FREE AFP Financial Planning Questions and Answers
Barry, age 67, is a widower and has two adult children, aged 36 and 33, who are both married. Twenty years ago, Barry purchased an investment property for $100,000 and today it is worth $200,000. He is considering transferring the property into joint tenancy with his two adult children. Which of the following is the biggest risk to consider before electing a transfer to joint tenancy?
1. With the property in joint tenancy when Barry dies, it will not go through his estate and he will not have to pay probate
2. Barry will not be able to split the income related to the investment property as attribution rules will apply to him
3. He will lose control of the property and his children could make changes or even sell their shares to someone else
4. Both Barry's children are married and if either of their marriages breakdown the investment property may be included in family assets.
Explanation:
Option 3 is correct. Once a joint tenancy is triggered, Barry can no longer make decisions solely on his own related to the property. Option 4 is correct. The investment property can be included in family property on marriage breakdown and he could have the asset or its value transferred to someone that is beyond his wishes (i.e. an ex-son or daughter in law).
Shailesh has been looking for ways to reduce probate on his estate as part of his overall estate planning review. Which of the following options below would remove probate fees that would need to be paid. Assume Shailesh is a widow with an adult daughter aged 24.
1. Transferring the cottage into joint ownership with his daughter today.
2. Designating his estate as the beneficiary of his life insurance policy and utilizing the Will to create a testamentary trust for his daughter utilizing the proceeds.
3. Naming his daughter as the beneficiary of his TFSA.
4. Transfer beneficial ownership only of his non-registered portfolio to his daughter to avoid tax on the immediate transfer.
Explanation:
Option 1 is correct. Transferring an asset into joint ownership removes probate as the asset would transfer automatically to the other joint tenant when one dies. Option 3 is correct. Naming a beneficiary to a registered account removes the asset from probate and transfers directly on death.
Max and his spouse, Beth, are both 55 years old and have recently decided to begin focusing on retirement. Currently, they have $850,000 saved in non-registered assets and are wondering how much pre-tax income can be generated on an annual basis. Retirement for them will begin in 5 years; their life expectancies are 92; their nominal return is 5% until they retire and 7% in retirement, both compounded annually; they don't plan to make any more contributions; income will be received at the beginning of the year.
Calculate the total amount of annual pre-tax income that the asset base will provide throughout retirement, based on the assumptions outlined above.
Explanation:
Step 1 is to calculate the accumulation of assets up to retirement:
N = 5
I = 5%
PV = $850,000
PMT = 0
Solve for FV = $1,084,839
Step 2 is to calculate the retirement income based on the asset value growth in Step 1:
MODE = BEG
N = (92 - 60 years)
PV = $1,084,839
I = 7%
FV = 0
Solve for PMT = $80,170
Amy is a single mother with one child, Eric, who just turned 5-years-old. Amy has recently heard from her bank advisor that it would make sense for her to open an RESP to help her start saving for his future education. She has managed to save some money, even though she only makes $20,000, and is ready to deposit $5,000 into the account this year. Given her income and first contribution, what amount of CESG (Canadian Education Savings Grant) would she receive in this first year?
Explanation:
Given her income and contribution, she will receive $500 on the first $2,500 contribution, $500 on the second $2,500 contribution (as a catch-up CESG), and $100 (20% of $500) as an enhanced CESG based on her lower income. Note – no catch-up grant is provided on the enhanced CESG portion for low-income families.
Connie is looking for income-focused investments for her portfolio as she is nearing retirement and will require this income to live off of. Which of the following investments would you recommend for her to achieve her investment objectives?
1. Mortgage-backed securities
2. Growth stocks
3. Preferred shares
4. Absolute return hedge fund
Explanation:
Option 1 is correct. Mortgage-backed securities are considered income investments as they pay both interest and principal on a monthly basis. Option 3 is correct. Preferred shares are like debt instruments that have a fixed price and pay a fixed dividend rate, which is usually significantly higher than dividends paid by common stock.
Jane works at a large financial institution. She is a member of their DC pension plan which is invested in a balanced fund (50% dividend mutual fund and 50% global government bond fund) for a total amount of $50,000. She also has her own self-directed RRSP that has $30,000 in mortgage-backed securities and $40,000 invested in CMHC bonds. Finally, her TFSA has $10,000 in cash and $45,000 invested in the S&P/TSX 60 ETF. What is Jane's current asset allocation?
Explanation:
Cash Allocation (10,000/175,000) = 6%
Fixed Income Allocation - (RRSP MBS + Pension Plan - Gov't Bond + CMHC Bond) - (30,000 + 25,000 + 40,000) / 175,000 = 54%
Equities (Pension Plan - Mutual fund + TFSA - S&P TSX 60 ETF) - (25,000 + 45,000) / 175,000 = 40%
Michelle, age 70, and her husband, Kip, age 74 were both retired for several years when Kip passed away from heart disease. He was receiving a monthly CPP payment of $495. Michelle is currently receiving a pension payment of $350 per month. As Kip's surviving spouse, what would be the lump-sum death benefit to Michelle?
Explanation:
The lump-sum payment to Michelle would be $2500. Amount payable under CPP is equal to 6 times the actual retirement pension the contributor was receiving or would have received, to a maximum of $2,500. Kip's monthly CPP payment of $495 multiplied by 6 would be greater than the CPP maximum allowed. ($2970 > $2500 MAX).
Richard, a financial planner, has been working with his client Glenn for the last 5 years. Glenn is the CEO of a small software company Glennatical listed on the TSX. Richard is considering to purchase a large amount of common shares of Gleenatical for his own personal investment account. What should Richard do in this situation?
Explanation:
If Richard purchases common shares in Glennatical, he will have a conflict of interest as Glenn's financial planner. Richard can influence Glenn into strategies that will benefit Glennatical which will directly provide monetary gain (common share ownership) for Richard in the short run. The financial planner should advise that they may not be able to continue in a professional relationship if a conflict of interest materializes in the future. Providing this information early on increases the level of trust and respect between the client and the financial planner.
Georgina and Hank meet with their advisor regarding income splitting as they approach retirement. Hank, age 55, expects to retire in 10 years while Georgina is retiring in two years when she turns 60. His annual income will be $125,000 up until he retires while she is expected to receive $27,000 from her defined benefit pension. Hank has $380,000 in RRSPs, and $70,000 in his TFSA, and has maximized her contributions annually while Georgina has $48,000 in her RRSP and never has contributed to her TFSA. What income-splitting strategy should the advisor recommend they use?
Explanation:
The only option available for Hank and Georgina to split income for tax purposes is for him to contribute to her RRSP. If Hank contributes to Georgina's TFSA, it will help her shelter income but it will not help for tax purposes unless she contributes directly. Georgina deferring her pension will reduce household income but will not split income between them.
How is the annual contribution room for a tax-free savings account (TFSA) calculated?
Explanation:
TFSA dollar limit is announced each year. This amount, plus previous years contribution limit, plus any withdrawals, makes up your max TFSA contribution in any year.
Mirhad wants to leave $500,000 to his favorite charity when he dies. If his net income in the year of death is $200,000, how much of this donation is eligible for a donation tax credit on his final return?
Explanation:
Charitable donations eligible for the tax credit are subject to a limit of 75% of net income. But in the year of death, it equals 100%, thus the entire $200,000 in his income in the year of death is eligible for the tax credit.