If a beneficiary has 5 or 5 power and fails to exercise it in a given year, the beneficiary will become the grantor of that portion of the trust over which the power has lapsed. Today's question concerns Investment Planning. The question/task is below:
Describe the Bond convexity. Answer: Bond duration and approximate change in price bear an interesting relation to one another. Actual price change will be greater than estimated price change when yields decrease, and actual price will be less than estimated price change when yields increase. The greater the change in yields, the less exact will be the measure of duration. This is because actual price as charted on a price-yield graph is a curved line, and the closer it gets to any extreme, the more it departs from the straight line of estimated price. When financial planners are able to measure the degree of bond convexity, they can better predict the price of a bond. Typically, duration is used to calculate the first percentage change in price, and convexity is used to calculate the second, and is added to duration. Today's question concerns Income Tax Planning. The question/task is below: Describe the Operation of the MACRS. Answer: The modified accelerated cost recovery system does not consider the estimated useful life of an asset when computing tax depreciation. Assets that have a 3, 5, 7, or 10 year recovering period are depreciated using a 200% declining-balance method. This method will be switched to a straight-line computation when the straight-line computation provides a greater reduction. Depreciation tries to recoup the costs of the assets that are purchased for use in a trade or business. It reduces the cost basis of an asset, and therefore increases future gains; at the same time, it reduces current income by providing a deduction in the calculation of the business' net income. Today's question concerns Retirement planning. The question/task is below: Describe the Required minimum distribution: rules, life expectancy method of calculation. Answer: A required minimum distribution (RMD) will apply to qualified plans, IRAs, SEPs, SIMPLE IRAs, and Section 457 government deferred compensation plans. The calculation base for RMD is the balance as of the end of the previous calendar year to the distribution. Required minimum distribution will be calculated separately for each IRA, though distributions may be taken from any account in order to satisfy the minimum. In the life expectancy method of calculating RMD, the owner's account balance is divided by the appropriate life expectancy. In order to satisfy the rules of RMD, the entire interest must be distributed by the required beginning date, or interest must be distributed over the lifetime of the participant, or the life of the participant and beneficiary. Today's question concerns Estate Planning . The question/task is below: Describe the Suitability of gifting as a planning strategy, techniques for gift-giving. Answer: In order for a transfer to be seen as a valid gift: the donor must be capable of transferring property; the donee must be capable of receiving an possessing property; there must be acceptance by either the donee or the donee's agent; and the donor must not have any interest in the property. The designer of a gifting program should try to give assets that have a high rate of return, in order to avoid a buildup of revenue that would be taxed at the donor's tax rate. If growth assets are given, then post-gift appreciation will not be taxed in the donor's gross estate. A gift of income-producing property will eliminate the income tax payable by the donor on the property. In general, one should avoid giving installment obligations, since one would then have to recognize the entire untaxed proceeds at the time of transfer.
Today's question concerns Employee Benefits Planning. The question/task is below: Describe the Junior stock, performance share/unit plans. Answer: Junior stock is a restricted stock that can be converted into common stock if certain performance goals are met. Junior stock may be converted automatically, or at the option of the employee. When junior stock is purchased at fair market value, there is no tax to the employee when it is issued. The employee will recognize the gain on the date that he or she sells the common stock received in exchange for common stock. Another type of plan is the performance share/unit plan. In this plan, awards are granted at the beginning of a specified time period, and are earned through the achievement of performance goals. This payment will be made either in cash or in stocks. Performance shares or units are taxed as ordinary income on the day that payments are made.
Today's question concerns Investment Planning. The question/task is below: Describe the Tactical asset allocation, passive and active portfolio management, dealing with concentrated positions. Answer: When an investor engages in tactical asset allocation, he or she is using security selection as the main determinant in developing a portfolio. Regular asset allocation tends to use an investment policy. A passive portfolio management strategy begins by establishing specific percentages for each asset class, and then rebalancing occasionally to maintain these percentages. In an active strategy, on the other hand, the most important factor is market timing. When dealing with a tax-deferred retirement account, it is most appropriate to rebalance a portfolio to maintain asset allocation percentages, since the gains on these securities will not be taxed. This is also appropriate for regular accounts, although constant rebalancing can make tax reporting overly complicated.
