# finc355 full course latest 2017

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Question # 00503900 Subject Finance Topic Finance Tutorials: 1
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Week 1 discussion

Getting a hold of Retirement Needs Analysis

DIRECTIONS:

Here is the Discussion #1 Retirement Needs Analysis Discussion Problem. Please refer to the following documents (located in Content, Week 1) to assist you in solving the following capital needs problem.

What makes Capital Needs Analysis so Important?

A financial planner capital needs analysis for a client exemplar

Calculator capital needs analysis example

Capital needs analysis MS Excel spreadsheet

Please submit your Capital Needs Analysis in MS Word format (with an accompanying MS Excel Spreadsheet, if you so desire) with the following file name: LastNameFirstInitial_CapitalNeedsAnalysis01.docx. For example, if you name is John Smith, the file name of your solution(s) should be SmithJ_CapitalNeedsAnalysis01.docx. Submit your Capital Needs Analysis solution to your Homework #1 Assignment Folder.

HERE IS THE CAPITAL NEEDS PROBLEM YOU ARE SOLVING:

The Smith’s had \$110,000 in savings at age 51. They had a desired retirement age of 65. They want to fund through age 92. Assume a 4 percent inflation rate and a 5 percent after-tax rate for investment both pre and post- retirement. They have household income of \$140,000, which is increasing at the rate of inflation. Their expenditures including taxes are \$125,000 a year. They estimate that in retirement they will receive \$28,000 a year together in Social Security and Mr. Smith will receive a \$12,000 a year pension, both in today’s dollars. Their retirement expenditures would be \$90,000 a year in today’s dollars.

Calculate

a) The lump sum needed at retirement

b) Current assets available at retirement

c) The difference between needs and resources

d) Yearly savings needed

Note: When using your calculator, remember that payments need to be received at the beginning of the year and not at the end of the year.

Here is the Discussion Question

How important is a capital needs analysis for retirement planning? Can the Smith's achieve their goal?

Week 2 discussion

DQ1 Uncovering the Different Types of IRAs

DQ2 Penalties and Taxes for Early Withdrawls

Discuss the reasons for making premature withdrawals from qualified retirement plans along with reasons why these withdrawals are taxed and often penalized.

DQ3 Becoming Aware of Non discrimination Requirements

Discuss the application and implications of nondiscrimination requirements for qualified plans.

Week 3 discussion

DQ1 Looking into a Defined Pension Plan

Discuss the advantages and disadvantages of installing a defined benefit pension plan.

DQ2 Observing Insurance and Retirement Plans

Discuss the implications of using life insurance to fund a qualified plan relative to the incidental death benefit test

DQ3 ERISA Exemptions

Discuss the types of pension and welfare plans that are exempt from ERISA regulations.

Week 4 discussion

DQ1 Benefits of Age-Weighted Retirement Plans

Discuss situation in which an employer might want to implement an age-weighted plan

DQ2 Taking Advantage of 401(k) Plans

Discuss the similarities and differences between Section 401(k) plans and other qualified profit sharing plans.

DQ3 Limiting Contributions From Higher Wage Employees

Discuss ways in which contributions from higher-income employees may be limited.

Week 5 discussion

Discuss ways in which Keogh plans are different from other qualified plans. Include any implications of a plan covering non-employee self-employed individuals.

Discuss SEP contributions from both the employee and employer perspectives.

DQ3 Is a Nonqualified Deferred Compensation Plan a Good Employee Benefit?

Discuss when it would be appropriate to implement a non-qualified deferred compensation plan, and what benefits would be achieved by doing so

Week 6 discussion

DQ1 Fair Market Value?

Define "fair market value". Explain how fair market value impacts estate taxes.

DQ2 Becoming Aware of Family Limited Partnerships (FLPs)

What is a Family Limited Partnership (FLP) and how is it valued?

DQ3 Looking into Defined Value Clauses

Please explain a "defined value clause" and state how this can reduce (or increase) taxes.

Week 7 discussion

DQ1 What is the IRD Rule?

What is the Income in Respect of a Decedent (IRD) rule?

DQ2 Picking out Roth Income and IRD Income

Is a Roth IRA considered income in Respect of a Decedent (IRD)? Please explain.

DQ3 Determining IRD Assets

List the various types of IRD assets

Week 8 discussion

DQ1 Establishing Post Mortem Estate Planning

What is "Post-death estate planning"?

DQ2 Disclaiming an Inheritance

Why would someone disclaim an inheritance?

DQ3 Spotting "Disclaiming" Issues

If a spouse disclaims an income interest, who gets the income?

Case study 1

Case Study Requirements

The FINC 355 Retirement and Estate Planning course has two estate planning cases. The following is Case #1: Incapacity Planning of a Parent. The case study must have a reference page. There should be a minimum of four references for each case study. Total page count of each case study should be 3-5 pages (750 to 1,250 words). The case studies will be evaluated on the completeness of the recommended solution(s) and the quality of the written assignment using the Course Written Paper Rubric provided in the course syllabus.

Case Study

Incapacity Planning of a Parent

John Jones has just finished visiting his aging mother, Claire. Her home is uncharacteristically unkempt. Some bills are unpaid and others have been paid twice. She cannot remember when she last took her medicine and she tells the same stories repeatedly. John has contacted you, his financial adviser, about what he can do to protect his mother. Eventually, Claire’s signature will be needed to manage a bank account, pay a bill, or handle her property. Being that you are unable to do so on her behalf, a court could get involved if you do not plan.

John understands that a person who lacks a certain level of capacity cannot enter into a contract. Many people are surprised to find out that a simple will does not keep the court from intervening into their affairs if they become incapacitated. Without planning for incapacity, John could find himself and his family in a difficult situation.

