AFC - Accredited Financial Counselor Retirement and Estate Planning Questions and Answers — Questions and Answers
Question 1: A client, age 62, plans to retire soon and is concerned about outliving their savings. They have a 401(k) and a separate brokerage account. As an AFC, which of the following topics is MOST crucial to discuss to address their primary concern?
- Advanced estate tax minimization strategies.
- The process of naming a guardian for their adult children.
- Aggressive growth stock investment options for their brokerage account.
- Annuity options and systematic withdrawal plans. (Correct answer)
Correct answer: Annuity options and systematic withdrawal plans.
The client's primary concern is longevity risk—the risk of outliving their assets. Annuities can provide a guaranteed stream of income for life, and systematic withdrawal plans structure distributions to last throughout retirement. While other topics are part of overall financial planning, addressing the income stream is most direct to their stated concern.
Question 2: Which of the following legal documents allows an individual to appoint a trusted person to make financial decisions on their behalf if they become incapacitated?
- A living will.
- A last will and testament.
- A durable power of attorney. (Correct answer)
- An irrevocable trust.
Correct answer: A durable power of attorney.
A durable power of attorney is a legal document that grants someone the authority to manage the financial and legal affairs of another person. A 'durable' clause ensures the document remains in effect even if the person becomes incapacitated. A living will concerns medical decisions, a last will and testament deals with asset distribution after death, and a trust is a separate legal entity for holding assets.
Question 3: A 45-year-old client wants to start saving for retirement but is unsure which account to use. Their employer offers a 401(k) with a 50% match on contributions up to 6% of their salary. They also qualify to contribute to a Roth IRA. What should be the AFC's initial guidance?
- Contribute the maximum amount to the Roth IRA first.
- Contribute at least 6% to the 401(k), then contribute to the Roth IRA. (Correct answer)
- Split contributions evenly between the 401(k) and the Roth IRA.
- Invest in a taxable brokerage account until they are closer to retirement.
Correct answer: Contribute at least 6% to the 401(k), then contribute to the Roth IRA.
The employer match is essentially a 50% return on investment. The first priority should always be to contribute enough to the 401(k) to get the full employer match. After securing the match, contributing to a Roth IRA can be an excellent strategy for tax diversification in retirement. Forgoing the match means leaving 'free money' on the table.
Question 4: The process of administering and distributing a deceased person's assets through the court system is known as:
- Intestacy.
- Probate. (Correct answer)
- Gifting.
- Trusteeship.
Correct answer: Probate.
Probate is the formal legal process that gives recognition to a will and appoints the executor or personal representative who will administer the estate and distribute assets to the intended beneficiaries. Intestacy refers to dying without a will. Gifting is a lifetime transfer of assets. Trusteeship is the management of assets held in a trust.
Question 5: An AFC is helping a military service member prepare for a deployment. Which estate planning document is NOT primarily focused on managing affairs in case of incapacity or death?
- Durable Power of Attorney.
- Last Will and Testament.
- Letter of Instruction. (Correct answer)
- Living Will (Advance Medical Directive).
Correct answer: Letter of Instruction.
A Letter of Instruction is an informal, non-legal document that provides guidance and information to the executor or family members. It can include details like funeral wishes, locations of important documents, and account passwords. While helpful, it is not a legally binding document for managing affairs like a will, power of attorney, or living will are.
Question 6: All of the following are considered non-probate assets EXCEPT:
- Assets held in a revocable living trust.
- Life insurance proceeds with a named beneficiary.
- A checking account owned solely by the decedent with no beneficiary designation. (Correct answer)
- A 401(k) account with a designated beneficiary.
Correct answer: A checking account owned solely by the decedent with no beneficiary designation.
Non-probate assets pass directly to a beneficiary or co-owner without going through the court process. This includes assets in a trust, accounts with payable-on-death (POD) or transfer-on-death (TOD) designations, and life insurance with a named beneficiary. An account owned solely by the decedent with no beneficiary listed must go through probate to determine its legal new owner.
AFC - Accredited Financial Counselor Retirement and Estate Planning Questions and Answers
A client, age 62, plans to retire soon and is concerned about outliving their savings.
They have a 401(k) and a separate brokerage account.
As an AFC, which of the following topics is MOST crucial to discuss to address their primary concern?