2018

CERTIFIED
FINANCIAL
PLANNER EXAM

HOW TO PASS THE

2018 CFP EXAM
THE ULTIMATE CHEAT SHEET
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INTRODUCTION
• Success will take a lot of hard work.
• Pass rates are in the 60% range but can be greatly increased with
a solid plan and additional insights.
• The exam is given 3 times a year, so having a pre-planned study
schedule that aligns with the test dates is critical as many fail
because they don’t put in the required study time.
THE WINNING STRATEGY
• To have a winning strategy, it’s important to understand the 4 S’s
for success. First, you must understand the exam’s setup. Then,
understand the subjects, followed by the study required and
finally the system.
CFP SETUP
• There are 170 multiple-choice questions (in six hours with an
extra 40-minute break). That’s approximately 2 minutes per
question, which includes comprehensive and mini cases. So, pace
and stamina are important.
• The following information outlines the 8 Principal Knowledge
Topic Areas as seen by the CFP Board.
CFP SUBJECTS:
8 PRINCIPAL KNOWLEDGE TOPIC AREAS:
A.  rofessional Conduct and Regulation (7%)
P
B. General Principles of Financial Planning (17%)
C. Education Planning (6%)
D. Risk Management and Insurance Planning (12%)
E. Investment Planning (17%)
F. Tax Planning (12%)
G. Retirement Savings and Income Planning (17%)
H. Estate Planning (12%)
THE CFP STUDY REQUIREMENT
• There is no predetermined pass rate, so your goal is to get the
highest score possible; therefore, it’s important to make sure
to have the biggest percentages areas covered well. However,
allotting extra time to difficult areas is important. Many
candidates say taxes cause them grief if they aren’t familiar with
the content.
• It’s important to look at the material from an understanding
perspective on the CFP exam. Strict memorization can lead to
failure as there are case studies. Candidates must be able to apply
their knowledge, and understanding the CFP Board’s rationale for
answers is important.
• A clear study plan covering all areas generally requires between
200 and 300 hours of preparation. Commit to the study plan and
gain “buy-in” from friends and family to support your success by
not enticing you to do other activities when you need to study.
• Get support, generally through solid materials, with tips and
insights to take away the mystery of the exam.
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THE CFP SYSTEM
• Start with the materials. A student should underline, highlight,
circle, as well as annotate in the margins any examples, insights,
tips, etc. found in the material. It sounds old school, but the act of
writing will greatly enhance retention, so it is an integral part of
the approach.
• Watch the videos, which will highlight important concepts and
areas to have nailed. It also helps to direct you by highlighting
tips, running through examples, and giving various mnemonics
and information that is often found on the exam.
• The importance of practice to retain the material until exam day
cannot be overstated. Make sure to do ALL your questions, and if
you have time, do them again. This will refine your approach to
the questions. In addition, questions that examine concepts that
have given students heartburn over the years, as well as concepts
that are not examined in Multiple Choice Question (MCQ) format
in the assigned material, are essential.
OTHER TIPS
• On exam day, answer every question. You’re shooting for the best
score as there is no minimum passing score.
• Stick to your first answer as it’s often your best.
TIPS BY EACH PRINCIPAL KNOWLEDGE
TOPIC AREA
A. PROFESSIONAL CONDUCT
AND REGULATION (7%)
The Professional Conduct and Regulation section is a lighter portions
of the eight principal knowledge topics. It’s only worth 7%, but there
are no computations, so make sure you pick up all those easy points.
(A.1) CFP Board’s Code of Ethics and Professional Responsibility
and Rules of Conduct
Three components: 1) The Code of Ethics, 2) the Rules of Conduct,
and 3) The Practice Standards. Taken together, they represent a CFP
professional’s responsibilities to the public, to clients, to colleagues,
and to employers. One thing the CFP exam loves to test is the things
that will automatically bar you from certification vs. things that will
probably bar you from certification.
(A.2) CFP Board’s Financial Planning Practice Standards
Best practices for the delivery of financial planning, organized to
correspond to the six-step financial planning process. It’s designed
this way to facilitate a consistent, professional, and reliable approach
to financial planning by those that hold the CFP marks.
(A.3) CFP Board’s Disciplinary Rules and Procedures
Several legal instances violate the candidate fitness standards and
will always or presumably bar you from CFP certification. It’s often
tested, and it’s easy points. Beyond those items, the CFP Board
is responsible for monitoring the behavior, and administering
disciplinary action for those who: a) hold the CFP certification, b)
gave passed the CFP exam, but have not yet met the experience
requirement, c) are enrolled in a registered CFP certificate or for-
credit academic program, or d) are registered to sit for an upcoming
CFP exam.
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(A.4) Function, Purpose, and Regulation of Financial Institutions of analysis. Pay extra attention to the lesson on Time Value of Money
Financial advisers are generally regulated by either the Securities and (TVM).
Exchange Commission (SEC) or the state securities commission for (B.8) Financial Planning Process
which the advisor is located as governed by the Investment Advisers
Analyze
Act of 1940. Generally, only advisers with at least $100 million in AUM Client’s Develop Implement Monitor
Establish the Gather the
must register with the SEC, with smaller firms registering with the Relationship Client Data
Current Recommen- Recommen- Recommen-
Financial dations dations dations
state(s) in which they do business. There are a few exceptions to the Status
rule of who must register as an investment advisor, but it does not
mean they may not be required to register with other regulators in This six step process can easily be remembered with the mnemonic
other capacities. “Every Good Apple Does Invest Money”
- Journalists or financial publications which publish news for the (B.9) Financial Statements
general public
Know how to quickly pull information from a balance sheet and/or
- Brokers income statement to identify weaknesses in a household’s financial
- Lawyers situation. This is a highly testable area, so make sure you review
- Accountants the “Financial Ratios” table in the study guide carefully. Two exam
- Engineers favorites are the Current Ratio the Emergency Fund Ratio.
- Teachers
Current Assets
- Domestic banks Current Ratio =
- Those who provide advice about only US gov’t securities Current Liabilities