John brings his mother, Claire, to your office for an assessment of how much she can process the information she is provided. During the assessment, you are looking for the following:

1. Does John’s mother understand the situation that brought her to your office?

2. If you provide her with information, can she process it and develop an opinion?

3. Can John’s mother communicate her opinions?

4. Are her opinions consistent with the opinions and values she has historically held?

5. Has she changed her values? What lead to the change?

6. Is she unduly susceptible or vulnerable to outside influences?

If you have any doubts about her capacity, you will ask your client to get an assessment from a physician, psychologist, or social worker. You have asked the family to seek the opinion of Claire’s doctor.

After a visit to her physician, it was determined that Claire could make and communicate her own decisions. However, the doctor informed the family that at some time in the near future Claire would likely be incapacitated. Claire’s physician suggests that the family make every effort to protect her from her own incapacity.

How Claire’s Capacity May Affect Your Ability to Plan

After the assessment about what the client can and cannot understand, you as the financial adviser will have to address the following scenarios. These scenarios demonstrate how capacity affects Claire’s ability to plan. For example, due to Claire’s capacity can she perform the following:

1. Create or update her will? (If Claire has diminished capacity, can she create or update her will?)

2. Create a living trust? Can a family member protest the creation of the new trust based on Clair’s capacity?

3. Create or update her Power of Attorney? Can a family member dispute the Power of Attorney?

4. What estate planning documents are needed to protect Claire when she becomes incapacitated? Can she sign these documents?

5. Create or update her Advance Directive for Healthcare? Can Claire revoke her current Advance Directive for Healthcare?

6. Can Claire move into an assisted care facility and sell her home? Could the sale of the home be challenged? On what grounds? What (if anything) can you do to prevent a dispute?

7. Can Claire marry her new boyfriend? Can John protest the marriage?

Case study 2

Case Study Requirements

The FINC 355 Retirement and Estate Planning course has two estate planning cases. The following is Case #2: Post-mortem Estate Planning. The case study must have a reference page. There should be a minimum of four references for each case study. Total page count of each case study should be 3-5 pages (750 to 1,250 words). The case studies will be evaluated on the completeness of the recommended solution(s) and the quality of the written assignment using the Course Written Paper Rubric provided in the course syllabus.

Post-Mortem Estate Planning

It is not unusual for someone to to be upset about how assets are distributed. Many of these situations create disputes. The wise financial adviser and estate planner watches for the following situations.

1. Those in which family members with the same status will not be treated the same, as when one child receives a larger share than another child;

2. Those where a family member who might reasonably expect to benefit will receive nothing, as when a child is disinherited completely;

3. Those where a beneficiary may not like the way in which his benefits will be received, as when assets will pass to a tightly-controlled trust rather than outright to the beneficiary;

4. Those which involve a blended family, where there are stepparents and stepchildren; and

5. Those in which one or more family members are generally inclined to complain and create problems.

Financial advisers careful about aiding clients in passing assets directly to beneficiaries that have (1) drug or alcohol abuse, (2) spendthrift habits, (3) disabling conditions, which might create a need for needs-tested government benefits, (4) immaturity, or other personality factors that weaken the beneficiary’s ability to properly handle finances.

Conversely, beneficiaries who have limits on their abilities to be self-supporting may have a real need to receive a larger share of inherited assets than a beneficiary who is well-to-do and successful. The client may wish to provide more to the relatives with greater needs.

Finally, your client may simply not wish to provide assets to individuals who have mistreated the client or from whom the client has long been estranged. If the client really prefers a plan, which creates a heightened risk of post-death disputes to one, which is less likely to result in such disputes, then the financial adviser should ensure that client’s plan reflects the client’s true desires and intent. However, the financial adviser should inform the client about the options available to help avoid or reduce the risk of post-death disputes. Often clients decide not to take any significant steps to avoid a post-death dispute and others will want to button up their plans as tightly as possible to avoid disputes. It is the job of the financial adviser to help the client decide which approach is best and meets his (or her) personal needs and desires.

Case Study 2_A1

Financial Planning for Jane to Avoid Post-Mortem Disputes

Jane owns a home she purchased many decades ago just a few houses away from her childhood home. She also owns her childhood home, having purchased it from her parents via a family annuity prior to her father’s death. Jane’s daughter, Jill and Jill’s two children live in “Momma and Daddy’s house” (Jane’s parents’ home), paying Jane close to fair market rent. Jane lives in her own home. Her son, Dan, was recently living there with her, but has moved out to live with friends. Jane would like Jill to inherit Momma and Daddy’s house, and she would like Dan to inherit her house. Dan and Jill are close and they like the idea of living near each other. Neither home has a mortgage. Jane intends to stay in her home for some time, but when she does decide to move to a retirement facility, Dan is prepared to move in and take over the home.

Jane has asked you, her financial adviser, to help her decide the best method for her children to inherit these two homes. Due to some other family land that may generate significant income (from oil and gas royalty rights), Jane is concerned about her estate tax situation. You have analyzed the potential income tax cost of losing the step-up basis on either or both houses in the estate.

1. How can you determine that Jane is competent to sign the estate planning documents?

2. Should the homes be put in a trust? Should the homes be put into two separate trusts?

3. If you were to recommend a trust(s) for the homes, what type of trust would you recommend? Should they be written for a certain term?

4. Should Jane consider using a fully funded revocable living trust instead of a will as her primary estate-planning document? Please provide your rationale.

5. Should Jane use an “Terrorem Clause” in her will or trust(s)?

6. Who should pay the real estate taxes and make maintenance improvements on each property?

7. Jane wants to know how she can lower her income liabilities.

A. What are your recommendations for the rental money Jane receives from Jill?

B. What are your recommendations for the royalties she receives from her other land

9. What possible post-mortem disputes do you envision?

Homework 1

DIRECTIONS: Here is the Homework #1 Assignment. Use the Homework #1 Answer Sheet for your responses to the questions. When you have completed Homework #1 submit the Answer Sheet to your Homework #1 Assignment Folder.

