CFP PREP EXAM |ACTUAL QUESTIONS AND
VERIFIED ANSWERS|BRAND NEW 2026-2027
UPDATE|GRADED A+
Question 1
Which of the following does the Federal Reserve use to control the money supply?
1. Adjusting the discount rate
2. Open market operations
3. Fiscal policy
A) 2 and 3
B) 1 only
C) 1 and 2
D) 2 only
CORRECT ANSWER
C) 1 and 2. The Federal Reserve can control the money supply by adjusting the discount
rate. For example, a higher discount rate discourages banks from lending money and
reduces the amount of money in circulation. The Federal Reserve also uses open market
operations to control the money supply. By buying government securities in the open
market, for example, the Fed can increase the amount of money in circulation. Fiscal
policy is conducted by Congress.
Question 2
Which of the following employee(s) is(are) highly compensated for qualified plan
nondiscrimination testing purposes in the current year?
1. Stephen, a 6% owner of an incorporated law firm
2. Franklin, who earned $145,000 last year and he was the top-paid employee
1
,3. Jerome, whose salary was the 10th highest of 50 employees and who earned $75,000 last
year
4. Margo, a corporate vice president of marketing and 1% owner of the company, whose
salary last year was $68,000
A) 2 only
B) 1 and 2
C) 1, 2, and 4
D) 1, 3, and 4
CORRECT ANSWER
B) 1 and 2. Stephen and Franklin are highly compensated for qualified plan purposes in
the current year. A highly compensated employee is one who was a greater than 5%
owner of the employer at any time during the current year or preceding year, or for the
preceding year, had compensation greater than $135,000 (2022).
Question 3
Duane, a financial planner, is meeting with Lisa, who wants information regarding how
several investment sales she has completed this year will impact her income tax return.
Lisa has sold the following properties:
-Section 1202 stock, which Lisa purchased on December 12, 2019, for $50,000 and sold on
December 15, 2022, for its FMV of $65,000.
-A vacation home Lisa inherited from her uncle, who died in 2020 and who had a basis of
$95,000 in the home. The home had a FMV of $135,000 in his gross estate. Lisa sold it for
$160,000 on July 1, 2022. Lisa has used the vacation home only four weeks since she
inherited it; otherwise it was vacant.
-Stock Lisa inherited from another uncle, who also died in 2020. His basis in the stock was
$20,000 and the FMV in his gross estate was $15,000. Lisa sold it on November 1, 2022, for
$17,000.
What should Duane tell Lisa?
2
,1. 100% of the gain on the sale of the Section 1202 stock is
CORRECT ANSWER
C) 2 and 3. Statement 2 is correct. Lisa's basis in the stock is the FMV of the stock in her
uncle's gross estate, $15,000. Statement 3 is correct. All of the gain on the sale of the
vacation home is capital gain. Statement 1 is incorrect. Section 1202 stock must be held
for five years in order for Lisa to exclude the gain from her taxable income. Statement 4 is
incorrect. The total gain Lisa must recognize is $42,000 ($15,000 on the Section 1202
stock + $25,000 on the vacation home sale + $2,000 from the stock sale). Note that the
vacation home does NOT qualify for the Section 121 gain exclusion, which applies to the
sale of a personal residence only.
Question 4
An 80-year-old widower explains to you that he is risk averse and wishes to find an
investment that will provide him with preservation of capital. Which of the following
should you recommend?
A) bank-insured CDs
B) preferred stock
C) long-term U.S. government bonds
D) S&P 500 index fund
CORRECT ANSWER
A) bank-insured CDs. Certificates of deposit (CDs) are deposits made with a bank or
savings and loan for a specified period, commonly one month to five years. CDs have
traditionally been used to provide an income stream to retirees. CDs are FDIC insured,
which is often a reason for investors' interest in purchasing CDs.
Question 5
A client consults a financial professional for help in formulating an estate plan. The client is
in poor health and expects to die within the next 3 to 4 years. He has a large estate and
would like to begin taking steps to reduce any estate tax that might be due at his death.
3
, The client is a widower with 1 adult daughter. The client owns the following property in his
name alone:
- A life insurance policy insuring his own life, with a death benefit of $5 million
- A personal residence with a market value of $6 million
- A brokerage fund with a balance of $10 million
Which of the following steps should the client implement first to meet his objectives?
A) Gift the residence to his daughter.
B) Add his daughter's name to the brokerage account as JTWROS.
C) Transfer ownership of the life insurance policy to his daughter.
D) Transfer his residence to an irrevocable living trust.
CORRECT ANSWER
C) Transfer ownership of the life insurance policy to his daughter. The proceeds of the life
insurance policy will be included in the client's gross estate if the client owns the policy
when he dies or if he transferred ownership of the policy within 3 years before his death.
Given the client's poor health and short life expectancy, the most urgent step is to
transfer ownership of the policy to his daughter. If the client survives for 3 years after the
transfer, the $5 million in death benefits will be removed from his gross estate. The 3-
year rule would not apply to a gift of the residence to an irrevocable trust or to the
daughter directly, so making either of these transfers is less urgent. Adding his daughter's
name to the brokerage account as JTWROS would not reduce the client's gross estate
because he supplied all of the consideration for the account.
Question 6
Which of the following statements regarding the skilled nursing facility benefit under
Medicare Part A is(are) CORRECT?
After 100 days of coverage in a benefit period, the patient must pay the entire cost of
remaining in the facility.
The skilled nursing facility benefit pays the entire cost of the first 30 days while the patient is
in the facility.
The skilled nursing facility benefit pays for custodial care received in a nursing home.