(A.5) Financial Services Regulations and Requirements

Current Assets
Business Model Description Registration Emergency Fund Ratio =
Monthly Non-discretionary expenses
All of the firm’s
compensation must come SEC (AUM > $100MM) (B.10) Cash Flow Management
“Fee-only” Registered
exclusively from fixed, flat, or State Securities
Investment Adviser*
hourly, or percentage of Commission
Helping clients meet current needs, while also saving for long-
AUM based fees. term financial goals means identifying ways to increase their net
Some of the firm’s
discretionary cash flow. Be able to identify weakness and potential
SEC (AUM > $100MM) solutions to increase net cash flow by prudent financial statement
compensation comes
“Fee and Commission” or State Securities
Registered Investment
from fees but may also
Commission AND FINRA
and ratio analysis. For example, many times you may see a household
have transaction-based holding high amounts of cash in an emergency savings account (just
Adviser AND State Insurance
commission business and/
or insurance license.
Commission in case), all while holding a balance on a high interest credit card. As a
CFP professional, it’s your duty to recommend paying off credit cards
SEC (AUM > $100MM)
All compensation comes
or State Securities
first, even if it means reducing or eliminating emergency savings
“Registered Rep” Agent for from commission or funds.
Commission AND FINRA
Broker-Dealer transaction based
AND State Insurance
business (B.11) Financial Strategies
Commission
*Cannot use the abbreviation “RIA” to describe an individual adviser. “Registered The most important use of consumer debt financing is through
Investment Adviser” should be spelled out and only used to describe the firm. mortgages. To qualify, clients will need to prove creditworthiness
(A.6) Consumer Protection Laws through current income, assets, and existing debt levels. Lenders
will typically calculate debt coverage ratios to determine how much
Chapter 7 Bankruptcy – Chapter 13 Bankruptcy –
Total Liquidation Reorganization
house you can realistically afford. There are two highly testable ratios
that you will need to memorize.
Personal and Household Liquidation, Designed for an individual who currently
allows for an orderly, court-supervised has a regular source of income. Chapter 1) Front-end or 28% housing ratio. This ratio tests the total cost of
procedure by which a trustee takes over 13 is typically preferable to chapter 7 borrowing (PITI) for a home against your gross income.
the assets of the debtor’s estate, reduces because it enables the debtor to keep
them to cash, and distributes to creditors. their stuff, and allows the debtor to Monthly PITI
What cannot be covered, is normally propose a court supervised plan to repay <28
Monthly Gross Income
discharged. creditors over time.
2) Back-end or 36% housing ratio. This ratio tests the total cost of
(A.7) Fiduciary borrowing for a home plus all other reoccurring debt payments
(student, car, credit card, etc) against your gross income.
The Rules of Conduct dictate that a CFP certificant who is using the
six-step process, and/or gathering data on multiple financial planning Monthly PITI + All other monthly debt payments
<36
subject areas, is ALWAYS required to act as a fiduciary. Similarly, Monthly Gross Income
fee-only registered investment advisers acting under the Investment
(B.12) Economic Concepts
Advisers Act of 1940 and those subject to ERISA are also required to
act as a fiduciary at all times. Gross Domestic Product (GDP) = total value of all goods and services
produced within the borders of the United States, regardless of firm
B. GENERAL PRINCIPLES OF ownership.
FINANCIAL PLANNING (17%) Gross National Product (GNP) = total value of goods and services
The General Principles Knowledge Topic Area is one of the big 4 areas produced by US owned firms, regardless of where they’re produced.
of the CFP Exam at 17%, so you need to spend a lot of time here. Steady growth in GDP is the ultimate goal of both the monetary
There’s a heavy focus on the financial planning process, and how it’s and fiscal policy arms of the US government. Monetary policy is
used in conjunction with the practice standards and traditional tools
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conducted by an independent committee called “the Fed” whose (C.18) Education Savings Vehicles
dual mandate is to maintain full employment and regulate price Requires understanding the differences between Coverdell ESA’s, US
levels (inflation). Congress can also act by employing fiscal policy to Savings Bonds, ROTH IRAs, UGMAs and others. The exam commonly