Number

Questions

1 Howard Stein is 65 this year and his wife, Gertie, is three years younger. They were married a month after Gertie graduated from high school. She has been a full-time homemaker all of her adult life. After Howard and Gertie’s youngest child graduated from college, Gertie devoted 20 hours a week to volunteer efforts. Howard will begin drawing Social Security retirement benefits this year. Gertie can receive

a. no benefits because she was never employed outside the home

b. a mother’s benefit because she has had children

c. a spouse’s benefit equal to 50% of Howard’s primary insurance amount (PIA)

d. a benefit based on credits earned from her volunteer work

e. a spouse’s benefit equal to less than 50% of Howard’s primary insurance amount (PIA)

2 Which of the following types of health care is not covered under Medicare Part A

a. home health visits

b. hospice care for terminally ill patients

c. physical therapy

d. inpatient hospital care

e. post-hospital extended care

3 Juan T. B. and I. B. Cool were married 8 years ago. Their divorce was finalized this week. At age 65, I. B. is eligible for Social Security benefits under Juan’s work record.

a. true

b. false

4 Which of the following is not an advantage of defined benefit plans?

a. security to participants

b. higher deduction for employer

c. flexibility to offer more in profitable years

d. greater value to older employees

5 Richard Leftin, founder of Leftin Manufacturing, Inc., wants to implement a retirement plan that would allow him and the three managers of his business to set aside up to a fourth of their earnings from the business in a retirement plan. He does not want to fund a retirement plan for any of his 50 line workers. Mr. Leftin should consider a

a. defined contribution plan

b. defined benefit plan

c. money purchase plan

d. profit sharing plan

e. nonqualified plan

6 Alice Compton, owner of Fashion Design, wants to offer a retirement plan that will give her employees an incentive to maximize their performance. Alice should consider

a. a defined benefit plan

b. a money purchase plan

c. a profit sharing plan

d. a and b

e. b and c

7 Mr. Teague is covered under Medicare Part A. He was hospitalized on August 10 and discharged on August 15. Complications set in and he was readmitted to the hospital on August 25. Which of the following is true?

a. Medicare Part A counts both hospitalizations as part of his first benefit period

b. Because both hospitalizations occurred in the same year, Mr. Teague need only pay the deductible for the first hospitalization

c. Medicare Part A will cover only one hospitalization per calendar year, so his second hospitalization is not covered

d. Medicare Part A will cover both hospitalizations, but Mr. Teague must pay a deductible for each one

e. Medicare Part A will cover all costs of the first hospitalization but will require a deductible for the second hospitalization

8 Mrs. Albright is covered under Medicare Part A. She was hospitalized on June 4. She was discharged on June 10. She was hospitalized again in late September for 5 days. Which of the following is true?

a. Medicare Part A will cover all costs of the first hospitalization but will require a deductible for the second hospitalization

b. Because both hospitalizations occurred in the same year, Mrs. Albright need only pay the deductible for the first hospitalization

c. Medicare Part A will cover only one hospitalization per calendar year, so her second hospitalization is not covered

d. Medicare Part A will cover both hospitalizations, but Mrs. Albright must pay a deductible for each one

e. Medicare Part A will cover all costs of both hospitalizations because, taken together, Mrs. Albright did not exceed her 60 days of hospitalization per year

9 Dr. I. L. Pullem, Dr. Ben Shur, and Dr. Jana Whitebite, are dentists. They have two full-time and one part-time office staff as the only employees in a professional corporation. The doctors want to maximize tax-favored benefits for themselves and lessen benefits for their employees. They should consider a

a. profit sharing plan

b. defined benefit plan

c. Section 401(K) plan

d. money purchase plan

e. cash balance plan

10 Which of the following is the last step when using the seven-step planner to determine the required current monthly savings that will meet a future retirement income objective?

a. calculate retirement cash flow (shortfall or surplus)

b. identify income from current assets

c. calculate required savings to fund shortfall

d. adjust income sources for inflation

e. identify fixed income and amounts payable at retirement

11 Which of the following is (are) true regarding entitlement to Social Security retirement benefits?

a. an individual must be fully insured to receive Social Security retirement benefits

b. reduced Social Security benefits are available at age 60

c. age for receiving full Social Security benefits is gradually being increased to 67

d. a and b

e. a and c

12 April Storm had earned 40 quarters of Social Security coverage before she was seriously injured in an auto accident. April was in the hospital for a month, but then she began working again at her former place of employment part time. April is entitled to Social Security disability benefits.

a. true

b. false

13 Hospice care is covered under Hospital Insurance (Part A) when the beneficiary meets all of the following requirements, except

a. is eligible for Hospital Insurance benefits

b. is certified by a doctor as terminally ill

c. files a statement electing to waive all other Medicare coverage for hospice care

d. pays the required deductible

14 Which of the following is not an acceptable method for overcoming a retirement shortfall?

a. cut back on expenses before retirement

b. invest a large portion of a retirement portfolio in a high-risk investment to obtain a higher return

c. increase pre-retirement savings

d. retire later

e. tap into home equity

15 Which of the following cannot be accomplished with a qualified retirement plan?

a. Help employees save for retirement

b. Defer taxes for owners and highly compensated employees

c. Customize benefits for selected executives

d. Help retire employees

e. Create an incentive for employees to be more productive

16 When selecting your assumptions for the retirement needs analysis, what type of data is relevant and source is valid?

a. stock market returns supplied by your local stock broker

b. price of gold listed on the commodities exchanges

c. historical inflation figures from the Bureau of Labor Statistics

d. retirement plan expenses provided by the plan administrator

e. Municiapal bond pricing data provided by the MSRB

17 Which of the following would not be included in a retirement “fact finder”?

a. balance in profit sharing plan

b. expected Social Security income

c. amounts invested in mutual funds

d. amount of last year’s tax refund

e. client goals and objectives in retirement

18 Dr. Curt N. Short practiced medicine in a general partnership for 15 years prior to his retirement this year at age 55. Is he eligible for Medicare benefits this year?

