Client Investment Recommendations and Strategies — Series 65 practice questions

Cash-value life insurance offers tax deferral on:

1. Inside build-up of cash value under the applicable rule.
2. Premium payments under the applicable rule under the applicable rule.
3. Death benefit only under the applicable rule under the applicable rule.
4. Loan repayments under the applicable rule under the applicable rule.

Answer: A — Inside build-up of cash value under the applicable rule.

A) Correct — inside build-up accumulates tax-deferred. B) Premiums are not tax-deferred; they're after-tax. C) Death benefit is generally tax-free, a separate feature. D) Loan repayments have no tax event.

Strategic asset allocation, as distinguished from tactical asset allocation, is BEST described as:

1. A long-term target mix based on the client's objectives, periodically rebalanced back to target.
2. Short-term shifts away from target weights to exploit perceived market opportunities.
3. A prohibition on ever changing portfolio weights.
4. A strategy used exclusively by day traders.

Answer: A — A long-term target mix based on the client's objectives, periodically rebalanced back to target.

A) Correct — strategic allocation sets a long-term target mix aligned with goals, risk tolerance, and time horizon, with rebalancing back to that target over time. B) Short-term, opportunistic weight shifts describe tactical allocation, not strategic. C) Strategic allocation still permits periodic rebalancing; it isn't a freeze on all changes. D) Day trading involves very short holding periods, unrelated to a long-term strategic framework.

An accredited investor under Rule 501 includes an individual with:

1. $100,000 income under the applicable rule.
2. Any brokerage account under the applicable rule.
3. $500,000 net worth under the applicable rule.
4. $200,000 individual income for two years.

Answer: D — $200,000 individual income for two years.

A) Below the threshold. B) An account alone doesn't confer accredited status.C) Below the threshold. D) Correct — individual income $200K (or $300K joint) with continuing expectation, or $1M net worth ex-primary residence.

The Uniform Transfers to Minors Act (UTMA) transfers assets to the minor:

1. At age 18 automatically under the applicable rule.
2. At the age of majority per state.
3. Never — the custodian retains title.
4. Only with court approval under the applicable rule.

Answer: B — At the age of majority per state.

A) Age 18 is not universal. B) Correct — UTMA transfers at the state's age of majority (often 21). C) The minor is the owner from inception. D) No court approval is needed.

A bond trading at a premium to its par value has a yield-to-maturity that is:

1. Higher than its coupon rate.
2. Equal to its coupon rate, always.
3. Unrelated to its coupon rate.
4. Lower than its coupon rate.

Answer: D — Lower than its coupon rate.

D) Correct — when price exceeds par, the effective yield an investor earns falls below the stated coupon. A) This reverses the actual price/yield relationship for a premium bond. B) Coupon and YTM are equal only when the bond trades exactly at par. C) Price, coupon, and yield are mathematically linked, not unrelated.

The federal estate tax applies at the individual level above the:

1. Annual gift exclusion.
2. AGI phaseout under the applicable rule.
3. LTCG threshold under the applicable rule.
4. Unified credit exemption.

Answer: D — Unified credit exemption.

A) The annual exclusion is a separate gifting limit. B) AGI phaseouts govern deductions, not estate tax.C) LTCG relates to income tax. D) Correct — the unified credit shelters estates below the exemption.

A traditional IRA contribution's deductibility phases out when the taxpayer:

1. Has any earned income under the applicable rule.
2. Is under age 50 under the applicable rule.
3. Is a Roth beneficiary under the applicable rule.
4. Is an active participant with high MAGI.

Answer: D — Is an active participant with high MAGI.

A) Earned income is required; phaseout is a separate test. B) Under-50 status affects catch-up, not phaseout.C) Roth beneficiary status is irrelevant. D) Correct — active participants above MAGI limits lose deductibility.

REIT distributions to shareholders are MOST often taxed as:

1. Qualified dividends taxed in full at preferential capital gains rates.
2. Return of capital only, never taxable.
3. Tax-exempt income similar to municipal bond interest.
4. Ordinary income, since REITs generally do not pay corporate-level tax on distributed earnings.

Answer: D — Ordinary income, since REITs generally do not pay corporate-level tax on distributed earnings.

D) Correct — because REIT income avoids entity-level tax, most distributions are passed through and taxed to shareholders as ordinary income. A) Most REIT distributions do not qualify for the preferential qualified-dividend rate, unlike typical corporate dividends. C) REIT income is not tax-exempt like municipal interest. B) A portion of distributions can be return of capital, but this is not the typical characterization of the bulk of REIT income.

The wash sale rule disallows a taxpayer from deducting a loss on a security sale if the taxpayer:

1. Sells the security at a gain instead of a loss.
2. Buys a substantially identical security within 30 days before or after the sale.
3. Holds the security for more than one year before selling.
4. Sells the security inside a Roth IRA.

Answer: B — Buys a substantially identical security within 30 days before or after the sale.

B) Correct — the wash sale rule disallows the loss deduction when a substantially identical security is purchased within the 61-day window (30 days before or after the sale). A) The wash sale rule applies specifically to losses, not gains. C) Holding period relates to long-term vs. short-term gain classification, not the wash sale trigger. D) The rule targets the repurchase timing, not the specific account type where the sale occurs (though IRA repurchases raise their own wash-sale complications).

An irrevocable life insurance trust (ILIT) is commonly used PRIMARILY to:

1. Increase the size of the insured's probate estate.
2. Remove life insurance proceeds from the insured's taxable estate while still providing liquidity to beneficiaries.
3. Guarantee the insurer will never raise premiums.
4. Convert term insurance into a variable annuity automatically.

Answer: B — Remove life insurance proceeds from the insured's taxable estate while still providing liquidity to beneficiaries.

B) Correct — by having the ILIT (rather than the insured) own the policy, death proceeds can be kept outside the insured's taxable estate while still delivering liquid funds to beneficiaries, often to help cover estate costs. A) The strategy is designed to shrink, not grow, the taxable estate. C) An ILIT has no effect on the insurer's premium-setting practices. D) An ILIT is a trust structure, not a mechanism for converting one insurance product into an annuity.

What is the difference between strategic and tactical asset allocation?

Strategic allocation sets long-term target weights based on goals/risk tolerance and is rebalanced periodically. Tactical allocation makes short-term deviations from those targets to exploit perceived market opportunities.

What is anchoring bias in behavioral finance?

The tendency to rely too heavily on an initial reference point (like a stock's purchase price or 52-week high) when making decisions, even when that reference point is no longer relevant to current value.

What is the sequence of returns risk?

The risk that poor returns early in retirement (when withdrawals are being made) will permanently deplete the portfolio, even if average returns are adequate.

What is the net investment income tax (NIIT)?

A 3.8% surtax on investment income for individuals with MAGI above $200K (single) or $250K (married). Applies to interest, dividends, capital gains, rents.