affect consumer demand through. tests which vehicles to use in a particular situation, so flagging the
(B.13) Time Value of Money Concepts and Calculations vehicle and the difference are important.
This is the most important topic to not only intuitively understand, Education Annual
but be able to apply. Its application is applied throughout the entire Income Tax-Free Fed. Tax
Savings Contribution College K-12
Limit Earnings Deduction
curriculum and across almost all eight principle knowledge topics, Vehicle Amount
so it’s worth your time to practice over and over again with your Very high No (but
financial calculator. Follow these eight steps for success! 529 plan (depends on No Yes Yes No maybe
plan) state)
1) Start with a timeline (determine whether you’re working
forward or backward in time) Coverdell $2,000 per
Yes Yes Yes Yes No
ESA beneficiary
2) Write down all your variables
3) Make sure your i/Y matches your N (if you’re solving for monthly Series EE / I $10,000 per
Yes Yes Yes Yes No
Bond individual
payments, you will have to divide your i/Y by 12)
$5,500 per
4) Determine whether your calculator should be in BGN or END Roth IRA
individual
Yes Yes Yes Yes No
mode – END is the default
5) CLEAR YOUR REGISTERS!!!! [2nd] [CLR TVM][2nd][CLR WORK]
(C.19) Financial Aid
6) Populate the variables in the calculator, making sure you
correctly enter (-) for cash outflows Is where the exam covers questions about the Free Application for
Federal Student Aid (FASFA) and the Expected Family Contribution or
7) Check to see that your answer makes sense
“EFC” (EFC = AGI + Pre-Tax HSA/IRA). It also covers Pell Grants, Perkins
8) Double check. (then clear your registers again, especially if in Loans, work-study programs, etc. This tends to be more of a test of
BGN mode) memorization. Do you know what goes on the FASFA, which aid is
(B.14) Client and Planner Attitudes, Values, Biases and Behavioral available for different scenarios, the amounts available, when loans
Finance can be forgiven, and other topics?
This is a relatively newer area of testing for the CFP Exam, but both (C.20) Gift/Income Tax Strategies
communication skills and behavioral finance are becoming an
Is about taxes. Remember direct payments to a college, gifting limits,
important area of focus. There are no quantitative data or problems
529’s and other tax benefits, such as the American Opportunity Tax
to solve in this section, but read through the material to ensure that
Credit (AOTC) and the Lifetime Learning Credit (LLC).
you can identify the general terms.
(C.21) Education Financing
(B.15) Principles of Communication and Counseling
Looks at various other financing, including personal and family loans,
Recognize that every client is different and may need a different
retirement loans, life insurance loans and others. The key is to know
approach to communication. There is nothing you will have to
the situation that is most applicable to use each.
memorize as a list, but it will be important to identify the counseling
techniques at work when presented with details of a case. D. RISK MANAGEMENT AND INSURANCE PLANNING
(B.16) Debt Management (12%)
- Credit scores affect approval for credit, terms of credit, and
The Risk Management and Insurance Planning knowledge topic area
interest rate on credit. A Credit Score is based on:
is an extremely broad and advanced crash course in a very large
- Payment history, making payments on time – 35% and complex global industry. There are 11 lessons in this section,
- Balances outstanding, including unsecured-debt-to-credit ratio so you may be tempted to spend more time here than you need to.
or utilization ratio - 30% Questions on this section will primarily be definitional, or ask you
- Credit history, how long have accounts been open - 15% to choose the best alternative for a case, given the facts presented.
- Applications for new credit accounts (called hard inquiries) - 10% Because this section is so large, it will be important to focus it down.
- Variety of credit accounts (e.g., mortgages, car loans, credit (D.22) Principles of Risk and Insurance
cards) - 10%
The fundamental aspect of insurance, within the financial planning
C. EDUCATION PLANNING (6%) process is to provide protection against events that can cause
economic loss; but not all risks can or should be insured against.
Education Planning on the exam is the lightest category; however,
you need to get as many points as possible. The 3-step “needs Risk-Management Strategy Guidelines:
calculation” is used in retirement planning, so make sure you know
how to use this calculation well. Low Frequency High Frequency