a. yes

b. no

19 Elsie and her husband Zeb were married 55 years before he died last year. When Zeb retired at age 65, he began receiving benefits from Social Security and Medicare Part A. As a life-long homemaker, Elsie receives spouse benefits from Social Security. Earlier this year, at age 75, Elsie was in a car accident, breaking her hip and cracking four ribs. After two weeks in the hospital, she was transferred to a skilled nursing facility for 10 more days. After her discharge, a visiting nurse came by her home once a week. Which of the following services are covered under Medicare Part A for Elsie?

a. inpatient hospital care only

b. inpatient hospital care and post-hospital extended care in a skilled nursing facility

c. inpatient hospital care and home health service benefits

d. post-hospital extended care in a skilled nursing facility and home health service benefits

e. inpatient hospital care, post-hospital extended care in a skilled nursing facility, home health service benefits

20 Employment after retirement will

a. always result in a loss of all Social Security Benefits

b. result in loss of some or all Social Security Benefits only for those under normal retirement age who have earnings above a specified threshold

c. result in loss of \$1 of benefits for each \$3 of earnings for those at or older than normal retirement age

d. reduce Social Security earnings only if the worker is under normal retirement age and self-employed

e. have no effect on Social Security Benefits

Homework 2

FINC 355 RETIREMENT AND ESTATE PLANNING HOMEWORK #2

1. Tony Johnson, an over-the-road trucker, had several out-of-town trips early in the year, so he got an extension for filing his income tax return. Tony can make the maximum IRA contribution this year. He has until the last date of his income tax filing extension to make a tax-deductible contribution to his IRA.

a. true

b. false

2. Ken and Barbie Dahl file a joint tax return in 2013. Both are employed. Ken is an active participant in his employer’s qualified retirement plan. Barbie is not. Barbie earns \$125,000 and Ken earns \$75,000. Assuming they have no other tax deductions,

a. based on their income levels, Ken can contribute to a traditional IRA and deduct contributions, but Barbie must contribute to a Roth IRA

b. both Ken and Barbie can make a deductible contribution to a traditional IRA

c. Ken can make a deductible IRA contribution, but Barbie must make a nondeductible IRA contribution

d. neither Ken nor Barbie can make a traditional IRA contribution because Ken is an active participant in his employer’s qualified plan

e. neither Ken nor Barbie can make a deductible contribution to a traditional IRA

3. Gary Hinton, age 54, is planning to retire this year. He has \$600,000 accumulated in a traditional IRA.

a. Gary must wait until he is 59½ to take IRA distributions without penalty

b. Gary could take an IRA distribution of \$100,000 without penalty before age 59½ if he uses the money to make a qualified purchase of a condo in a retiree community

c. Gary must pay a 10% penalty for any withdrawals that he makes from his IRA before age 59½ unless the distribution is to purchase health insurance or medical care

d. an amount equal to an annual payment under a life annuity can be distributed to Gary without penalty, but once begun, the payment can never be changed

e. Gary can make penalty-free withdrawals in an amount equal to an annual life annuity payment until age 59½; at that time, he can withdraw the remaining balance in his IRA without penalty

4. Orville Winbacher died last year at age 58, leaving \$500,000 accumulated in a Roth IRA. Which of the following is (are) true?

a. monies in the Roth IRA must be distributed within a year of the Orville’s death either to his estate or to a beneficiary

b. distribution from the account can be made over the life of a designated beneficiary if begun within a year of Orville’s death

c. initial distribution of Orville’s Roth IRA funds to a beneficiary are tax-free, but subsequent investment returns on amounts distributed are taxable

d. a and b

e. b and c

5. George Flint was transferred to Chicago three years ago. When he left Detroit, he sold his home and put some of the money in a new Roth IRA. He and his wife, Wilma, have been renting a home for the past 3 years. Recently, the homeowner decided to sell. George is interested in buying the home. George can make a penalty-free withdrawal from his Roth IRA to help complete the purchase.

a. true

b. false

6. Brothers Tim and Jim Shanton have asked you, their financial advisor, to settle a friendly quarrel between them. Tim argues that a Roth IRA and a traditional IRA are actuarially equivalent if \$4,000 is available for investing on a before-tax basis, contributions to the traditional IRA are deductible, tax rates are expected to stay the same, and both have the same interest rates. So, it makes no difference which vehicle one uses to save for retirement. Jim insists that a Roth IRA is the better investment. You tell them

a. Tim is wrong; the tax deduction available for a traditional IRA allows more money to work for the contributor

b. Jim is wrong; at least for some low-income individuals, the traditional IRA is a better investment because of its relatively lower tax rates

c. Tim is right; the two investments are equivalent in every respect when considered at the end of an investment horizon at least 10-years long

d. Jim is right; the ability to make tax-free withdrawals from a Roth IRA gives a greater return even when contributions and interest rates are equivalent over time

e. both are right; the two investments are actuarially equivalent, but absence of a minimum distribution date and more liberal penalty-free withdrawal options may make the Roth IRA more attractive

7. The owner of Hilton Tours is considering installing a money purchase plan and integrating it with Social Security. Which of the following is true?

a. Social Security integration will allow Hilton Tours to make greater contributions to higher-paid employees

b. Hilton’s owner must use the excess method for integrating defined contribution formulas with Social Security

c. Hilton’s owner must use the offset method for integrating defined contribution formulas with Social Security

d. a and b

e. a and c

8. Dalton Construction has a defined contribution plan that provides 65% of account balances to the three owners, each of whom have a 10% ownership of the company. To remain qualified, which of the following vesting schedules would Dalton be permitted to use?

