CASE STUDIES for Review of the CFP Certification Examination

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1 Published by: KEIR EDUCATIONAL RESOURCES 4785 Emerald Way Middletown, OH FAX CASE STUDIES for Review of the CFP Certification Examination

2 TABLE OF CONTENTS Case Page Professional Conduct and Regulation (Topics 1-7) 11 Topic 1: CFP Board s Code of Ethics and Professional Responsibility and Rules of Conduct 12 Topic 2: CFP Board s Financial Planning Practice Standards 21 Topic 3: CFP Board s Disciplinary Rules and Procedures 24 Topic 4: Function, Purpose, and Regulation of Financial Institutions 26 Topic 5: Financial Services Regulations and Requirements 28 Topic 6: Consumer Protection Laws 31 Topic 7: Fiduciary 33 General Financial Planning Principles (Topics 8-16) 36 Topic 8: Financial Planning Process 37 Topic 9: Financial Statements 41 Topic 10: Cash Flow Management 43 Topic 11: Financing Strategies 45 Topic 12: Economic Concepts 47 Topic 13: Time Value of Money Concepts and Calculations 49 Topic 14: Client and Planner Attitudes, Values, Biases, and Behavioral Finance 51 Topic 15: Principles of Communication and Counseling 53 Topic 16: Debt Management 56 Education Planning (Topics 17-21) 58 Topic 17: Education Needs Analysis 59 Topic 18: Education Savings Vehicles 67 Topic 19: Financial Aid 70 Topic 20: Gift/Income Tax Strategies 73 Topic 21: Education Financing 75 Risk Management and Insurance Planning (Topics 22-32) 78 Topic 22: Principles of Risk and Insurance 79 Topic 23: Analysis and Evaluation of Risk Exposures 87 Topic 24: Health Insurance and Health Care Cost Management (Individual) 89 Topic 25: Disability Income Insurance (Individual) 91 Topic 26: Long-Term Care Insurance (Individual) 93 Topic 27: Annuities 95 Topic 28: Life Insurance (Individual) 97 Topic 29: Business Uses of Insurance 100 Topic 30: Insurance Needs Analysis 103 Topic 31: Insurance Policy and Company Selection 105 Topic 32: Property and Casualty Insurance Keir Educational Resources ii

3 TABLE OF CONTENTS (Continued) Case Page Investment Planning (Topics 33-41) 110 Topic 33: Characteristics, Uses, and Taxation of Investment Vehicles 111 Topic 34: Types of Investment Risk 121 Topic 35: Quantitative Investment Concepts 123 Topic 36: Measures of Investment Returns 126 Topic 37: Asset Allocation and Portfolio Diversification 130 Topic 38: Bond and Stock Valuation Concepts 133 Topic 39: Portfolio Development and Analysis 135 Topic 40: Investment Strategies 137 Topic 41: Alternative Investments 139 Tax Planning (Topics 42-51) 141 Topic 42: Fundamental Tax Law 142 Topic 43: Income Tax Fundamentals and Calculations 150 Topic 44: Characteristics and Income Taxation of Business Entities 153 Topic 45: Income Taxation of Trusts and Estates 155 Topic 46: Alternative Minimum Tax (AMT) 157 Topic 47: Tax Reduction/Management Techniques 159 Topic 48: Tax Consequences of Property Transactions 161 Topic 49: Passive Activity and At-Risk Rules 165 Topic 50: Tax Implications of Special Circumstances 167 Topic 51: Charitable/Philanthropic Contributions and Deductions 169 Retirement Savings and Income Planning (Topics 52-62) 171 Topic 52: Retirement Needs Analysis 172 Topic 53: Social Security and Medicare 179 Topic 54: Medicaid 182 Topic 55: Types of Retirement Plans 184 Topic 56: Qualified Plan Rules and Options 186 Topic 57: Other Tax-Advantaged Retirement Plans 190 Topic 58: Regulatory Considerations 192 Topic 59: Key Factors Affecting Plan Selection for Businesses 194 Topic 60: Distribution Rules and Taxation 196 Topic 61: Retirement Income and Distribution Strategies 198 Topic 62: Business Succession Planning Keir Educational Resources iii