Low Severity Retain the Risk Reduce the Risk

(C.17) Education Needs Analysis
Transfer the Risk (e.g.,
Can show up in two primary ways: 1) how much should the client be High Severity Through the Purchase of Avoid the Risk
saving for college, 2) will the client have enough money saved based Insurance or Contract)
on his/her current plan? Use your calculator to 1) determine the cost
of the first year of college, 2) determine the Present Value of the total (D.23) Analysis and Evaluation of Risk Exposures
cost of college the year the student begins college and, 3) determine
the necessary savings. Note: Remember the annuity due function!! When evaluating your client’s need for insurance, it’s also important
to consider the difference in premiums for coverage up to the
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“maximum possible loss” which is the worst case scenario of
complete and total loss vs. “maximum probable loss” which is the
worst thing that’s likely to happen, and can often be mitigated by
cheaper alternatives (like smoke detectors). While we can’t plan
for everything, it is in most cases going to be more cost effective to
advise our clients to insure up to the maximum probable loss.
(D.24) Health Insurance and Health Care Cost Management
Insurance policies will have several key coverage items you will need
to be able to identify quickly and calculate.
- Premium – the monthly payment made to acquire the policy
- Deductible – upper limit for which the insured is responsible
before the insurance policy is liable for any benefit payments.
- Coinsurance – once the deductible is met, insurance will pay a
percentage commonly 80/20 up to the
- Max out-of-pocket cost – insurance pays 100% beyond
(D.25) Disability Income Insurance
Disability insurance in the United States is typically purchased
through an employer’s group benefit package, but can also be
purchased in the private market. To qualify for benefits, an insured
must meet the policy’s definition of disability, which can vary based
on what you do for a living.
- Own-occupation: provides benefits when an insured is unable
to perform their own occupation because of a covered illness or
injury. This would be the coverage you would absolutely need to
have if you have a high earning or high activity job function, but
it’s also more expensive.
- Any-occupation: an insured is generally considered eligible for
benefits only if they are unable to perform the duties of any
occupation for which they are qualified. Least expensive
- Split-definition: this policy typically uses own-occupation for
the first two years of disability and any-occupation definition
to determine if the insured will continue to receive benefits.
Becoming popular, middle
(D.26) Long-term Care Insurance
Need to know the activities of daily living that can trigger the need for
long-term care. These you’ve got to memorize. They are:
- Bathing
- Dressing
- Eating
- Transferring (bed to chair)
- Toileting
- Continence
If your client is unable to perform two or more of the six for at least 90
days, this will typically trigger eligibility for benefits under most long-
term care policies.
(D.27) Annuities
Two basic questions for annuities are “immediate or deferred?” and
“fixed or variable?” Don’t spend a lot of time memorizing the various
combination of riders. Focus on being able to identify their usage and
applications to the overall financial plan, which is usually going to
involve some mention of outliving your money or “longevity risk.”
(D.28) Life Insurance
Questions you are likely to see will test your knowledge of which of
the five major types of insurance would be most appropriate given
the facts of a case, as well as simply asking you to identify which type
of insurance policy has the given characteristics. Pay special attention
to term, as the CFP exam will be highly biased towards it.
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(D.29) Business Uses of Insurance
A buy-sell agreement is a contract between or among business
owners requiring one or more owners to purchase some or all of
another business owner’s interest upon their retirement, death, or
disability.
There are three broad types of buy-sell agreements, they are:
- Cross purchase agreement – each business owner must buy life
insurance policy on the lives of all the other owners and use the
proceeds to purchase the business interest from the deceased’s
estate
- Entity purchase agreement – the business, purchases and
owns life insurance policies on each of its owners and use the
proceeds to purchase back shares from the owner’s heirs
- Wait-and-see agreement –life insurance is purchased by all
the owners on all the owners, but when one dies, the surviving
owners are given a first right of refusal under the cross purchase
agreement, but if the surviving owners decline to purchase the
shares, the corporation would then be required to purchase the
shares.
(D.30) Insurance Needs Analysis
There are many online tools and calculators for calculating life
insurance need, but the CFP Exam focuses on two big methods: 1)
needs approach and 2) human life valuation approach. Conducting
a full life insurance needs analysis includes estimating a wide range
of income and lump-sum needs of the survivors in the event of an
untimely death, but because of the time constraints on the exam, it is
very unlikely that you’ll be asked to perform a full needs analysis. You
may need to perform a present value calculation for the human life
valuation approach.
(D.31) Insurance Policy and Company Selection
This lesson is a good review of the whole section, so you will want to
go back and review as you near exam day. Financial planners should
always request to review any sales illustrations obtained by client. A
sales illustration is a detailed projection of future policy values based
upon variables selected by a client and a client’s agent. It shows how
the policy is expected to work. Remember that even if a client has
already purchased the policy, they have a 10-30 day (depending on the
state they live in) “free-look period” to return the policy for a full refund.
(D.32) Property and Casualty Insurance
A CFP candidate should be able to differentiate among the seven
forms of home insurance:
not very comprehensive (but also not very
HO-1 Basic Form expensive) and covers ONLY the basic named
perils specifically named in the policy
covers everything in basic form but with
HO-2 Broad Form
additions
provides coverage on an open perils basis,
HO-3 Special Form which means coverage for everything, unless
specifically excluded
Contents Broad Form designed to protect against damage to a client’s
HO-4
(Renters) property when renting and for personal liability
covers all the perils associated with an HO-3
HO-5 Comprehensive Form special forms policy, plus additional coverage for
personal property (contents)
coverage for any alterations, appliances, fixtures,
HO-6 Condominium improvements, and interior walls within a
condominium
modified HO-1 policy which provides
Market Value Policy
HO-8 replacement cost coverage. Appropriate when
(Old homes)
replacement cost exceeds market value.
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E. INVESTMENT PLANNING (17%) (E.39) Portfolio Development and Analysis

Will determine if the candidate understands how to put together an
(E.33) C
 haracteristics, Uses and Taxation of Investment Vehicles
Investment Policy Statement (IPS), which relates to the “TURRTLL”
Make sure to know the different categories of investments. They go mnemonic among other items; how the IPS is used to make decisions
from most safe/least return to most risky/highest return: in a given scenario; and how to analyze the subsequent results.
1. Cash and Cash Equivalents
(E.40) Investment Strategies
2. Bonds
Will require the candidate to be able to identify passive and
3. Stocks
active investing as well as core/satellite allocations. This requires
4. Real Estate understanding when each is appropriate as well as how to build a
5. Other Tangible Assets strategy given the client’s desires and constraints.
6. Pooled Assets
(E.41) Alternative Investments
7. Derivatives
Include ADRs, REITS, precious metals and others. The test may
(E.34) T ypes of Investment Risk ask about the differences between traditional investments and
Include systematic (affects all investments) and unsystematic alternatives. Understand the advantages and disadvantages of each
(particular to each investment) risk. Expect at least one question here as well as when to add an alternative investment in a particular
as risk is a very important topic. scenario based on a hypothetical client within a portfolio.