a. 5-year cliff

b. 3 to 7 year

c. 3-year cliff

d. a and b

e. b and c

9. Blake Johnston retired from Brumley Enterprises a month after his 56th birthday. Blake began receiving a series of substantially equal periodic payments from his qualified plan based on his life expectancy. When he turned 59, he decided that he wanted to alter his payments so that he would receive a higher monthly payment. If Blake does this

a. he will not incur any additional taxes

b. he will pay an early withdrawal penalty for the additional amount withdrawn until he reaches age 59½

c. a penalty with interest will be imposed for early withdrawal backdated to his original retirement date

d. he can avoid a penalty tax if he uses the additional income to pay for health insurance

10. Jim Tandy, age 65, will retire next month from Algor Industries. Last month, Jim withdrew \$40,000 from his qualified retirement savings plan at work. Before the withdrawal, Jim had an account balance of \$500,000. While employed at Algor, Jim made \$100,000 of after-tax contributions to his retirement plan. The taxable portion of his withdrawal is

a. \$8,000

b. \$20,000

c. \$32,000

d. \$40,000

e. not enough information to calculate

11. For purposes of required minimum distributions from an IRA or qualified plan, which of the following cannot be a designated beneficiary?

a. a spouse

b. an individual unrelated to the participant

c. a charity

d. a trust

12. Advantages of rolling a qualified plan over to an IRA include

a. an IRA can invest in life insurance

b. there may be more investment flexibility with an IRA

c. spousal consent is required for IRA distributions

d. the ability to take loans from the IRA

13. If a spouse is to be the beneficiary of an IRA or a qualified plan, it is generally preferrable to leave the IRA or qualified plan

a. to a bypass trust

b. to a QTIP trust

c. to the participant’s estate

d. outright to the spouse

14. Under a qualified domestic relations order (QDRO)

a. a demand for cash payment can be made even if the plan has no provision for the account owner

b. a person who receives a distribution because of a QDRO can roll over the distribution to his/her own retirement account and preserve the tax deferral

c. a means is provided to circumvent the provision that qualified plan benefits cannot be assigned to another

d. a and b

e. b and c

15. For IRAs, the early distribution penalty applies to all of the following, except

a. distributions attributable to the participant’s disability

b. distributuions to unemployed individuals for health insurance premiums under certain conditions

c. distributions to the IRA participant’s estate prior to the participant’s death

d. distributions for higher education costs for the taxpayer

e. distributions made on or after attainment of age 59 ½

16. As an actuary, you are helping Roadster Custom Auto Shop determine the annual cost of its defined benefit plan. In making your calculations, you must make reasonable assumptions about:

a. employee turnover rate

b. employee salary scale

c. future investment and inflation rates

d. all of the above

e. only b and c

17. Ann has a Roth IRA. She died this year. Her son Jim is the designated beneficiary. Jim is not required to start minimum distributions next year because Roth IRAs are not subject to the required minimum distribution rules after death.

a. true

b. false

18. Requirements for participant loans from qualified retirement plans include which of the following:

a. the loan must bear reasonable repayment terms

b. the loan may not exceed specific dollar limits

c. a written loan contract signed by all parties must be used

d. a and b

e. b and c

19. When rolling over an existing IRA to a Roth IRA, all of the following are true, except

a. the amount rolled over is not included in the gross income of the IRA account holder for federal income tax purposes

b. there is no limit on the rollover, and it can be a total or partial rollover of an existing IRA

c. distributions from the Roth IRA are received tax free if they are made after a 5-year holding period and they are made after age 59 ½, death, disability, or for a first-time home purchase

d. no minimum distribution rules apply to the Roth IRA except at death

e. all of the above are true

20. Jon, age 53, is a disabled veteran. He is married to Lisa, age 50, and they have two children. Their son Garrett is 15 years old. Their daughter Olivia is 23 years old and was diagnosed with multiple sclerosis when she was 22 years old. In determining who is entitled to Social Security disability benefits, which of the following are true?

(1) Only Jon is eligible

(2) Lisa is not eligible because she is not older than 62

(3) Lisa is eligible because she is caring for a child under age 16

(4) Garrett is eligible because he is unmarried and under age 18, but Olivia is not eligible because she was not diagnosed with a disability prior to age 22

a. (1) only

b. (1) and (2) only

c. (3) only

d. (3) and (4) only

Homework 3

DIRECTIONS: Here is the Homework #3 Assignment. Use the Homework #3 Answer Sheet for your responses to the questions. When you have completed Homework #3 submit the Answer Sheet to your Homework #3 Assignment Folder.

Number

Question

1 The IRS caught the plan trustee for Hopper Manufacturing violating the prohibited transaction rules. Hopper Manufacturing:

a. must pay a initial penalty equal to 5% of the amount involved

b. must pay a 100% penalty if the transaction is not corrected within time limits set by the IRS

c. may face penalties for breech of fiduciary responsibility

d. all of the above

e. only a and b

2 Sherin Blake, owner of Blake Architectural Design, Inc., has hired an actuary to calculate the funding requirement for the company’s defined benefit plan. To make an accurate calculation, the actuary will have to consider:

a. the estimated retirement age of all employees covered by the plan

b. the formula that Sherin chose to use to calculate employee retirement benefits

c. interest earnings on the fund

d. all of the above

e. only a and b

3 ERISA requires report and disclosure of benefits to plan participants under the

a. Summary Plan Description

b. Summary Annual Report

c. Individual Accrued Benefit Statement

d. all of the above

e. only a and b

4 Adequate liquidity is one of several specific investment objectives in a qualified plan. Which of the following types of assets offers the most liquidity?

a. common stock traded on the stock market

b. real estate

c. equipment leasing

d. long term debt

e. collectibles

5 Harper Engineering, Inc. offers several benefits to employees. Which of its benefits would be exempt from the ERISA reporting and disclosure requirements?