4 TABLE OF CONTENTS (Continued) Case Page Estate Planning (Topics 63-72) 202 Topic 63: Characteristics and Consequences of Property Titling 203 Topic 64: Strategies to Transfer Property 209 Topic 65: Estate Planning Documents 212 Topic 66: Gift and Estate Tax Compliance and Tax Calculation 217 Topic 67: Sources for Estate Liquidity 226 Topic 68: Types, Features, and Taxation of Trusts 230 Topic 69: Marital Deduction 233 Topic 70: Intra-Family and Other Business Transfer Techniques 237 Topic 71: Postmortem Estate Planning Techniques 241 Topic 72: Estate Planning for Non-traditional Relationships 243 Comprehensive Cases Dan and Laura Bajadali Case 246 Ed and Carol Callsen Case 261 Robert and Mary Jones Case 275 Ron and Sandy Revak Case 290 Kenneth and Laurie Perkins Case 307 Published Case Scenarios and Multiple Choice Questions Mathews Case 319 Kincaid Case 332 Clarke Case Released Case Scenario and Multiple Choice Questions 352 Appendix Key Facts and Figures Tax Tables Formulas Key Facts-1 Tables-1 Formulas Keir Educational Resources iv

5 EDITORS NOTE: Most cases in the COMPREHENSIVE CASE STUDY text are 5 to 6 pages of information. You are seeing only a sample of the Ryan case in this Look Inside the Book. Ron and Sandy Revak Financial Planning Case Ron and Sandy Revak have asked you to prepare a comprehensive financial plan covering all aspects of their financial condition. This is a second marriage for Ron, and Sandy s first. Ron has two adult children from his first marriage, and he and Sandy have twins from their marriage. Name Age Occupation Notes Ron 58 Insurance Agent Poor Health Sandy 45 Insurance Agent Excellent Health Christopher 30 Bartender Spendthrift Tendencies Emily 27 Insurance Agent Excellent Health Hayley 7 Grade School Gifted Jenny 7 Grade School Gifted Ron and Sandy are stockholder/employees of an incorporated insurance agency that offers property and casualty, life, disability, and long-term care insurance. They plan to keep the agency in the family and are grooming Emily to assume control in ten years. Christopher is not at all interested in becoming involved with the agency, and it is premature to assess the twins ambitions. Ron has continuing obligations to pay alimony to his ex-wife Helen, in the amount of $2,000 per month for another four years. Objectives Generate 80% of combined gross preretirement earned income, beginning at Ron s age 68, for Ron and Sandy s joint life expectancy. Allow Sandy to retire from the business when Emily emerges as the controlling owner in ten years. Provide 60% of combined gross income for the survivor in the event of the death of either spouse. Assure 60% of a spouse s gross income in the event of disability of either Ron or Sandy. Minimize or eliminate federal estate tax at the first death. Pre-fund anticipated federal estate tax due at the second death. Structure retirement plan distributions for optimal long-term wealth accumulation and reasonable cash flow. Reconfigure investment portfolio to minimize risk and enhance return. Fund college expenses for the twins at $12,000/year for each, inflation-adjusted. Assumptions Moderate growth in the economy is anticipated long-term. Inflation will average 3% per year Keir Educational Resources 5

6 Revak Comprehensive Case Ron and Sandy Revak Statement of Financial Position January 1, Current Year Assets 1 Liabilities Financial Assets (non-retirement) Cash equivalents (J) $ 16,000 Credit cards (J) $ 4,800 Short-term bond fund (H) 28,000 Car loan (H) 29,500 Large-cap blend fund (J) 36,000 Primary mortgage (J) 228,000 Energy stock DRIP (H) 24,600 HELOC 5 44,000 Bank stock DRIP (W) 15,000 Total $306,300 Cash value of life ins. 86,000 Total $205,600 Retirement Assets 2 IRA rollover (H) $ 285,000 IRA rollover (W) 315, (k) plan (H) 256, (k) plan (W) 204,000 SPDA (H) 3 153,000 Total $1,213,000 Use Assets Primary residence (J) 4 $625,000 NET WORTH $3,043,300 Personal property (J) 230,000 Automobiles (J) 76,000 Total $931,000 Business Assets Business interest (H) $ 500,000 Business interest (W) 500,000 Total $1,000,000 TOTAL LIABILITIES AND TOTAL ASSETS $3,349,600 NET WORTH: $3,349,600 1 Key: H = Husband; W = Wife; J = Joint tenancy with right of survivorship 2 Payable to owner s revocable living trust, except qualified plans 3 SPDA = Single-premium deferred annuity 4 Land value = $100,000 5 HELOC = Home equity line of credit 2017 Keir Educational Resources 6