Systematic Risk (PRIME)

Unsystematic F. TAX PLANNING (12%)
(Detective Comic Book FiLMs)
(F.42) Fundamental
 Tax Law
Purchasing Default Requires an understanding of the different components of the
Reinvestment Country progressive tax system. A candidate must clearly understand filing
status, marginal and average tax rates, qualifying aspects of a
Interest Business dependent, and other details of the system including steps within the
calculation for AGI, taxable income and credits.
Market Financial
(F.43) Income
 Tax Fundamentals and Calculations
Exchange Rate Liquidity
Will test a candidate’s knowledge of the details of the tax calculation,
Marketability including understanding income, standard deductions, itemized
deductions and personal exemptions. The candidate will have to
(E.35) Q uantitative Investment Concepts differentiate between a deduction for AGI and from AGI as well as how
deductions are reduced or phased out. Understanding tax brackets
Is all about statistics. Make sure to know how to quantify risk for a
and payroll taxes as well as refundable and non-refundable credits
single asset and a portfolio (standard deviation). You’ll be asked a
will complete this section.
question on the calculation as well as how to calculate the expected
return which will be used in asset selection in each scenario. (F.44) Characteristics of Income Taxation on Business Entities
(E.36) I nvestment Returns The peculiarities of various types of business and their taxation is
important in this section. On the exam the candidate will have to
Will require knowledge about how various returns are calculated
differentiate various elements of different businesses, including how
as well as the meaning of several performance measures (Sharpe,
each entity is taxed as well as their liability, organizational structure.
Treynor, M2 and Information Ratio). Be able to differentiate between
and other aspects as shown in the table.
each performance measure and which ones are applicable in various
situations.
Sole C S
Partnership
(E.37) Asset
 Allocation and Portfolio Diversification Proprietor Corporation Corporation

Will require a candidate to see deficiencies in a portfolio or Unlimited

understand the appropriate addition to meet a client’s needs. (General Partner)
Liability? Unlimited Limited Limited
This uses the “TURRTLL” mnemonic to understand the objectives and Limited
constraints within a portfolio. (Limited Partner)

Time Horizon At Entity

How is Level + again
Unique Situations organization
On Personal
Flow-Through at personal Flow-through
Return
Risk taxed? level (Double
Taxation)
Return
Tax Form 1120 — Form 1120S —
What tax Form 1065 — Entity Entity Entity
Legal Form 1040
forms are Schedule K-1 - Form W-2 & Form W-2 and
Liquidity Schedule C
needed? Personal 1099-DIV — Schedule K-1 —
(E.38) B
 ond and Stock Valuation Concepts Personal Personal

Require a candidate to understand the items that influence an asset’s Self-Employment

How is Income W-2 Income W-2 Income
value. Be able to calculate a bonds value (with a calculator) and owner’s
Self-
(General Partner) (Salary) and (Salary) and
Employment
understand bond risks (duration, convexity, reinvestment, etc.). Also, income
Income
Dividend Income Ordinary Income
be able to perform stock valuation calculations with various dividend taxed? Ordinary Income (Distributions) (Flow-through)
(Limited Partner)
and growth rates.

