FINC 351 Study Guide (Simple)

What is an engagement letter

A legally binding letter that establishes the relationship between the financial planner and the client

What does the engagement letter include

Scope of services, responsibilities of the planner and the client, time horizon/time frame for the work, compensation/fees, terms and conditions of the engagement

What is qualitative information in financial planning

Information about the client’s attitudes, feelings, goals, values, and preferences

What are some examples of qualitative information in financial planning

General attitude toward spending, risk tolerance, retirement goals, feelings about money

What is quantiative information in financial planning

Measurable financial information

What are some examples of quantitative information in financial planning

Income, expenses, assets, liabilities, taxes, account balances

What information is NOT qualitative information

Will and trust information

What is stage 1 of the financial planning process

understanding the client’s personal and financial circumstances

• tax returns

• Financial statements

• Bank statements

• Employee Benefits

(Gather information)

What is stage 2 of the financial planning process

Identify and select goals

• retirement goals

• education funding

• buying a home

(What does the client want)

What is stage 3 of the financial planning process

Analyzing the client’s current course of action and potentail alternatives

• calculating housing ratio

• calculating savings ratio

• analyzing cash flow

(where are we now and what could we do differently)

What is stage 4 of the financial planning process

Developing the financial planning recommendations

• Developing investment recommendations

• Developing retirement strategies

• Creating insurance strategies

(What should we recommend)

What is stage 5 in the financial planning process

Presenting the financial planning recommendations

• giving “martin” three education savings plans to choose from

(Here are your options/recommendations)

What is stage 6 in the financial planning process

Implementing the financial planning recommendations

• i.e. Johnny and June call the benefits office to change their tax withholding

(Do it)

What is stage 7 in the financial planning process

Monitoring progress and updating

• i.e. reviewing Martha’s retirement portfolio and determining whether she is on track

(Is the plan working)

What is a quick way to memorize the 7 steps of the financial planning process

Gather → Goal → Analyze → Recommend → Explain → Do → Review

What three ways can a financial planner receive compensation?

1. Assets under management (a percentage of assets managed)

2. Hourly fees (client pays based on time spent)

3. Commissions (compensation from investment or insurance products sold)

What is a PLUS loan

A federal education loan available to parents of dependent undergraduate students and graduate/professional students under the applicable federal rules.

PLUS = _ + _

Parent + Credit

What is a 529 Savings plan

A tax-advantaged education savings vehicle

What are qualified expenses under a 529

Tuition, fees, books, certain computers/computer equipment, other qualified education expenses

What limitations are there income tax-wise for a 529

There are no federal income limitations/phase-outs on who can contribute to a 529

True or false: contributions to a 529 do not receive a federal income-tax deduction

True

What is a grant

A financial aid that generally does not have to be repaid, assuming the applicable requirements are satisfied

What is the TEACH grant

Non-need-based aid for students who intent to teach in qualifying schools/educational service agencies serving low-income communities

What is the formula for financial need

Financial Need = Cost of Attendance - Student Aid index

What is FAFSA

Free application for federal student aid

What is the LLC

Lifetime Learning Credit

Helps offset qualified education expenses - max credit $2,000

Is the LLC limited to the first four years of postsecondary education

No you can use the LLC for graduate, undergraduate, professional, and other postsecondary educations

What is the AOTC

American Opportunity Tax Credit

Up to $2,500 per student

What is the basic structure of the AOTC

100% of the first 2,000

25% of the next 2,000

What kind of education does the AOTC apply to

Undergraduate education

Is success repayment considered a recognized repayment method

No

What kind of expense are required textbooks

Qualified

What is estate planning

A plan for managing property during one’s lifetime and at one’s death

What are estate planning goals

• minimize transfer taxes

• providing liquidity at death

• providing for family members

• managing property

• carrying out healthcare wishes

• controlling disposition of property

• protecting beneficiaries

Can a CFP draft legal documents such as a revocable trust document

No that must be drafted by an attorney

What is a will

controls disposition of assets that pass through teh probate estate

What is an advance medical directive

Communicates healthcare wishes if a person cannot make decisions for themself

What is a power of attorney

Allows another person to act on your behalf in specified circumstances

What is a trust

Can control property during life and/or after death

What documents would a financial planner ask a client to bring to an estate planning meeting

Any existing will and trust documents

What is “fee simple”

A form of property ownership giving the owner broad ownership rights (not limited to married couples)

What is Tenancy In Common

Multiple people own an interest in property (not limited to marreid couples)

What is Joint Tenancy with Right of Survivorship

When one joint tenant dies, their interest generally passes automatically to the surviving joint tenant(s)

What is Tenancy by the Entirety

A form of property ownership available ONLY TO MARRIED COUPLES

What is the law of small numbers

A psychological bias where people draw conclusions from small or insufficient samples of information and can affect financial/estate planning decisions

What are 3 relevant psychological factors when it comes to estate planning

1. Procrastination

2. Complex family dynamics

3. Law of small numbers

What is a simple trust

Generally must distribute its income currently/annually to beneficiaries under the applicable trust-tax rules

What is a complex trust

A trust that may accumulate income, distribute principal, make certain distributions beyond the requirements of a simple trust

What is a grantor trust

A trust where the grantor is treated as the owner for federal income-tax purposes because the grantor retains certain powers or interests specified by the tax rules.

