AWMA Exam Practice Questions with Correct Answers

AWMA Exam Practice Questions with Correct Answers What are the 4 rules in terms of investing in a small firm? - Answer-Time frame of at least 3-5 years, diversify among 20-30 different issues, avoid turnover of 30% annually, and sell if and when 40% of company's shares become owned by institutional investors. What is a characteristic of an unfunded excess benefit plan? - Answer-The plan generally need not comply with either the disclosure or reporting requirements of ERISA. Unfunded excess benefit plans need not comply with ERISA disclosure or filing requirements. What is a correct statement regarding federal transfer taxation of the transfer of wealth? - Answer-The generation-skipping transfer tax (GSTT) can be applied to transfers of wealth between parties who are not related to each other. If the transferor and transferee are not related to each other in any way, the GSTT can still apply if the transferee is more than 37.5 years younger than the transferor. The gift tax is tax exclusive. Direct payment of tuition expenses is exempt from gift tax and GSTT, but is not exempt from estate tax. The marital deduction merely delays application of the gift or estate tax until the recipient spouse dies. According to the investment pyramid, what sequence is correct in terms of increasing safety of principal (least to most safety of principal)? - Answer-*futures contracts, balanced mutual funds, EE bonds In terms of increased safety of principal, of the four sequences given, the investment pyramid in the study materials shows futures contracts (least safety), balanced mutual funds, EE bonds (most safety with principal guaranteed by the U.S. government) is the correct sequence. Three years ago, Kerri received a gift of 1,000 shares of Mica Inc. common stock from her parents. The fair market value of the stock on the date of the gift was $20,000. Kerri's parents purchased the stock several years earlier for $40,000. She sold this stock for $31,000 last week. What is the amount of gain or loss, if any, from Kerri's stock sale? - Answer-$0 Where the fair market value on the date of gift is less than the donor's adjusted basis, and the asset is sold at a price between the fair market value on the date of gift and the donor's adjusted basis, there is no gain or loss recognized on the sale. What trust will not entitle the grantor to take an annual exclusion upon funding the trust? - Answer-*Bypass trust in which income is paid at the discretion of the trustee For gifts to a trust to be entitled to the annual exclusion, income must be payable on a mandatory basis (Section 2503(b)), the beneficiaries must be given a general power of appointment (such as a Crummey power) over the trust assets, or the trust must conform to the requirements of Section 2503(c). A bypass trust that gives the trustee discretion over income is not entitled to the annual exclusion. When suggesting portfolio assets for a millennial investor, which would best suit that age group in general? - Answer-*36% equities, 22% fixed income, 21% real estate, 21% alternative investments Investors under 40 are more likely to choose real estate and alternative investments and less likely to choose equities and fixed income investments, as compared to investors 40 and over. What indicator would a contrarian investor interpret as a bullish indicator? - Answer- *bullish specialist sentiment Specialists are considered "smart money" and, therefore, if they are bullish a contrarian investor would follow their sentiment. Your client, John Westfall, is age 72. He has started taking required minimum distributions from his 401(k), which has grown to over $3 million. He currently has no IRA account. His RMDs are mostly an annoyance, as he doesn't need the funds to cover his living expenses, and he doesn't want to leave too much of an inheritance to his children. What planning option might you discuss with John? - Answer-*John could roll over a portion of the funds from his 401(k) to an IRA, and then execute a qualified charitable distribution from his IRA to his alma mater, the University of Notre Dame.