CFP Case Studies & Practical Application 3 — Questions and Answers
Question 1: Robert and Susan are married filing jointly with combined income of $320,000. Their financial planner recommends tax-loss harvesting. They realize $15,000 in losses and $8,000 in short-term gains. What is the net tax outcome?
- $15,000 deduction reduces ordinary income dollar-for-dollar
- $7,000 net loss, with $3,000 deducted against ordinary income and $4,000 carried forward (Correct answer)
- $15,000 carried forward; gains are unaffected
- Losses may not offset short-term gains
Correct answer: $7,000 net loss, with $3,000 deducted against ordinary income and $4,000 carried forward
Net capital losses offset capital gains first; remaining losses up to $3,000 reduce ordinary income annually, with excess carried forward indefinitely.
Question 2: A client age 52 wants to access $50,000 from her 401(k) to fund a business venture. She separated from service this year. Which option avoids the 10% early withdrawal penalty?
- 72(t) SEPP payments from the 401(k)
- Rule of 55 separation-from-service exception (Correct answer)
- Hardship withdrawal for business startup
- 60-day rollover to IRA then withdrawal
Correct answer: Rule of 55 separation-from-service exception
The Rule of 55 allows penalty-free distributions from a current employer's 401(k) when an employee separates from service in or after the year they turn 55.
Question 3: A high-net-worth client holds $3M in appreciated stock with a $200,000 basis. She wants to diversify without triggering capital gains. Which advanced strategy is most appropriate?
- Sell all shares and reinvest in a diversified portfolio
- Establish a Charitable Remainder Trust (CRT) funded with the stock (Correct answer)
- Transfer shares to a UTMA for her adult child
- Exchange shares for a fixed annuity
Correct answer: Establish a Charitable Remainder Trust (CRT) funded with the stock
A CRT allows the client to contribute appreciated stock, avoid immediate capital gains tax, receive an income stream, and claim a partial charitable deduction.
Question 4: John, age 62, is considering claiming Social Security. His FRA benefit is $2,400/month. His wife (age 60) has no work history. What is the primary financial planning consideration for the claiming decision?
- Claim immediately to maximize total lifetime payments assuming average life expectancy
- Delay to 70 to increase his benefit by 32% and maximize the survivor benefit for his wife (Correct answer)
- Claim now so his wife can immediately claim spousal benefits
- Both claim at 62 to maximize household income now
Correct answer: Delay to 70 to increase his benefit by 32% and maximize the survivor benefit for his wife
Delaying to 70 earns 8%/year delayed credits and maximizes the survivor benefit, which is critical since his wife has no independent Social Security earnings record.
Question 5: A client has a $500,000 whole life policy with $180,000 cash value and a $120,000 cost basis. She wants to surrender it and purchase a diversified investment portfolio. What is the tax consequence?
- No tax; life insurance proceeds are always tax-free
- $60,000 ordinary income on the gain inside the policy (Correct answer)
- $180,000 taxed as long-term capital gain
- $120,000 taxed as return of premium
Correct answer: $60,000 ordinary income on the gain inside the policy
Surrendering a life insurance policy triggers ordinary income tax on the gain (cash value minus cost basis), which is $180,000 − $120,000 = $60,000.
Question 6: A client's estate is worth $15M. She wants to transfer her closely held business (valued at $4M) to her children while minimizing estate and gift taxes. Which strategy is most applicable?
- Annual gift exclusion transfers of $18,000 per child
- Grantor Retained Annuity Trust (GRAT) funded with business interests (Correct answer)
- Irrevocable Life Insurance Trust (ILIT)
- Simple testamentary transfer at death
Correct answer: Grantor Retained Annuity Trust (GRAT) funded with business interests
A GRAT allows appreciation above the IRS hurdle rate (Section 7520 rate) to pass to beneficiaries gift-tax-free, ideal for high-growth assets like a closely held business.
Question 7: A 40-year-old client earns $95,000 and contributes 6% to his 401(k) to get the full employer match of 3%. His advisor recommends increasing his savings rate. What should be evaluated FIRST before recommending a higher contribution?
- His credit score and mortgage interest rate
- His emergency fund adequacy and high-interest debt obligations (Correct answer)
- Whether he should switch to a Roth 401(k)
- His long-term care insurance coverage
Correct answer: His emergency fund adequacy and high-interest debt obligations
CFP financial planning hierarchy requires securing an adequate emergency fund and eliminating high-cost debt before increasing retirement contributions beyond the employer match.
CFP Case Studies & Practical Application 3
Robert and Susan are married filing jointly with combined income of $320,000.
Their financial planner recommends tax-loss harvesting.
They realize $15,000 in losses and $8,000 in short-term gains.
What is the net tax outcome?