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(F.45) Income Taxation of Trusts and Estates
Are different from individual taxation, but have some aspects of
business taxation. Trusts and estates are considered separate legal
entities and can be created in different ways. Both are terminated
when the assets are fully distributed, and while both can be required
to file an income tax return, an estate may have to file an estate tax
return based on assets as well. Trust income tax rates are generally
much higher than personal rates, so it generally makes sense to pass
through income to the recipient.
(F.46) Alternative Minimum Tax (AMT)
AMT is a tax system that runs parallel to the regular system. On the
exam, understanding that a taxpayer may have to pay the higher of
the two is just the beginning. Candidates must also understand that
AMT starts with Taxable Income and either adds back or subtracts
preference items and adjustments. It then uses an exemption which
can be phased out. Once the tentative Minimum Taxable income is
calculated, it is then multiplied by the AMT tax rates and compared
(TAPE). Memorizing some of the main add backs (SSHIP2) will be
helpful if given a scenario.
TAPE = Taxable Income +/- Adjustments
+/- Preference Items - Exemptions
Standard deduction
State and local taxes
Home mortgage not for your home
Incentive stock options
Personal exemptions
2% of AGI floor for miscellaneous itemized
deductions
(F.47) Tax Reduction/Management Techniques
Tax avoidance represents tax planning to reduce a taxpayer’s liability.
Understanding marginal rates and having a familiarity with beneficial
tax vehicles (i.e. ROTH/Traditional IRAs along with 529’s, HSAs and
others) will help to answer questions when attempting to shift or
reduce income along with tax advantaged investment and deduction
clustering. Understanding the tax system and how to avoid tax in a
scenario will be helpful on the exam.
(F.48) Tax Consequences of Property Transactions
Property transactions can be complicated, but understanding the
differences in each and their taxation for the exam are helpful. “CAR
ID” are treated as ordinary income. Capital assets have special tax
treatment, while Section 1231 can be broken down between 1245 and
1250 assets. Recapturing depreciation is important when calculating
total tax, but first make sure to understand how to calculate basis.
Creative Works
Accounts
Receivable
Inventory
Depreciable Personal Property
(F.49) Passive Activity and At-Risk Rules
Set up to eliminate some of the distorted business incentives
previously available to a taxpayer. Remember, a taxpayer can’t take
a loss for more than the capital “at-risk”. “RIC” outlines items that
are used to determine at-risk (Recourse debt, Income allocated and
Contributed capital). In addition, passive activity losses can only
be used against passive income. Passive income is generally for
taxpayers that don’t “materially participate” in the business, which
has special rules.
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(F.50) Tax Implications of Special Circumstances
Relate to supporting an elderly parent or adult child, post-secondary
education credits and deductions, as well as the transfer of assets
between divorcing spouses. Be aware of the rules for claiming the
support, qualifications for credits/deductions, and the different
taxation issues with asset transfers related to property, alimony and
child support.
(F.51) Charitable/Philanthropic Contributions and Deductions
Can be a powerful tool for reducing taxes; however, there are various
rules related to qualified organizations and the types of items that
can be deducted. There are also limitations on the amount of a
deduction that can be taken relative to AGI. It can be 20, 30 and even
50%. Depending on the organization, COPS (Cash, Ordinary [income]
Property and Short-term capital gain property) will allow for the
largest potential deduction. Otherwise, the deduction can be carried
forward for a period of time.
G. RETIREMENT SAVINGS AND INCOME PLANNING
(17%)
(G.52) Retirement Needs Analysis
Is used to calculate the amount of money needed for retirement.
This calculation looks the same as the educational funding
calculation, with 3 steps: 1) Determine the cost of the first year
of retirement; 2) Determine the present value of the total cost of
retirement; and 3) Determine the necessary savings. There are many
factors put into this calculation, and the mnemonic “RIGORous
CLIMB” is used to make sure you have them all:
Retirement Age
Inflation
Goal Priorities and Importance
Other Retirement Income Sources
Retirement Savings Rate
Cashflows
Life Expectancy
Investment Returns
Market Volatility
Bequest Motives
(G.53) Social Security
As a subject on the exam, requires an understanding of the benefits
under OASDI (Old Age, Survivors and Disability Insurance), how it’s
funded (6.2% by the employer and the employee), and how it is
increased, decreased and taxed. Understand the earned credit rule
as well as how to calculate an increase and decrease in retirement
benefits.
(G.54) Medicaid
Will focus on the eligibility for Medicaid, which is normally selected
during old age to cover long-term care. There are a couple income
and asset tests (which aren’t as important as the penalty period)
when the state will not pay benefits due to transfers within the 5-year
lookback period.
(G.55) Types of Retirement Plans
This area requires a fair amount of memorization. First, understand
the difference between a defined benefit, defined contribution, a
pension plan and profit sharing. Since the exam normally wants
to make sure the candidate understands the differences, you can
expect questions on “pick a plan.” This will give information about
the requirements of the plan, and the candidate will have to pick the
correct one. Here are a couple tables which will help.
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Pension Plan Profit Sharing Plan Don’t memorize the phaseout amounts as they are given, but know
how they are calculated. It would be helpful to also memorize when
Defined Benefit
Defined Benefit
Pension Plan
N/A the 10% penalty is avoided, which can be done with the “DAD Sells
HEMP” mnemonic.
Cash Balance Pension Plan
Age Limit
Contributions Pre-tax RMD
Contributions
Target Benefit
Defined Contribution Thrift Plans
Pension Plan Traditional IRA $5,500/$6,500 Up to 70 ½ Yes Yes, at 70 ½
Money Purchase ROTH IRA $5,500/$6,500 None No No
401 (k) Plan
Pension Plan
Age-Based Profit Death
Sharing Plan Age 59 1/2
Stock Bonus Plans Disability
Profit Sharing Plan
Substantially Equal Periodic Payments
Employee Stock
Ownership Plan (ESOP) Home Purchase (first-time)
New Comparability Plans Education Expense-Higher Education
Medical Expenses
Pension Plan Profit Sharing Plan
Payment of Health Insurance Premiums by Unemployed
Minimum Funding? Yes No Individuals
Actuary Required? Yes No (G.58) Regulatory Considerations
Employer Stock Will focus on the Employee Retirement Income Security Act (ERISA),
Yes-10% No-100%
Limitation?
which sets the minimum standards for most voluntarily established
Yes-Qualified pension and health plans. This generally requires memorization of
Required Annuity? No
Joint & Survivor
the minimum age (21), service requirement (1 year-1,000 hours),
In-Service Withdrawals? No Yes and vesting rules (2-6 year graduated or 3-year cliff, unless defined
benefit at 3-7 year or a 5-year cliff), as well as nondiscrimination
Defined Benefit Defined Contribution calculations/rules (safe harbor, ratio percentage and average
Pension or Profit
benefits). Remember, communication is key, and with a fiduciary
Types of Plan? Only Pension Plans
Sharing Plans responsibility a participant must have investment choices if it is a
defined contribution plan.
Up to the Required Yes, 25% of
Contribution Limits?
Funding Covered Comp (G.59) Key Factors Affecting Plan Selection for Businesses
Investment Risk? Employer Employee Is where the exam wants to find out if the candidate knows
Account Type? Commingled Individual how to “pick a plan.” A business may have different reasons for
PBGC Insurance? Yes No choosing a plan, and the candidate must choose which plan fits the
requirements. See the table below.
Reduce Costs or Allocate
Forfeitures Allocated? Reduce Plan Costs
to Other Participants
Yes No
(G.56) Qualified Plans Profit Sharing (SEP
IRAs are most flexible
Have several requirements and drawbacks, which include tax Good, Stable Cashflow Pension Plan
when considering the
implications for both the employer and employee. There are various contribution calendar)
eligibility, vesting, coverage and discrimination guidelines, as well as Focus on covering Key
other items that will need to be followed to remain in compliance in DB, Target Date, Age 401(k) with Safe Harbor,
Employees and
Based, New Comparability SEP, SIMPLE IRAs
addition to the fiduciary responsibilities. Owners who are Older?

