Chartered Financial Consultant (ChFC) Applied Comprehensive Financial Planning Flashcards

24 sample cards from the Applied Comprehensive Financial Planning deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Why should parents of a special-needs child avoid leaving assets or naming the child directly as a beneficiary?

   Direct ownership or a direct beneficiary designation gives the child countable resources that can disqualify them from SSI/Medicaid; instead, assets should pass to a properly drafted third-party special needs trust.

2. What are the three phases of the financial life cycle in wealth planning?

   (1) Accumulation phase — building assets, higher risk tolerance, growth focus; (2) Preservation (conservation) phase — protecting accumulated wealth, reducing risk; (3) Distribution phase — drawing down assets for income, tax-efficient withdrawals and legacy transfer.

3. How does appropriate asset allocation typically shift across the accumulation, preservation, and distribution phases?

   Accumulation favors a higher equity/growth allocation (long horizon); preservation shifts toward balanced/lower-volatility holdings; distribution emphasizes income, liquidity, and capital preservation to fund withdrawals and reduce sequence-of-returns risk.

4. What is sequence-of-returns risk and which life-cycle phase is most vulnerable to it?

   It is the risk that the ORDER of investment returns harms a portfolio when withdrawals occur, because poor returns early in retirement combined with withdrawals permanently deplete capital. The distribution phase is most vulnerable.

5. For a small business owner, what is a buy-sell agreement and what are its two main funding structures?

   A buy-sell agreement is a binding contract setting how an owner's interest is transferred upon death, disability, or withdrawal. The two structures are the cross-purchase (owners buy each other's interest) and the entity (redemption) agreement (the business buys the interest).

6. Compare a cross-purchase versus an entity (stock-redemption) buy-sell arrangement regarding number of life insurance policies needed.

   Cross-purchase requires each owner to insure every other owner: $n(n-1)$ policies for $n$ owners. An entity/redemption plan requires the business to own one policy per owner: $n$ policies, simpler with many owners but the surviving owners get no basis step-up in their existing shares.

7. What qualified retirement plan options are commonly recommended for small business owners, and what distinguishes a SEP IRA from a SIMPLE IRA?

   Common options include SEP IRA, SIMPLE IRA, solo 401(k), and defined benefit plans. A SEP is funded only by employer contributions (up to 25% of comp / a dollar cap), while a SIMPLE IRA allows employee deferrals plus a required employer match or nonelective contribution, suited to firms with employees.

8. What is key person (key employee) insurance and why might a small business owner need it?

   Key person insurance is a policy the business owns on an essential employee/owner; the business is beneficiary. It provides funds to offset lost profits, recruit/train a replacement, and reassure creditors if the key person dies or becomes disabled.

9. Compare a 529 plan and a Coverdell ESA for education funding.

   A 529 plan has high contribution limits, state tax benefits, and broad qualified-expense rules (K-12 tuition up to $10,000/yr, college, apprenticeships). A Coverdell ESA is limited to $2,000/year per beneficiary, has income phase-outs, and broader K-12 expense flexibility but must generally be used by age 30.

10. What are the gift-tax advantages of '5-year front-loading' (superfunding) a 529 plan?

    A donor may contribute up to five times the annual gift-tax exclusion in one year to a 529 and elect to treat it as made ratably over five years, using the annual exclusion each year and avoiding gift tax while front-loading tax-deferred growth.

11. How does the FAFSA generally treat a parent-owned 529 plan versus assets owned by the student?

    A parent-owned 529 is treated as a parental asset, assessed at a maximum of about 5.64% in the expected family/student aid contribution, which is far more favorable than student-owned assets, which are assessed at 20%.

12. What is the tax treatment of qualified withdrawals from a 529 plan, and what happens to non-qualified withdrawals?

    Qualified withdrawals (for qualified education expenses) are entirely income-tax-free. Non-qualified withdrawals are taxed on the earnings portion as ordinary income plus a 10% penalty on earnings.

13. In planning for sudden wealth (lottery, inheritance, IPO, settlement), what is the recommended initial behavioral step?

    Recommend a 'decision-free' cooling-off period: park the funds in safe, liquid accounts, assemble an advisory team (planner, CPA, attorney), avoid major purchases or commitments, and let emotions settle before making irreversible decisions.

14. What is the income tax basis rule for inherited property, and why is it favorable?

    Inherited property generally receives a step-up (or step-down) in basis to fair market value at the decedent's date of death under IRC §1014, eliminating tax on pre-death appreciation when the heir sells.

15. How do post-SECURE Act rules affect a non-spouse beneficiary who inherits a traditional IRA?

    Most non-eligible designated beneficiaries must fully distribute the inherited IRA within 10 years of the owner's death (the '10-year rule'), eliminating the old lifetime 'stretch' and creating significant income-tax-timing planning needs.

16. Who are the 'eligible designated beneficiaries' exempt from the SECURE Act 10-year rule?

    Surviving spouses, minor children of the account owner (until majority), disabled individuals, chronically ill individuals, and beneficiaries not more than 10 years younger than the owner; these may still use life-expectancy stretch distributions.

17. What are best practices for effectively presenting recommendations to clients?

    Use plain language, tie each recommendation to a stated goal, prioritize and quantify, present trade-offs and alternatives, use visuals, confirm understanding, and obtain explicit client buy-in before moving to implementation.

18. What is the planner's role during the implementation step of the financial planning process?

    To put approved recommendations into action: assign responsibilities (client, planner, other professionals), set deadlines, complete applications and transfers, and coordinate so each step happens in the correct sequence.

19. Why is coordination with other professionals (CPA, attorney, insurance agent) essential, and what is the planner's role?

    Because comprehensive plans cross legal, tax, and insurance domains beyond the planner's licensure. The planner acts as the 'quarterback,' identifying needs, making referrals, sharing information, and ensuring the professionals' work stays aligned with the overall plan.

20. What are the typical triggers for monitoring and updating a financial plan?

    Scheduled periodic reviews (e.g., annual) plus life-event triggers: marriage, divorce, birth, death, job change, inheritance, major purchase, health change, and significant tax-law or market changes.

21. What is the purpose of a regular review cycle in the ongoing financial planning relationship?

    To measure actual progress against goals, rebalance portfolios, adjust for changed circumstances and laws, update beneficiary designations and documents, and keep the plan a living, current roadmap rather than a static report.

22. What are the standard steps of the financial planning process used to structure a comprehensive case study?

    (1) Establish the client relationship and scope; (2) Gather data and define goals; (3) Analyze and evaluate the client's current status; (4) Develop and present recommendations; (5) Implement recommendations; (6) Monitor and review the plan.

23. In a comprehensive case study, how is a 'goal funding gap' analyzed?

    Project the future cost of the goal, compute the future value of currently dedicated resources, and the gap is the shortfall: $$\text{Gap} = \text{FV of Goal Cost} - \text{FV of Current Resources}$$ then solve for the additional periodic savings needed to close it.

24. When analyzing whether a client can fund retirement, what is the capital-needs/income-replacement objective and a common target replacement ratio?

    The objective is to accumulate enough capital so that withdrawals plus other income (Social Security, pensions) replace pre-retirement spending. A commonly cited target replacement ratio is roughly 70%–85% of pre-retirement income, adjusted for the client's specific lifestyle and goals.

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