7 Revak Comprehensive Case Multiple Choice Questions 6. At Ron s planned retirement, which of the following is an available option? A. Ron can take the present value of his defined-benefit plan in cash and roll it into his IRA. B. Ron may select a life-only option from his defined-benefit plan. C. Sandy may begin Social Security benefits at that time, on her own record. D. Ron may elect 10-year special averaging on a lump-sum distribution from his defined-benefit plan. 7. What is the most suitable technique to transfer the Revak business interests? A. Have Ron and Sandy enter into a one-way buy-sell agreement with Emily. B. At retirement, contribute the agency to a qualified charitable remainder trust, while retaining an income of at least 5% of the original gift for Ron and Sandy. C. Establish an LLC (limited liability company) now and gift the business interests over 10 years to Christopher and Emily. D. Use a split-dollar policy on Ron s life to ensure transfer of the business in case he dies before retirement. 8. Which of the following deficiencies is the most serious in the Revak family insurance and risk management program? A. Inadequate long-term care insurance B. Insufficient life insurance on Ron C. Inadequate coverage on their home D. Lack of excess personal liability insurance 9. When Hayley and Jenny go to college, what is the result of using the current education funding vehicle? A. Earnings will be taxed as ordinary income but will avoid a penalty tax. B. Earnings will be taxed as long-term capital gain, with no penalty tax. C. Earnings will be distributed income-tax-free. D. A 10% penalty tax will be imposed on the earnings element, in addition to income tax. 10. Based on the existing documents, what is the amount of life insurance included in Ron s gross estate? A. $0 B. $900,000 C. $1,100,000 D. $1,400, Keir Educational Resources 7

8 Revak Comprehensive Case Answers and Rationales 6. B is the answer. Although notarized consent must be given, Ron may select a life-only option from his defined-benefit plan. A is wrong because lump-sum distribution is not available. C is wrong because Sandy will be too young to begin benefits on her own account. D is incorrect because Ron is not old enough for this option. Topic A is the answer. The unilateral buy-sell agreement will transfer the business to Emily at whatever triggering events they agree upon, including death, disability, or the retirement of Ron and Sandy. Ron and Sandy have shown no desire to gift the business interest and will need the cash flow from the sale to supplement other resources. Since Emily is not currently an owner, she has no business interest to be purchased, so it is a one-way agreement. B is incorrect because there is no evidence that a CRT is part of their objectives; moreover, there is no assurance with this technique that Emily will take over the business. C is wrong because Christopher is not interested in being involved; also, gifting provides no cash flow to Ron and Sandy. D is wrong because the split-dollar policy would merely provide a death benefit to Ron and/or Sandy s personal beneficiaries. Moreover, Sandy s interest is not mentioned in this option, even if it were viable. Topic D is the answer. The limits shown in the case indicate a maximum of $300,000 of liability coverage, certainly inadequate, considering their net worth. A is wrong due to solid LTC insurance. B is incorrect, as the amount of existing life insurance and other resources are adequate. C is wrong because the amount of insurance on the home is right on target, considering that the land is worth $100,000 (footnote). Topic C is the answer. The only education funding vehicle shown is the 529 plan indicated on the cash flow statement; thus, the distributions will be tax-free. A is wrong because the earnings will be tax-free. B is wrong for the same reason. D is doubly wrong, as no tax or penalty is imposed. Topic B is the answer. Ron owns $900,000 of life insurance. The $500,000 in the ILIT is owned by the trustee. A is wrong because it confuses income-tax-free with estate-tax-free. C is wrong because it assumes that all but the group insurance is included. D is wrong because it includes all insurance. Topic Keir Educational Resources 8