Today's question concerns Income Tax Planning. The question/task is below: Describe the Estimated taxes and withholdings, net operating loss. Answer: For most taxpayers, the required annual payment will be whichever is lower: 90% of the tax shown on the current year's return or 100% of the tax shown on the prior year's return. A quarter of the required annual payment must be paid by the 15th of April, June, September, and January; if the tax on the return is less than $1000, though, there can be no underpayment penalty. For corporations, estimated payment is either 100% of the past year's tax or 100% of the current year's tax. A net operating loss is an excess of business deductions over gross income for a particular tax year. NOL deductions are allowed as either carrybacks or carryovers to other tax years in which gross income exceeded business deductions. NOL deduction is permitted for individuals, corporations, estates, and trusts, but is forbidden for partnerships and S corporations. Today's question concerns Estate Planning . The question/task is below: Describe the Duties of a fiduciary.
Answer: A fiduciary is any individual or organization that has been given the power to manage the assets of another. Some of the people who are considered fiduciaries are executors, administrators, personal representatives, and custodians. Fiduciaries are required to exercise loyalty in making decisions concerning the estate, meaning that the must be confidential and always act in the nest interests of the party they represent. A fiduciary must also exercise care, diligence, and prudence when handling the estate of another. Finally, a fiduciary is charged with preserving and protecting estate assets; this can mean both protecting material assets and making productive investments. Today's question concerns General Principles of Financial Planning . The question/task is below: Describe the Pro forma statement. Answer: A pro forma statement forecasts future balance sheets and cash flow statements. Sometimes, the best way to create a pro forma statement is to consider three scenarios: the worst-case budget, in which income is lowest and expenditures are highest possible; an average-case budget, in which both income and expenditures are at a reasonable level; and a best-case budget, in which income is highest and expenditures are at lowest possible. These three measures typically are enough to create pro forma statements that can serve as a rough guide to the potential cash flow over the coming year. Today's question concerns Employee Benefits Planning. The question/task is below: Describe the Voluntary employee beneficiary association (VEBA). Answer: A voluntary employee beneficiary association (VEBA) is a multiple-employer trust that can be used to prefund employee benefits. In a VEBA, employer deposits are immediately tax deductible. VEBAs that comply with IRC Section 501(c) (9) and Section 505 are exempt from an income tax on earnings. These associations are usually expensive to set up and administer, and are governed by stricter IRS regulations. The benefits a VEBA is created to provide include sickness or accident compensation, vacation pay, child care, education and job training benefits, and preretirement death benefits. Only plan benefits, and not trust earnings, are paid out to individuals through a VEBA. Membership in a VEBA is voluntary for the employee; the employee's beneficiaries may also join, and noncurrent employees may as well provided that they do not make up more than 10% of total membership.
Today's question concerns Retirement planning. The question/task is below: Describe the Section 403(b) plans: eligibility, plan characteristics. Answer: Section 403(b) plans, also known as tax-deferred annuity plans or tax-sheltered annuity plans, cannot be offered without being available to all employees regardless of age, service, or union affiliation. In order to adopt such a plan, an organization must be either a tax-exempt employer as described in Section 501(c) (3) of the Code, or an educational organization. These plans are funded by employee contributions and may be rolled over to traditional IRAs, as well as other 403(b) plans, 401(k) plans, or 457 plans that are maintained by a state or local government. Although they are not considered to be qualified plans, they are subject to similar restrictions. These plans are subject to ERISA if an employer contributes, but are exempt if employee participation is voluntary, or if all the rights under the annuity contract are controlled by the participant.