Discrimination testing must be passed at 70% or greater to Cover All Employees,

Pension Plan, Profit Sharing,
SEP or SIMPLE IRAS, 401(k)
remain in compliance including Key Employees?
with safe harbor
HC = Highly Compensated, NHC = Non-Highly Compensated,
AB = Average Benefit
Safe Harbor = NHC Covered / NHC total Yes No

Ratio Percentage = % NHC Covered / % HC Covered Company to Fund?

Pension Plan, Profit 401(k) and Thrift Plans,
Sharing SIMPLE IRAs
Average Benefit = AB % of NHC / AB % of HC
IRAs (up to $1,283,025 in
(G.57) Tax-Advantaged Retirement Plans ERISA Protection? Qualified Plan
2017)
Include traditional, ROTH and rollover IRAs as well as SEPs, SIMPLEs Pension Plans,
and several others. Understand the basics for the SEP/SIMPLE/403b/ Can handle Burdensome
Stock-based Plans SEP or SIMPLE IRA are
etc., but since the IRA is a widely recognized plan, it will definitely and those with easiest, safe harbor 401(k)
Administration?
cross/non-discrimination is good
show up on the exam. Understanding the contribution limits (given testing
on the exam) and how the amounts are used to a client’s benefit
Employees Lack ability to Qualified Plans, Certain
(pre- or post-tax, with catch ups) will help in a scenario question. Manage? Pension Plans
SEP or SIMPLE IRA
In addition, understanding the phaseout rules will also help.

