CFP Ultimate Certified Financial Planner 3 — Questions and Answers
Question 1: A client wants to minimize estate taxes and retain income from an asset during their lifetime. Which trust structure best accomplishes both goals?
- Revocable living trust
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT) (Correct answer)
- Special Needs Trust
Correct answer: Grantor Retained Annuity Trust (GRAT)
A GRAT allows the grantor to retain an annuity stream for a fixed term while transferring any appreciation above the IRS hurdle rate to heirs gift-tax free.
Question 2: Under the Uniform Prudent Investor Act (UPIA), which of the following is the PRIMARY criterion for evaluating an investment's suitability in a trust portfolio?
- Each investment must be evaluated in isolation for its individual risk
- The investment's contribution to the overall portfolio's risk and return (Correct answer)
- The investment must guarantee principal preservation
- The trustee must maximize current income for the beneficiary
Correct answer: The investment's contribution to the overall portfolio's risk and return
The UPIA shifted the standard from evaluating each investment in isolation to assessing each investment's role within the context of the total portfolio.
Question 3: A married couple has a net worth of $4 million. The husband wants to ensure that both federal estate tax exemptions are fully utilized. Which planning tool accomplishes this most directly?
- Annual gifting program
- Irrevocable Life Insurance Trust (ILIT)
- Portability election (Correct answer)
- Generation-Skipping Transfer Trust
Correct answer: Portability election
Portability allows a surviving spouse to use the deceased spouse's unused federal estate tax exemption by filing a timely estate tax return, effectively doubling the exemption.
Question 4: Which Social Security claiming strategy, now prohibited for new claimants, allowed a higher-earning spouse to collect spousal benefits while letting their own benefit grow?
- Restricted application strategy (Correct answer)
- File and suspend strategy
- Voluntary suspension strategy
- Delayed retirement credit strategy
Correct answer: Restricted application strategy
The restricted application strategy allowed a spouse who had reached FRA to claim only spousal benefits while deferring their own benefit to earn delayed retirement credits; it was eliminated by the Bipartisan Budget Act of 2015 for most claimants.
Question 5: A client has a $500,000 traditional IRA and names her estate as beneficiary. She dies at age 72 without taking her RMD. What distribution rule applies to the estate?
- Stretch IRA over the estate's life expectancy
- 10-year rule from date of death
- 5-year rule — full distribution by December 31 of the 5th year (Correct answer)
- Immediate lump-sum distribution required
Correct answer: 5-year rule — full distribution by December 31 of the 5th year
When a non-designated beneficiary (such as an estate) inherits an IRA from an owner who had already reached RMD age, the 5-year rule applies requiring full distribution within 5 years.
Question 6: A business owner wants to provide retirement benefits only for herself and exclude part-time employees who work fewer than 1,000 hours per year. Which plan type allows this exclusion?
- SIMPLE IRA
- SEP IRA
- Solo 401(k) (Correct answer)
- Defined benefit pension plan
Correct answer: Solo 401(k)
A Solo 401(k) (also called an individual 401(k)) is available only to self-employed individuals with no full-time employees other than a spouse, effectively excluding part-time workers.
Question 7: In Monte Carlo simulation used for retirement planning, what does a 90% probability of success mean?
- The portfolio will grow at 90% of its projected rate
- 90% of simulated scenarios show the portfolio lasting through the retirement horizon (Correct answer)
- The client needs only 90% of their planned income
- There is a 90% chance the market will outperform inflation
Correct answer: 90% of simulated scenarios show the portfolio lasting through the retirement horizon
A 90% probability of success in Monte Carlo analysis means that in 90% of the thousands of randomly simulated market scenarios, the portfolio did not run out of money before the end of the planning period.
CFP Ultimate Certified Financial Planner 3
A client wants to minimize estate taxes and retain income from an asset during their lifetime.
Which trust structure best accomplishes both goals?