Mixed Deck — All CFC Topics Flashcards

Which investment vehicle allows a CFC client to gain diversified exposure to real estate without directly owning property?

Answer: Real Estate Investment Trust (REIT)

REITs are publicly traded companies that own income-producing real estate and must distribute at least 90% of taxable income to shareholders.

For a business continuation plan, which buy-sell agreement structure requires each owner to personally purchase life insurance on the other owners?

Answer: Cross-purchase agreement

In a cross-purchase agreement, each co-owner buys and owns life insurance on the other owners, using proceeds to purchase the deceased owner's interest directly.

Sequence-of-returns risk is most dangerous for retirees because:

Answer: Poor returns early in retirement, combined with withdrawals, permanently deplete the portfolio

When poor market returns occur in early retirement while the retiree is withdrawing funds, fewer shares remain to benefit from eventual recovery, accelerating portfolio depletion.

The 'catch-up contribution' provision allows workers aged 50 and older to contribute an additional $7,500 to their 401(k) in 2024. This provision primarily benefits:

Answer: Workers who started saving late or need to boost retirement savings near retirement

Catch-up contributions help older workers who may have started saving late or experienced financial setbacks to accelerate tax-advantaged retirement savings in their peak earning years.

A defined benefit pension plan provides retirement income based on:

Answer: A formula using salary and years of service

Defined benefit plans calculate benefits using a formula that typically incorporates final average salary, years of service, and a benefit multiplier.

Which valuation method is typically most appropriate for capital-intensive industries like utilities or real estate?

Answer: Asset-based (net asset value) approach

Asset-based valuation is most relevant when a company's value is closely tied to its tangible assets, such as in utilities, real estate, or holding companies.

The '4% rule' in retirement planning suggests retirees can withdraw 4% of their initial portfolio annually with a high probability of:

Answer: Not outliving assets over a 30-year retirement

Research by Bengen showed that a 4% initial withdrawal rate, adjusted annually for inflation, historically sustained a 30-year retirement across market cycles.

A financial consultant is helping a client choose between a home equity loan and a home equity line of credit (HELOC). Which statement best describes the key difference?

Answer: A home equity loan provides a lump sum at a fixed rate; a HELOC is revolving with a variable rate

A home equity loan disburses a lump sum at a fixed interest rate, while a HELOC functions as a revolving line of credit with a variable rate during the draw period.

A closely held business using the 'family limited partnership' (FLP) structure can transfer wealth by leveraging:

Answer: Valuation discounts for lack of control and lack of marketability

FLPs allow senior family members to gift limited partnership interests at discounted values (due to lack of control and marketability), transferring more wealth with less gift tax.

Which retirement account allows self-employed individuals to contribute both as employer and employee, potentially contributing up to 25% of compensation plus elective deferrals?

Answer: Solo 401(k)

A Solo 401(k) allows self-employed individuals to make both employee elective deferrals and employer profit-sharing contributions, maximizing contribution potential.

Which retirement account offers tax-free withdrawals for qualified expenses?

Answer: Roth IRA

Withdrawals from a Roth IRA are tax-free if they meet the criteria for qualified distributions.

Which of the following is considered a 'secured' form of debt?

Answer: Auto loan

An auto loan is secured debt because the vehicle serves as collateral that the lender can repossess if the borrower defaults.

What is a common method for reducing estate taxes?

Answer: Gifting assets during the grantor’s lifetime

Gifting assets during the grantor’s lifetime can reduce the taxable estate and thus reduce estate taxes.

Under CFP Board's fiduciary standard, a financial planner must always act in:

Answer: The client's best interest

The CFP Board's Code of Ethics requires CFP professionals to act as fiduciaries — placing the client's interest first at all times when providing financial advice.

Which type of life insurance provides permanent coverage and builds cash value through a separate investment account?

Answer: Variable universal life (VUL) insurance

Variable universal life insurance combines permanent coverage with investment subaccounts, allowing policyholders to allocate cash value to equity or bond funds.

A company's price-to-book (P/B) ratio of 0.8 suggests the market values the company at:

Answer: 80% of its stated net asset value

A P/B ratio below 1.0 means investors are willing to pay only $0.80 for each $1.00 of the company's net book value, possibly indicating distress or undervaluation.

Which tax is specifically associated with the transfer of assets from a deceased person to their heirs?

Answer: Estate tax

The estate tax is levied on the transfer of the estate of a deceased person to their heirs.

Free cash flow to equity (FCFE) represents:

Answer: Cash available to equity shareholders after capital expenditures and debt repayments

FCFE is calculated as net income plus non-cash charges minus capital expenditures minus changes in working capital plus net borrowing.

Which tax-advantaged account is specifically designed for education expenses?

Answer: 529 Plan

A 529 Plan is a tax-advantaged savings plan designed to encourage saving for future education costs.

A business continuation plan funded with life insurance should be reviewed and updated when:

Answer: Annually or when business value changes significantly

Buy-sell agreements and associated insurance funding should be reviewed regularly — ideally annually — and whenever major changes in business value, ownership, or personal circumstances occur.