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(G.60) Taxation and Distribution Rules
Will focus on exceptions. However, you the candidate must first
know what a normal distribution is. It generally occurs after the age
of 59 1/2. Memorize the exceptions for the IRA as well as qualified
rollovers and Qualified Domestic Relations Orders (QDRO). Otherwise
distributions are taxed as ordinary income (except ROTHs).
(G.61) Retirement Income and Distribution Strategies
On the exam will focus on understanding the various risks and taxes.
Longevity risk is the biggest risk, in which a client will outlive their
assets. Understanding purchase power risk, strategies to reduce
outliving funds (annuitizing, increasing risky assets, etc.), and tax
issues if all funds are in pre-tax accounts will be the key. This is where
an understanding of whether to take social security early or later will
be discussed.
(G.62) Business Succession Planning
Is generally limited to three types of buy-sell agreements, including
the cross-purchase, the entity-purchase, or the wait-and-see
agreement. Understand the difference between each as they offer
different benefits and drawbacks; however, this may not be the most
significant section, so limit your time spent on it.
H. ESTATE PLANNING (12%)
This section is not overly technical in term of formulas to memorize
or quantitative problems to work through, but it is very conceptual,
which can sometimes take more time to study and work through. The
estate planning section is worth 12% on the on the CFP exam, so it
should be right in the middle of your priorities.
(H.63) Characteristics and Consequences of Property Titling
Requires
Percentage Included
Title Type Probate Consent for
in Gross Estate
Partition
Fee Simple 100% YES NO
Tenancy in Common Ownership % YES NO
Ownership %
JTWROS proportional to NO NO
contribution
Tenancy by the Entirety
(Only between spouses)
50% NO YES
For exam purposes, you need to be able to distinguish the key
features and ultimate disposition process for the four big individual
ownership structures. In community property states, both spouses
have an equal and undivided interest in all property, income,
earnings, and wealth accumulated during the marriage. There are
10 community property states, which are important enough to
memorize. They are: Alaska, Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, and Wisconsin.
(H.64) Strategies to Transfer Property
A change of title from a decedent’s name to a new owner’s name can
only legally happen through the probate process. A will only serves
as instructions for the court, but cannot be used as a standalone tool
to transfer title. In some cases, probate proceedings are unavoidable,
but in a lot of cases it may be more advantageous to design an
estate plan that eliminates the need for it. To be able to make the
right recommendation, you first need to know and communicate
the advantages and disadvantages of probate to your clients. For
CFP Exam purposes, it is usually in your best interest to make
recommendations designed to avoid the probate process
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Advantages of Probate Disadvantages of Probate
Creditor protection Time consuming
Distribution objectives of a
decedent’s will are followed
Expensive
Public process, and therefore
Clear new title for the beneficiaries
a loss of privacy
Opportunity for all involved
parties to participate in the
disposition proceedings
Prudent management of the
decedents’ assets
(H.65) Estate Planning Documents
Everything ranging from granting powers of attorney for health care
decisions and advanced directives, to property transfers upon death
require legally precise documentation. At the very least, your clients
should all have a fully executed will. Remember that a will is a legal
document which serves as an instruction manual to the probate
judge for the ultimate disposition of a descendant’s property at
death. A will can be amended, changed, or revoked at any time prior
to death as long as the testator is both mentally competent and at
least 18 years of age. There are three different types of wills that are
likely to be tested which are:
- Holographic – handwritten, signed and dated
- Nuncupative – oral will, generally non-binding in most wills in
many states
- Statutory will – legal documents drafted by an attorney that
meets and addresses the statues of the state which is signed in
the presence of witnesses
(H.66) Gift and Estate Tax Compliance and Tax Calculation
For 2018, every individual can gift $15,000 to any other individual
without incurring any gift or estate tax penalties. This value is called
the annual gift tax exclusion, and can be an incredible tool to transfer
large amounts of assets, during life, without ever counting against
your applicable exclusion. The following needs to take place for a
transfer to be considered a gift:
- Donor needs to have the intent to make a voluntary transfer.
- The donor and done must be competent.
- The donee must be competent.
- Must be of legal age
- Must be mentally capable.
- The donor must either own or have power of appointment over
the intended gift.
- The donee must receive the gift and take delivery.
- The donor must relinquish all control on the gift upon its
transfer.
(H.67) Sources for Estate Liquidity
Easy access to cash and other liquid assets is often needed during
the process of estate administration for making final payments and
providing for a surviving spouse and family members. Estate taxes, if
necessary, are due nine months from the date of death and must be
paid in cash. Life insurance proceeds may be a good source of quick
liquidity, except that proceeds are typically not paid to the estate.
Remember that insurance policies have named beneficiaries, and
therefore are not subject to probate BUT are usually still includable
in the gross estate calculation - UNLESS the policy is owned by an
irrevocable life insurance trust (ILIT).
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(H.68) Types, Features, and Taxation of Trusts
Every trust has 1) a grantor, 2) a trustee, and 3) at least one
beneficiary. The grantor gets to make all the decisions and trustee
is the enforcer of those decisions. Beneficiaries make no decisions.
Duties of the Trustee:
- Receipt & management of trust assets
- Collection & distribution of income
- Accounting & tax reporting
- Following the provisions of the trust document (FIDUCIARY)
Remember that trust law varies from state to state, and that the
practice of law is outside of the scope of the financial planning
relationship. Most, if not all, of these strategies must be implemented
with the help of legal and tax professional partners.
(H.69) Marital Deduction
Spouses in the US can transfer unlimited ownership of assets back
and forth between each other without ever triggering gift tax during
life, or estate tax at death. This is known as the unlimited marital
deduction, but it is only available to US citizen spouses. If only one
spouse is a non-US citizen, a smaller lifetime exclusion is available or
assets can be transferred into a qualified domestic trust (QDOT). The
QDOT must have a US trustee to qualify, and all the income must be
distributed to the surviving non-citizen spouse.
(H.70) Intra-family and Other Business Transfer Techniques
The best tool to facilitate a transfer of business interests within a
family, or down to the next generation, is through the use of a family
limited partnership (FLP). The key here is control. The business owner
transfers highly appreciated business interests to the FLP, retaining
the general partnership control interest. Then over time, gifts limited
partnership units to other family members. You can also usually take
a lack of marketability and lack of liquidity discount on the value of
the gifts. Eventually, the original owner gets down to only a minimum
ownership interest, but still retains full control as the General Partner.
As a general rule- if an asset is not includable in the gross taxable
estate, it will not qualify for a stepped-up basis to the beneficiaries.
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(H.71) Postmortem Estate Planning Techniques
Sometimes there are unique situations and opportunities to optimize
the estate settlement for both the descendent and the surviving
spouse after death.
- Date of death valuation vs. six-month valuation
- Qualified disclaimer
- Strategic tax deduction allocation to estate returns
- QTIP election
(H.72) Estate Planning for Non-traditional Relationships
Planning for “non-traditional” relationships in the context of estate
planning, or simply relationships outside of the legal definition
of “married,” and includes planning in the event divorce and/or
remarriage.
Many strategies are ONLY allowed between spouses (both hetero and
homosexual):
- Unlimited marital deduction during life and at death (as long as
both are US citizens)
- Portability of unused applicable exclusion (double exclusion)
- Tenancy by the Entirety ownership
- Gift Splitting for annual exclusion gifts
- QTIP election
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