a. Harper pays for life insurance to provide for employee dependents if the employee dies

b. Harper gives each employee a small gift worth less than \$5 on St. Patrick’s Day

c. Harper has a scholarship program that pays for employee tuition for industry-relevant continuing education based on the employee passing the course, out of the employer’s general assets

d. b and c

e. a and c

6 Walter Graves, owner of Graves Excavating wants to deposit employer stock in a qualified individual account plan. The stock is not publicly traded. Which of the following is (are) true for Walter?

a. ERISA limits such contributions to 10% of fair market value of the assets

b. employer stock will provide the qualified plan with ample liquidity

c. Walter could use a profit-sharing plan to accomplish his objective

d. a and c

e. b and c

7 The retirement plan for Bethel Shalom synagogue must adhere to ERISA reporting and disclosure rules.

a. true

b. false

8 Wheels, a small bike sales and repair shop, has ten employees, 5 full time and 5 part time. Walt Morgan, the owner, can’t afford to provide many employee benefits, but he does provide all employees three full-pay sick days a year. He funds the sick pay out of his general assets. He also provides his full time employees with basic health insurance that has a high deductible to keep costs down. Walt pays an annual premium for this insurance out of his general assets. Under ERISA:

a. Walt must file an annual report to the IRS

b. Walt must provide employees with a Summary Plan Description

c. Walt must do either a or b

d. Walt must do both a and b

e. Walt qualifies for the small welfare plan exemption

9 Which of the following is (are) true regarding a cash balance plan?

a. employee bears investment risk

b. each participant has a hypothetical account that the employer credits at least annually

c. plan benefits older workers more than younger workers

d. a and c

e. b and c

10 An employer who wants to reward an employee’s years of service and contribution to the company (measured as salary) would use a defined benefit plan formula based on:

a. a flat amount

b. a flat percentage based on years of service

c. a flat percentage based on final average pay

d. a flat percentage based on career average pay

e. a unit credit formula

11 In a combination plan, retirement benefits are funded with a combination of

a. whole life policies

b. term life policies

c. assets in a ‘side fund’

d. a and c

e. b and c

12 A cash balance plan and a traditional defined benefit plan share which of the following characteristics:

a. Pension Benefit Guaranty Corporation coverage

b. employer bears investment risk

c. able to use Social Security integration

d. all of the above

e. only a and b

13 Alternatives to using life insurance in a qualified plan include

a. group term life insurance

b. split dollar life insurance

c. personally owned life insurance

d. all of the above

e. only a and b

14 Shannon McDougal will retire December 31 of this year. Shannon has worked for Shamrock Construction for 30 years. During his last 5 years, he earned \$40,000, \$47,000, \$44,000, \$46,000 and \$48,000. Shamrock’s retirement plan uses a unit credit formula that awards employees 1.5% for each year of service using a financial average of the last 3 years. Shannon’s annual benefit will be:

a. \$19,500

b. \$20,250

c. \$20,700

d. \$21,150

e. \$21,600

15 Bane Industries, Inc. has 1,000 employees. The average age of the workforce at Bane is 45 and 80% of the workers earn a mid-range income. Ten percent of workers are highly compensated and 10% of workers are low wage workers. Advantages of using a cash balance plan at Bane Industries include:

a. employer can spread administrative cost over a large number of employees

b. younger workers have time to accumulate retirement savings

c. employee bears investment risk

d. only a and b

e. only a and c

16 April Showers, age 30, opened the Unique Boutique 5 years ago. April has 5 employees ranging in age from 25 to 42. Earnings have fluctuated. Profits have been made only in the last two years. April:

a. should not have a defined benefit plan because it is designed for older business owners

b. should have a defined benefit plan because it will maximize April’s tax deduction

c. should not have a defined benefit plan because there are a large number of years until the owner or employees retire

d. should have a defined benefit plan because the owner can get \$1,500 tax credit for establishing a new retirement plan

e. should not establish a defined benefit plan because it is not likely April can meet the annual funding requirements

17 Well Corporation has a life insurance policy on the life of the owner Ben Well as part of his defined benefit plan. Ben plans to retire in five years at the age of 65. At that time, he will receive \$2,000 per month. The face value of his insurance policy is \$210,000. The IRS will treat Ben’s life insurance plan as an incidental death benefit.

a. true

b. false

18 John Appleton, owner of Appleton Enterprises, Inc. is considering installing a retirement plan in his company. He wants a plan that allows the use of Social Security integration. Which of the following plans would permit this?

a. cash balance plan

b. typical defined contribution plan

c. typical defined cost plan

d. a and b only

e. a and c only

19 Hal Staton died earlier this year at age 70. Hal was covered by life insurance provided by his employer’s defined benefit plan. Hal’s son, Walt Santon is the beneficiary of his father’s death benefit. The death benefit was \$100,000. When Hal died, the policy had a cash value of \$10,000. Walt:

a. receives the entire death benefit tax free

b. must pay tax on the entire \$100,000

c. must pay tax on any death benefits received above \$50,000

e. must pay tax on \$90,000

20 Sarah Tensley, owner of Riverwood Spas, a dealer for saunas and hot tubs, installed a qualified retirement plan in her business three years ago. Sarah’s strength is in public relations and sales. She says “numbers make me nervous,” so she has delegated the handling and investment of the retirement plan to a trustee.

a. Sarah has freed herself from any fiduciary responsibility, having transferred all of that responsibility to the plan trustee

b. Sarah should be sure that her liability insurance covers any liabilities that arise out of breech of fiduciary responsibility

c. Sarah can reimburse the plan trustee for any losses the trustee might incur as a result of performing fiduciary duties.

d. a and b

e. b and c

Homework 4

DIRECTIONS: Here is the Homework #4 Assignment. Use the Homework #4 Answer Sheet for your responses to the questions. When you have completed Homework #4 submit the Answer Sheet to your Homework #4 Assignment Folder.

