Personal Financial Advisory Services Questions and Answers

Sample Questions and Answers

What is the primary goal of personal financial planning?

A) Maximize short-term savings

B) Ensure financial stability and achieve long-term financial goals

C) Minimize tax liabilities only

D) Increase current cash flow
Answer: B

Which of the following is a key component of a financial plan?

A) Investment portfolio analysis

B) Insurance needs evaluation

C) Tax strategy

D) All of the above
Answer: D

What is the first step in creating a personal financial plan?

A) Analyzing investment options

B) Determining cash flow needs

C) Establishing goals

D) Tax planning
Answer: C

Which of these is typically considered a short-term financial goal?

A) Saving for retirement

B) Paying off credit card debt within a year

C) Building a trust for dependents

D) Estate tax planning
Answer: B

Which type of trust allows for income distribution during the grantor’s lifetime but avoids probate?

A) Revocable trust

B) Irrevocable trust

C) Testamentary trust

D) Charitable remainder trust
Answer: A

What is the current (2024) federal estate tax exemption for an individual in the U.S.?

A) $5.34 million

B) $11.58 million

C) $12.92 million

D) $15 million
Answer: C

Gift taxes apply when the value of a gift exceeds which of the following annual exclusion limits (2024)?

A) $10,000

B) $15,000

C) $17,000

D) $20,000
Answer: C

Which tax planning strategy reduces the taxable estate and provides income to the grantor during their lifetime?

A) Gifting assets to heirs

B) Establishing a Qualified Personal Residence Trust (QPRT)

C) Funding a retirement account

D) Creating an Irrevocable Life Insurance Trust (ILIT)
Answer: B

What is the main purpose of asset allocation in a financial plan?

A) Maximize returns regardless of risk

B) Spread investments to balance risk and return

C) Concentrate investments in high-growth areas

D) Eliminate taxes on investment income
Answer: B

Which of the following is a low-risk investment vehicle?

A) Corporate bonds

B) Index funds

C) Treasury bills

D) Real estate investment trusts (REITs)
Answer: C

What type of life insurance provides coverage for a specified term and has no cash value?

A) Whole life insurance

B) Universal life insurance

C) Term life insurance

D) Variable life insurance
Answer: C

Which retirement account allows for tax-deferred contributions and growth?

A) Roth IRA

B) Traditional IRA

C) Brokerage account

D) Savings account
Answer: B

What is the maximum contribution limit for a 401(k) in 2024 for individuals under 50?

A) $19,000

B) $20,500

C) $22,500

D) $25,000
Answer: C

Which retirement plan is designed specifically for self-employed individuals?

A) SEP IRA

B) SIMPLE IRA

C) 403(b)

D) Defined benefit plan
Answer: A

What is the primary purpose of estate planning?

A) Minimize legal fees

B) Reduce estate taxes and ensure assets are distributed per the owner’s wishes

C) Avoid creating a will

D) Liquidate assets before death
Answer: B

Which document specifies medical treatment preferences if an individual is unable to make decisions?

A) Last will and testament

B) Living will

C) Durable power of attorney

D) Trust agreement
Answer: B

What is the primary purpose of a power of attorney?

A) To create a will

B) To designate someone to manage financial or medical decisions

C) To establish guardianship

D) To transfer property after death
Answer: B

What does the fiduciary duty of a financial advisor entail?

A) Acting in the best interest of the client

B) Maximizing their own commission

C) Avoiding complex investment strategies

D) Providing tax advice exclusively
Answer: A

Which regulatory body oversees financial advisors in the U.S.?

A) FDIC

B) SEC

C) FINRA

D) IRS
Answer: B

If a client wants to gift $50,000 to their child, how much is subject to gift tax in 2024?

A) $33,000

B) $17,000

C) $50,000

D) $0
Answer: A

A business owner seeks advice on reducing income tax liabilities. What strategy might you suggest?

A) Invest in municipal bonds

B) Create an irrevocable trust

C) Open a Roth IRA

D) Delay income to the following year
Answer: A

 

What is the primary benefit of a grantor retaining income from a Grantor Retained Annuity Trust (GRAT)?

A) Reduce gift tax obligations

B) Defer income tax payments

C) Maximize trust income distribution to beneficiaries

D) Eliminate estate taxes entirely
Answer: A

What is the primary tax benefit of gifting appreciated assets to a charity?

A) The donor avoids capital gains tax on the asset’s appreciation

B) The donor receives a deduction for the asset’s original purchase price

C) The charity pays lower taxes on the gift

D) The donor reduces future taxable income
Answer: A

In estate planning, what does the “step-up in basis” rule refer to?

A) Adjusting the asset’s value to the market price at the time of inheritance

B) Increasing the capital gains tax rate for inherited assets

C) Using a higher tax rate for gifted property

D) Eliminating taxes on inherited property
Answer: A

Which of the following is a common strategy for reducing taxable income for high-income individuals?

A) Increasing cash reserves

B) Contributing to a Health Savings Account (HSA)

C) Investing in certificates of deposit (CDs)

D) Delaying estate planning decisions
Answer: B

Insurance and Risk Management

Which of the following describes umbrella insurance?

A) A policy that covers only life insurance claims

B) Additional liability insurance that supplements underlying policies

C) A specialized policy for corporate entities only

D) Insurance that guarantees full reimbursement for all losses
Answer: B

What is a key characteristic of long-term care insurance?

A) Covers lost wages during disability

B) Pays for services such as nursing home care and assisted living

C) Excludes coverage for chronic illnesses

D) Is required by federal law for individuals over 65
Answer: B

What is the purpose of key person insurance in a business context?

A) Protect the company from losses due to the death or disability of an essential employee

B) Cover liabilities related to employee lawsuits

C) Provide group health benefits to all employees

D) Secure funds for employee retirement plans
Answer: A

Estate Planning

Which estate planning tool allows an individual to transfer assets while retaining income from them during their lifetime?

A) Revocable living trust

B) Charitable lead trust (CLT)

C) Testamentary trust

D) Generation-skipping trust (GST)
Answer: B

What is the primary function of a durable power of attorney?

A) To create a trust for children

B) To appoint someone to manage financial or medical decisions if the grantor becomes incapacitated

C) To establish rules for distributing assets after death

D) To reduce estate taxes during the grantor’s lifetime
Answer: B

Which type of trust is commonly used to benefit grandchildren and reduce generation-skipping transfer tax?

A) Special needs trust

B) Irrevocable life insurance trust (ILIT)

C) Generation-skipping trust (GST)

D) Charitable remainder trust
Answer: C

Retirement Planning

Which retirement plan allows employers to contribute to employees’ retirement accounts based on profits?

A) SIMPLE IRA

B) Profit-sharing plan

C) 401(k) plan

D) Defined benefit plan
Answer: B

What is the main difference between a Roth IRA and a Traditional IRA?

A) Contribution limits

B) Tax treatment of contributions and withdrawals

C) Eligibility requirements

D) Investment options
Answer: B

At what age must individuals start taking Required Minimum Distributions (RMDs) from a Traditional IRA as of 2024?

A) 65

B) 70 ½

C) 73

D) 75
Answer: C

Financial Planning for Business Owners

What is the primary tax benefit of incorporating a business?

A) Higher income tax rates for the business owner

B) Separation of personal and business liabilities

C) Deduction of business expenses from taxable income

D) Exemption from all federal taxes
Answer: C