Today's question concerns Estate Planning . The question/task is below: Describe the Transfers through trusts. Answer: There are three parties to a trust: the trustor, who creates the trust and who funds it; the trustee, who has legal title and manages the trust assets; and the beneficiary, who enjoys the beneficial interest in the trust. In an inter vivo (living) trust, the trust is activated immediately after it is created, and is funded during the lifetime of the trustor. In a testamentary trust, the creation of the trust is written into the will and activated upon the death of the trustor. There are five main reasons for transfers through trusts: to provide for more than one beneficiary; to manage property in the event that the trustor is incapacitated; to protect beneficiaries; to avoid probate; and to reduce transfer taxes. Trusts are said to be transferred by contract if they are passed through life insurance contracts, annuities, qualified retirement plans, buy-sell agreements, or prenuptial agreements. Today's question concerns General Principles of Financial Planning . The question/task is below: Describe the yield curve. Answer: A yield curve is a graph that shows the relationship between term to maturity and yield to maturity. A yield curve will show the relationship between interest rates and time, typically as relating to government Treasury securities. This graph is helpful for investors because rates do not usually change by the same amount as basis points across maturities. Yield curve risk is the risk that yields for different maturities may not change by the same amount of basis points across maturities. This risk can be measured with the help of duration, a measure of bond price sensitivity to interest rates. In general, short- and intermediateterm rates are lower in an upward-sloping yield curve. Today's question concerns Investment Planning. The question/task is below: Describe the Swaps. Answer: A swap is an investment technique in which bonds are sold and different bonds are purchased with the proceeds, for the purposes of deriving advantageous tax treatment, yields, maturity structure, or trading profits. In a substitution swap, bonds with virtually identical characteristics but different yields are swapped. When the difference in yields between the bonds is huge, it is called an intermarket spread swap. When a low-yield bond is sold and a high-yield bond purchased (typically because it has a longer maturity), it is known as a pure-yield pickup swap. A swap that is designed to handle an expected interest rate change is called a rate anticipation swap. When an investor seeks to lock into a loss, he or she may execute a tax swap, selling a bond only to then buy a similar bond. Today's question concerns Income Tax Planning. The question/task is below: Describe the Tax implications of divorce. Answer: Alimony is a series of payments made by one spouse to another, sometimes through an intermediary. The recipient of alimony may be taxed on it, while the payor may deduct it from taxes. Alimony payments must be made in cash; must occur between two parties who do not live together; and must avoid front loading. Front loading is a method of property settlement in which payments are large at the beginning and then decrease quickly. Child support payments will be established by the courts, and will be based on a ratio of
each parent's income, the percentage of time the child spends with each parent, and the amount of alimony. Child support is not deductible by the payor, and is not included in the income of the recipient. The child can only be claimed as an exemption by one parent in each year Today's question concerns Insurance Planning and Risk Management. The question/task is below: Describe the Long-term care insurance: comparing policies. Answer: There are a few considerations that consumers should make before settling on a long-term care insurance policy. First, a policy should always be guaranteed renewable for life. Also, a three-month waiting period will usually offer the best value relative to the premium. A policy should provide coverage for skilled, intermediate, and custodial care. It may be prudent to select a policy that does not require hospitalization before entering a nursing home. Not every policy will provide coverage for Alzheimer's disease. One should always select a policy that provides for unanticipated rises in the cost of long-term care. Finally, one should select a policy that provides for a waiver of premiums in the event of disability, and that provides level premiums for life. Today's question concerns General Principles of Financial Planning . The question/task is below: Describe the types of acquisition and disposition. Answer: When a business is liquidated, all of the properties are distributed to the shareholders, and the business' stock is cancelled. Many times, the tax treatment after a liquidation may be disadvantageous, so liquidation may not be the appropriate way to end a business. A corporation will have to pay a tax on capital gains when it distributes property to shareholders. In the taxable sale of a business, the sale of stock creates a taxable gain to the people selling stock, which will be equal to the difference between the selling price and their basis. This asset sale will create a taxable gain for the corporation should the selling price exceed the corporation's basis. In a tax-free disposition of a business, stock sale will qualify as long as 80% of voting power and at least 80% of the other stock in the seller are transferred to the acquiring firm in exchange for only voting stock in the buyer. In a tax-free sale, there is no tax to the seller or to the selling corporation at the date of sale. Today's question concerns Employee Benefits Planning. The question/task is below: Describe the Group disability insurance. Answer: Disability insurance protects individuals for whom injury or illness has made gainful employment impossible. Disability insurance may be integrated with Social Security, worker's compensation, or other income. To the extent that other benefits are payable, disability benefits payable may be reduced. Premiums that are paid by an employer will be tax-deductible to the employer if benefits are paid. Any benefits that are attributable to employer-paid premiums will be taxable to the employee. The premiums paid by the employer are nontaxable to the employee
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