1- Ocatagon Industries has an age-weighted profit sharing plan that uses a fixed age-weighted formula for allocating employer contributions. The plan covers 50 employees. The owner and two key employees are highly compensated, each earning \$500,000 per year. Average pay for the rank-and-file employees is \$35,000 per year. This year, the company allocated \$1,000 to each employee’s retirement account. The tax implications of such an allocation include which of the following?

a. because the plan is top-heavy, Ocatagon cannot receive a tax deduction until an employee withdraws funds from his or her retirement account

b. participant does not pay income tax on employer contributions and earnings until the plan participant withdraws the funds

c. plan distributions for hardship withdrawals made to employees before age 59 1/2 are tax free

e. a and c

2- Allen Industries has a money purchase benefit plan that is integrated with Social Security. The integration level is \$30,000. Employer contributions are 15% above and 10% below the integration level. Bill Wheaton earns \$75,000 this year. Allen Industries will contribute \$_____ to Bill’s money purchase plan this year:

a. \$9,750

b. \$4,500

c. \$6,750

d. \$3,000

e. none of the above

3- A disadvantage of profit sharing plans is that

a. employee bears the investment risk

b. actuarial costs make the plan expensive to administer

c. there is no predictable level of employer funding under the plan

d. a and b

e. a and c

4- All of the following are true regarding money purchase plans, except

a. most money purchase plan benefit formulas use a factor related to the employee’s service that favors owners and key employees

b. nondiscrimination regulations provide a safe harbor for money purchase plans

c. a plan benefit formula can be integrated with Social Security

d. forfeitures, unvested amounts left behind by employees in their plans, can be used to reduce future employer contributions

e. money purchase plan funds are generally invested in a pooled account managed by the employer or a fund manager selected by the employer

5- If employer contributions to a profit sharing plan are based on a discretionary provision, all of the following are true, except

a. the employer can determine each year the amount to be contributed

b. the employer can omit a contribution

c. if too many years go by without an employer contribution, the IRS will likely claim that the plan has been terminated

d. when a qualified plan is terminated, all nonvested amounts in participants’ accounts are forfeited.

e. all of the above are true

6- Evergreen Semiconductors, Inc., is a young and innovative company with 25 employees between 24 and 35 years of age. Turnover has averaged about 2% per year for the 9-year old company. Profit has been intermittent. The owners believe that a substantial investment will need to be made in new equipment next year. Which of the following retirement savings plans is best for Evergreen?

a. money purchase plan

b. target benefit plan

c. nonqualified deferred compensation plan

d. defined benefit plan

e. profit sharing plan

7- John Wald has participated in his company’s profit sharing plan for the past 15 years and currently has an account balance of \$250,000. Last month, his 12-year-old son had to have an emergency appendectomy. Complications extended his hospital stay to a week. Right before the accident, John used all of the family savings to purchase a new car. John must pay a \$2,000 deductible and an additional \$5,000 for medical expenses not covered under his medical plan. If John withdraws \$7,000 from his profit sharing plan,

a. he is in big trouble because withdrawals from a profit sharing plan are not allowed by law

b. he must pay income tax and a 10% penalty on the amount withdrawn

c. he must pay income tax but face only a 5% penalty for early withdrawal because it is a hardship withdrawal

d. all withdrawals from a profit sharing plan are penalty free, but income tax must be paid

e. he would pay income tax, but no early withdrawal penalty to the extent the medical expenses are tax-deductible

8- Which of the following is (are) true regarding an ESOP or stock bonus plan?

a. participant’s accounts are stated in terms of stock

b. employer contributions to employee accounts can be in stock or cash

c. stockholders must be given the right to vote on all issues

d. a and b

e. a and c

9- Sandy Beech earns \$40,000 as a guide for Tropical Tours, Inc. Tropical Tours typically contributes 10% of profit to its profit sharing plan. Total payroll for Tropical Tours is \$120,000. This year, Tropical Tours will contribute \$21,000 to its profit sharing plan. Sandy’s share this year will be

a. \$3,000

b. \$4,000

c. \$7,000

d. \$12,000

10- Which of the following types of businesses can have an ESOP or stock bonus plan?

a. S corporation

b. professional corporation

d. a and c

e. b and c

11- An advantage of a profit sharing plan from the employer’s point of view includes which of the following?

a. employer contributions to the plan are discretionary

b. plan can benefit long-term employees

c. nonvested benefits can be reallocated to remaining employees

d. allows integration with Social Security

e. all of the above

12- Stock bonus plans and ESOPs share many characteristics, but ESOPs have some unique characteristics. Which of the following characteristics is (are) unique to an ESOP?

a. accounts of employees over 55 must be offered diversification

b. employer’s ability to borrow to leverage ownership

c. tax-free treatment of appreciated company stock distributed to a retiree

d. a and b

e. b and c

13- The owner of Whitney Corporation, Inc., earned \$250,000 in 2013. In the same year, three highly compensated employees earned \$100,000 each. The remaining 30 line workers earn about \$20,000 each, for a total payroll of \$600,000 for this group of workers. Whitney Corporation made the maximum allowable contribution to each employee’s money purchase plan in 2013. In 2013, what was the total amount that Whitney Corporation contributed to their money purchase plan?

a. \$51,000

b. \$150,000

c. \$225,000

d. \$276,000

e. \$318,000

14- An ESOP enables the employer company to borrow money on a favorable basis. All of the following are true about ESOP loans, except

a. the ESOP trustee borrows money from a lending institution, such as a bank

b. the trustee uses the loan proceeds to purchase stock of the employer from the employer corporation or from principal shareholders

c. the employer makes tax-deductible contributions to the ESOP in amounts sufficient to enable the trustee to pay off the principal and interest of the loan to the lender

d. the leveraging feature of an ESOP loan distinguishes an ESOP from a regular stock bonus plan

e. all of the above are true

15- Which of the following is (are) true regarding the tax implications of having a money purchase plan?