4
VERIFIED ANSWERS|BRAND NEW 2026-2027
UPDATE|GRADED A+
Question 1
Which of the following does the Federal Reserve use to control the money supply?
1. Adjusting the discount rate
2. Open market operations
3. Fiscal policy
A) 2 and 3
B) 1 only
C) 1 and 2
D) 2 only
CORRECT ANSWER
C) 1 and 2. The Federal Reserve can control the money supply by adjusting the discount
rate. For example, a higher discount rate discourages banks from lending money and
reduces the amount of money in circulation. The Federal Reserve also uses open market
operations to control the money supply. By buying government securities in the open
market, for example, the Fed can increase the amount of money in circulation. Fiscal
policy is conducted by Congress.
Question 2
Which of the following employee(s) is(are) highly compensated for qualified plan
nondiscrimination testing purposes in the current year?
1. Stephen, a 6% owner of an incorporated law firm
2. Franklin, who earned $145,000 last year and he was the top-paid employee
1
,3. Jerome, whose salary was the 10th highest of 50 employees and who earned $75,000 last
year
4. Margo, a corporate vice president of marketing and 1% owner of the company, whose
salary last year was $68,000
A) 2 only
B) 1 and 2
C) 1, 2, and 4
D) 1, 3, and 4
CORRECT ANSWER
B) 1 and 2. Stephen and Franklin are highly compensated for qualified plan purposes in
the current year. A highly compensated employee is one who was a greater than 5%
owner of the employer at any time during the current year or preceding year, or for the
preceding year, had compensation greater than $135,000 (2022).
Question 3
Duane, a financial planner, is meeting with Lisa, who wants information regarding how
several investment sales she has completed this year will impact her income tax return.
Lisa has sold the following properties:
-Section 1202 stock, which Lisa purchased on December 12, 2019, for $50,000 and sold on
December 15, 2022, for its FMV of $65,000.
-A vacation home Lisa inherited from her uncle, who died in 2020 and who had a basis of
$95,000 in the home. The home had a FMV of $135,000 in his gross estate. Lisa sold it for
$160,000 on July 1, 2022. Lisa has used the vacation home only four weeks since she
inherited it; otherwise it was vacant.
-Stock Lisa inherited from another uncle, who also died in 2020. His basis in the stock was
$20,000 and the FMV in his gross estate was $15,000. Lisa sold it on November 1, 2022, for
$17,000.
What should Duane tell Lisa?
2
,1. 100% of the gain on the sale of the Section 1202 stock is
CORRECT ANSWER
C) 2 and 3. Statement 2 is correct. Lisa's basis in the stock is the FMV of the stock in her
uncle's gross estate, $15,000. Statement 3 is correct. All of the gain on the sale of the
vacation home is capital gain. Statement 1 is incorrect. Section 1202 stock must be held
for five years in order for Lisa to exclude the gain from her taxable income. Statement 4 is
incorrect. The total gain Lisa must recognize is $42,000 ($15,000 on the Section 1202
stock + $25,000 on the vacation home sale + $2,000 from the stock sale). Note that the
vacation home does NOT qualify for the Section 121 gain exclusion, which applies to the
sale of a personal residence only.
Question 4
An 80-year-old widower explains to you that he is risk averse and wishes to find an
investment that will provide him with preservation of capital. Which of the following
should you recommend?
A) bank-insured CDs
B) preferred stock
C) long-term U.S. government bonds
D) S&P 500 index fund
CORRECT ANSWER
A) bank-insured CDs. Certificates of deposit (CDs) are deposits made with a bank or
savings and loan for a specified period, commonly one month to five years. CDs have
traditionally been used to provide an income stream to retirees. CDs are FDIC insured,
which is often a reason for investors' interest in purchasing CDs.
Question 5
A client consults a financial professional for help in formulating an estate plan. The client is
in poor health and expects to die within the next 3 to 4 years. He has a large estate and
would like to begin taking steps to reduce any estate tax that might be due at his death.
3
, The client is a widower with 1 adult daughter. The client owns the following property in his
name alone:
- A life insurance policy insuring his own life, with a death benefit of $5 million
- A personal residence with a market value of $6 million
- A brokerage fund with a balance of $10 million
Which of the following steps should the client implement first to meet his objectives?
A) Gift the residence to his daughter.
B) Add his daughter's name to the brokerage account as JTWROS.
C) Transfer ownership of the life insurance policy to his daughter.
D) Transfer his residence to an irrevocable living trust.
CORRECT ANSWER
C) Transfer ownership of the life insurance policy to his daughter. The proceeds of the life
insurance policy will be included in the client's gross estate if the client owns the policy
when he dies or if he transferred ownership of the policy within 3 years before his death.
Given the client's poor health and short life expectancy, the most urgent step is to
transfer ownership of the policy to his daughter. If the client survives for 3 years after the
transfer, the $5 million in death benefits will be removed from his gross estate. The 3-
year rule would not apply to a gift of the residence to an irrevocable trust or to the
daughter directly, so making either of these transfers is less urgent. Adding his daughter's
name to the brokerage account as JTWROS would not reduce the client's gross estate
because he supplied all of the consideration for the account.
Question 6
Which of the following statements regarding the skilled nursing facility benefit under
Medicare Part A is(are) CORRECT?
After 100 days of coverage in a benefit period, the patient must pay the entire cost of
remaining in the facility.
The skilled nursing facility benefit pays the entire cost of the first 30 days while the patient is
in the facility.
The skilled nursing facility benefit pays for custodial care received in a nursing home.
4