What is a pourover trust

A trust that receives assets “pour over” into it from another source (wills, life insurance, retirement plan proceeds)

What is a revocable Inter Vivos Trust

A trust that was created during the grantor’s lifetime where the grantor retains the ability to revoke/change the trust

Upon the grantors death what happens to the assets of a revocable Inter Vivos Trust

Assets are included in the gross estate, and receive step-to-FMV basis

What is a bypass trust

AKA Credit Shelter Trust - it can provide benefits to a surving spouse while ultimately preserving the remaining assets for other beneficiaries such as children.

Why would someone want a bypass trust

• provide for surviving spouse

• preserve assets for children

• address estate-tax planning

• prevent assets from simply passing outright to the surviving spouse

What is a testamentary trust

A trust established at death, generally through the person’s will

What is a Inter Vivos Trust

A trust created during someone’s lifetime

What is QPRT

Qualified Personal Residence Trust

What are QPRT’s designed for

A home or vacation home

What is a GRAT

Grantor Retained Annuity Trust

The grantor transfers assets to the trust but retains an annuity interest for a specified period

What is Crummey power

Gives the beneficiary a temporary right to withdraw contributions made to a trust

What is the purpose of crummey power

help a contribution qualify as a present interest for the annual gift-tax exclusion

What is the 5-and-5 rules

If a beneficiary allows a crummey withdrawal right to lapse, the amount that can generally lapse without being treated as taxable gift to other beneficiaries is the greater of $5,000 or 5% of the trust principal

What is a 2503c trust

A trust designed to allow gifts to minors to qualify for the gift-tax annual exclusion

What is the important rule for 2503c trusts

The beneficiary must have the ability to receive the property outright when they reach age 21

What is an IDGT

Intentionally Defective Grantor Trust

Goal is generally to have the trust assets outside the grantor’s estate while still treating the grantor as the owner for income-tax purposes

What is special use valuation

Under IRC 2032A, qualifying property can potentially be valued based on its qualified use rather than its highest and best use

(i.e. farms best use = $6M, farms qualified agricultural use = $3M → 2032A can reduce the taxable value relative to the highest and best use value assuming all requirements met)

What is the recapture rule for 2032A

10-year recapture period, if the property stops meeting the requirements some of the tax benefit can potentially be recaptured

What is a qualifying disclaimer

Allows someone to refuse an interest in property without treating the property as having been transferred by that person for federal gift-tax purposes

What are the four requirements for a qualifying disclaimer

1. Written (must be in writing)

2. Nine months (must be made within 9 months)

3. No prior benefit (disclaiming person cannot have already accepted the benefits of the interest)

4. Cannot direct the property (the disclaiming person cannot direct the property to a particular person)

What is the alternate valuation date

6 months after the decedent’s death (only if it reduces the value of the gross estate and reduces estate tax liability)

What happens if the property is sold/disposed before the six-month alternate valuation date

use the value on the date of disposition

What is IRC 6166

Allows qualifying estates to defer payment of estate tax attributable to a qualifying closely held business interest

When is IRC 6166 useful

When a large portion of the estate consists of a closely held business

What is the special interest rule for 6166

2% interest rate applies to the applicable portion of deferred estate tax

What is the first four year rule for 6166

The first 4 years is interest only, principal payments begin after this period under the installment schedule

What happens if you fail to make 6166 payments

Acceleration of unpaid tax + loss of the special 2% rule

Wat is step-up in basis

When property is included in a decedent’s gross estate, it generally receives a basis adjustment to fair market value at the applicable valuation date

Estate Administration Expenses

Ordinary and necessary admin expenses paid by the estate’s fiduciary can generally be deducted on form 1041 OR form 705 ONE OR THE OTHER - NOT BOTH

What is form 1041

Fiduciary income tax return

What is form 706

Federal estate tax return

What is the main purpose of a 529 plan

Education

What is the age limit for 529 beneficiaries

There is no age limit

What is the main purpose of a Coverdell ESA

Education

What is a key rule/characteristic about the Coverdell ESA

Tax-free qualified education withdrawals; contribution income limits; must generally distribute by age 30

What is the main purpose of an UTMA or UGMA

General savings for a minor

Key rul about UGMA/UTMA

Money can be used for basically anything benefiting the child; becomes child’s property at majority

What is the main purpose of a traditional IRA

Retirement

Key rule about Traditional IRA

Contributions may be deductible; earnings grow tax-deferred; distributions generall taxable

What is the main purpose of a Custodial Roth IRA

Retirement for a minor

Key rule about Custodial Roth IRA

Child must have legitimate earned income; tax-free qualified withdrawals

What is the main purpose of a trump account

Child Savings

Key rule about trump account

Must be under 18 to open account; turns into IRA at 18, $1,000 bonus if born between 1/1/25 - 12/31/28

What is the main purpose of EE Savings Bonds

Education

Key rule about EE Savings Bonds

Parent must own bond and be 24+ when purchased; interest can potentially be tax-free when used for qualifying education, subject to income limits