a. employer contributions and plan earnings are tax-deferred for the employee

b. employers beginning a new plan are eligible for a \$2,500 business tax credit in the first year to help with startup costs

c. the employer tax deduction is limited to 25% of total payroll of the employees covered under the plan

d. only a and b

e. only a and c

16- Harris Corporation has a savings plan for employees. Last year, Harris made non-elective contributions amounting to 4% of compensation to all employee accounts. By doing this, Harris has met the contribution requirements for a safe harbor test.

a. true

b. false

17- The stock of Vagabond Corporation is not publicly traded. Vagabond has an ESOP. A. Wanderer, an employee

a. can expect that stock valuations will be made by an independent appraiser

b. can demand that distributions from the ESOP be made in the form of employer stock

c. can exercise a “put option”

d. all of the above

e. only a and b

18- Jane Tally has a thrift/savings plan with her employer. She knows

a. her contribution to the plan is voluntary and made with after-tax dollars

b. 100% of her contribution to her account is vested immediately

c. her employer’s contributions to her account must comply with Internal Revenue Code requirements for qualified plans

d. all of the above

e. only a and b

19- Which of the following is (are) true regarding elective deferrals in a Section 401(k)?

a. elective deferrals are not subject to Social Security and Federal Unemployment payroll taxes

b. elective deferrals are always made on an after-tax basis

c. if the company elects to have a safe harbor plan, elective deferrals must meet the actual deferral percentage test

d. account funds can be withdrawn without a premature distribution penalty if the employee becomes disabled or dies

e. since employees elect the amount of funds to defer, nondiscrimination tests do not apply to elective deferrals

20- Last year, employee contributions and employer matching contributions amounted to 4% of compensation for all nonhighly compensated employees at Addison Corporation, a 400-employee company. Which of the following options allow Addison to preserve a nondiscriminatory plan during this plan year?

a. satisfying the requirements of a safe harbor 401(k) plan

b. keeping the average ratio of nonhighly compensated employee contributions to highly compensated employee contributions at or below 4% to 6%

c. making sure employee contributions meet the requirements for a SIMPLE 401(k) plan

d. a and b

e. a and c

Final exam

FINC 355: RETIREMENT AND ESTATE PLANNING

TRUE OR FALSE

1. Traditional 401(k) plans can be funded entirely through salary reductions by employees, enabling employers to bear no additional cost for employee compensation.

2. A cash balance plan establishes a separate fund for each plan participant.

3. Defined benefit plans provide more benefit security than do age-weighted or cross-tested plans.

4. All group insurance programs offered to employees must comply with ERISA reporting and disclosure requirements.

5. A cross-tested plan uses a fixed age-weighted formula. The plan is designed to maximize benefits for a firm’s highly compensated employees while providing whatever is necessary for remaining employees to satisfy nondiscrimination regulations.

6. An employee cannot be covered under both a defined benefit and a defined contribution plan.

7. A self-employed person with less than 10 employees can use a money purchase plan to fund his or her own retirement.

8. Unlike a traditional IRA, a Roth IRA contribution is not restricted by active participation in an employer’s retirement plan.

9. An early distribution penalty can be assessed on Roth IRA withdrawals.

10. Account holders with more than one Roth IRA can treat them as separate accounts when calculating tax consequences of distributions from any of them.

11. A trust cannot provide for creditor protectioninsurance

12. Including a spendthrift clause is recommended for children with money management or substance abuse problems.

MULTIPLE CHOICE

13. All of the following are true regarding tax implicatons of cash balance plans, except

a. employer contributions to the plan are deductible when made

b. taxation of the employee on employer contributions is deferred

c. the plan is not subject to minimum funding rules of the Internal Revenue Code

d. certain employers who adopt a cash balance plan may be eligible for a business tax credit up to \$500

e. employees may make voluntary contributions to a “deemed IRA” established under the plan

14. Which of the following is (are) true regarding elective deferrals in a Section 401(k)?

a. elective deferrals are not subject to Social Security and Federal Unemployment payroll taxes

b. elective deferrals are always made on an after-tax basis

c. if the company elects to have a safe harbor plan, elective deferrals must meet the actual deferral percentage test

d. account funds can be withdrawn without a premature distribution penalty if the employee becomes disabled or dies

e. since employees elect the amount of funds to defer, nondiscrimination tests do not apply to elective deferrals

15. Which of the following types of employer plans are exempt from most or all ERISA provisions?

a. plans of state, federal, or local governments or governmental organizations

b. plans of churches, synagogues, or related organizations

c. plans maintained solely to comply with workers’ compensation, unemployment compensation, or disability insurance laws

d. all of the above

e. none of the above because no employer plans are exempt from ERISA provisions

16. Irrevocable Life Insurance Trusts (ILIT) are primarily designed to ensure that the death benefit is excludable from the insured’s federal gross estate.

a. true

b. false

17. All of the following approaches are commonly used to increase the security of benefits for an employee under a nonqualified deferred compensation plan, except

a. employer’s general assets

b. reserve account maintained by employer

c. third-party guarantees

d. corporate-owned life insurance

e. employer reserve account with employee investment direction

18. Paul owns the following property:

a. Boat (fee simple)

b. Condominium on the beach (tenancy in common with his brother and sister)

c. House and two cars with his wife, Karen (tenancy by the entirety)

d. Checking account with his son, William (POD)

e. Karate business (JTWROS with his partner, Mike)

Which item(s) will go through probate, if any? There may be multiple answers. List each LETTER you believe is correct.

19. Two brothers have consulted you about the purchase of a lakefront cottage. The brothers plan to use the cottage on a seasonal basis. They are unsure of how they should title the property. Which of the following items of information do you need to obtain before making a recommendation?

1. The purchase price of the cottage

2. How much each brother plans to cont

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