CASE STUDIES for Review of the ® CFP Certification Examination

Revised February 2016 for the July 2016 Exam

Published by: KEIR EDUCATIONAL RESOURCES 4785 Emerald Way Middletown, OH 45044 800-795-5347 800-859-5347 FAX Email [email protected] www.keirsuccess.com

TABLE OF CONTENTS Case

Page

Professional Conduct and Regulation (Topics 1-7) Topic 1: CFP Board’s Code of Ethics and Professional Responsibility and Rules of Conduct Topic 2: CFP Board’s Financial Planning Practice Standards Topic 3: CFP Board’s Disciplinary Rules and Procedures Topic 4: Function, Purpose, and Regulation of Financial Institutions Topic 5: Financial Services Regulations and Requirements Topic 6: Consumer Protection Laws Topic 7: Fiduciary

11

General Financial Planning Principles (Topics 8-16) Topic 8: Financial Planning Process Topic 9: Financial Statements Topic 10: Cash Flow Management Topic 11: Financing Strategies Topic 12: Economic Concepts Topic 13: Time Value of Money Concepts and Calculations Topic 14: Client and Planner Attitudes, Values, Biases, and Behavioral Finance Topic 15: Principles of Communication and Counseling Topic 16: Debt Management

36 37 41 43 45 47 49 51 53 56

Education Planning (Topics 17-21) Topic 17: Education Needs Analysis Topic 18: Education Savings Vehicles Topic 19: Financial Aid Topic 20: Gift/Income Tax Strategies Topic 21: Education Financing

58 59 67 70 73 75

Risk Management and Insurance Planning (Topics 22-32) Topic 22: Principles of Risk and Insurance Topic 23: Analysis and Evaluation of Risk Exposures Topic 24: Health Insurance and Health Care Cost Management (Individual) Topic 25: Disability Income Insurance (Individual) Topic 26: Long-Term Care Insurance (Individual) Topic 27: Annuities Topic 28: Life Insurance (Individual) Topic 29: Business Uses of Insurance Topic 30: Insurance Needs Analysis Topic 31: Insurance Policy and Company Selection Topic 32: Property and Casualty Insurance

12 21 24 26 28 31 33

78 79 87 89 91 93 95 97 100 103 105 107

TABLE OF CONTENTS (Continued) Case

Page

Investment Planning (Topics 33-41) Topic 33: Characteristics, Uses, and Taxation of Investment Vehicles Topic 34: Types of Investment Risk Topic 35: Quantitative Investment Concepts Topic 36: Measures of Investment Returns Topic 37: Asset Allocation and Portfolio Diversification Topic 38: Bond and Stock Valuation Concepts Topic 39: Portfolio Development and Analysis Topic 40: Investment Strategies Topic 41: Alternative Investments

110 111 121 123 126 130 133 135 137 139

Tax Planning (Topics 42-51) Topic 42: Fundamental Tax Law Topic 43: Income Tax Fundamentals and Calculations Topic 44: Characteristics and Income Taxation of Business Entities Topic 45: Income Taxation of Trusts and Estates Topic 46: Alternative Minimum Tax (AMT) Topic 47: Tax Reduction/Management Techniques Topic 48: Tax Consequences of Property Transactions Topic 49: Passive Activity and At-Risk Rules Topic 50: Tax Implications of Special Circumstances Topic 51: Charitable/Philanthropic Contributions and Deductions

141 142 150 153 155 157 159 161 165 167 169

Retirement Savings and Income Planning (Topics 52-62) Topic 52: Retirement Needs Analysis Topic 53: Social Security and Medicare Topic 54: Medicaid Topic 55: Types of Retirement Plans Topic 56: Qualified Plan Rules and Options Topic 57: Other Tax-Advantaged Retirement Plans Topic 58: Regulatory Considerations Topic 59: Key Factors Affecting Plan Selection for Businesses Topic 60: Distribution Rules and Taxation Topic 61: Retirement Income and Distribution Strategies Topic 62: Business Succession Planning

171 172 179 182 184 186 190 192 194 196 198 200

TABLE OF CONTENTS (Continued) Case Estate Planning (Topics 63-72) Topic 63: Characteristics and Consequences of Property Titling Topic 64: Strategies to Transfer Property Topic 65: Estate Planning Documents Topic 66: Gift and Estate Tax Compliance and Tax Calculation Topic 67: Sources for Estate Liquidity Topic 68: Types, Features, and Taxation of Trusts Topic 69: Marital Deduction Topic 70: Intra-Family and Other Business Transfer Techniques Topic 71: Postmortem Estate Planning Techniques Topic 72: Estate Planning for Non-traditional Relationships

Page 202 203 209 212 217 226 230 233 237 241 243

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

334

Clarke Case

345

2004 Released Case Scenario and Multiple Choice Questions 354 Appendix

EDITORS NOTE: Most cases in the COMPREHENVISE CASE STUDY text are 5 to 6 pages of information. You are seeing only a sample of the Revak 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.

Ron and Sandy Revak Statement of Financial Position January 1, Current Year Assets1

Liabilities

Financial Assets (non-retirement) Cash equivalents (J) Short-term bond fund (H) Large-cap blend fund (J) Energy stock DRIP (H) Bank stock DRIP (W) Cash value of life ins. Total

$ 16,000 28,000 36,000 24,600 15,000 86,000 $205,600

Retirement Assets2 IRA rollover (H) IRA rollover (W) 401(k) plan (H) 401(k) plan (W) SPDA (H)3 Total

$ 285,000 315,000 256,000 204,000 153,000 $1,213,000

Use Assets Primary residence (J)4 Personal property (J) Automobiles (J) Total

$ 625,000 230,000 76,000 $931,000

Business Assets Business interest (H) Business interest (W) Total

$ 500,000 500,000 $1,000,000

TOTAL ASSETS

$3,349,600

Credit cards (J) Car loan (H) Primary mortgage (J) HELOC5 Total

NET WORTH

TOTAL LIABILITIES AND 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

$ 4,800 29,500 228,000 44,000 $306,300

$3,043,300

Revak Comprehensive Case Multiple Choice Questions - Sample 6.

At Ron’s planned retirement, which of the following is an available option? A. B. C. D.

7.

Ron can take the present value of his defined-benefit plan in cash and roll it into his IRA. Ron may select a life-only option from his defined-benefit plan. Sandy may begin Social Security benefits at that time, on her own record. Ron may elect 10-year special averaging on a lump-sum distribution from his definedbenefit plan.

What is the most suitable technique to transfer the Revak business interests? A. B. C. D.

Have Ron and Sandy enter into a one-way buy-sell agreement with Emily. 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. Establish an LLC (limited liability company) now and gift the business interests over 10 years to Christopher and Emily. 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. B. C. D.

Inadequate long-term care insurance Insufficient life insurance on Ron Inadequate coverage on their home 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. B. C. D.

Earnings will be taxed as ordinary income but will avoid a penalty tax. Earnings will be taxed as long-term capital gain, with no penalty tax. Earnings will be distributed income-tax-free. 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. B. C. D.

$0 $900,000 $1,100,000 $1,400,000

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 60. 7. 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 70. 8. 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 23. 9. 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 18. 10. 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 67.