Free CFP practice questions

Priya, aged 58, separated from service with her employer this year and took a lump-sum distribution of her entire 401(k) balance in one taxable year. The distribution included employer stock with a plan cost basis of $180,000 and a fair market value of $500,000 on the date of distribution. She transferred the stock in kind to a taxable brokerage account and elected net unrealised appreciation treatment, and she rolled the remaining plan assets directly to a traditional IRA. Eight months later she sold all of the employer stock for $560,000. How is the $380,000 of total gain recognised on that sale treated?

• A$320,000 is long-term capital gain and $60,000 is short-term capital gaincheck_circle Correct
• B$380,000 is long-term capital gain and no part of the gain is short-term
• C$320,000 is short-term capital gain and $60,000 is short-term capital gain
• D$320,000 is long-term capital gain and $60,000 is taxed as ordinary income

Why A is correct: The net unrealised appreciation of $500,000 minus $180,000, or $320,000, is long-term capital gain when the stock is sold irrespective of how long Priya held it after the distribution, while the further $60,000 of appreciation earned after the distribution takes its own holding period, which is eight months and therefore short-term.

Why B is wrong: This is tempting because the automatic long-term character of net unrealised appreciation is the memorable part of the rule, but that character attaches to the $320,000 measured at the distribution date, and appreciation arising after the distribution is governed by the ordinary holding period rules.

Why C is wrong: A candidate who applies the eight-month post-distribution holding period to the whole gain reaches this answer, but net unrealised appreciation is treated as long-term capital gain by statute, so the holding period after the distribution does not govern that portion.

Why D is wrong: This confuses the ordinary income element with the post-distribution growth, because the amount taxed as ordinary income under the election is the $180,000 plan cost basis reported in the year of the lump-sum distribution, not the appreciation that accrued in the taxable account afterwards.

Dominic is aged 61. He opened his first and still his only Roth IRA in 2023 with a single regular contribution of $7,000 and has made no regular contributions since. In 2024 he converted $100,000 from a traditional IRA to that same Roth IRA and paid the resulting income tax from taxable savings. The account is now worth $135,000. In 2026 he withdraws $60,000 to fund a home renovation. What is the federal income tax and penalty treatment of the $60,000 withdrawal?

• AThe whole $60,000 is a qualified distribution, so it is free of income tax and free of the 10 percent additional tax
• BThe whole $60,000 is free of income tax and free of the 10 percent additional tax under the ordering rules, although it is a non-qualified distributioncheck_circle Correct
• C$53,000 of the withdrawal is subject to the 10 percent additional tax because the 2024 conversion has not satisfied its own five-year holding period
• D$53,000 of the withdrawal is ordinary income because the account has not satisfied the five-year contribution holding period

Why A is wrong: The outcome is right but the reasoning is wrong, and the label matters because it changes how earnings would be treated: the distribution is not qualified, since Dominic's five-year contribution clock began in 2023 and does not finish before 2028, so the correct description is a non-qualified distribution that happens to reach only untaxed layers.

Why B is correct: Roth IRA distributions come out in the order of regular contributions, then converted amounts oldest first, then earnings, so the $60,000 is made up of the $7,000 regular contribution and $53,000 of already-taxed converted principal, neither of which is taxable, and Dominic is past age 59 and a half so the conversion five-year clock cannot impose the 10 percent additional tax.

Why C is wrong: This applies the conversion five-year clock correctly in form but ignores the condition that makes it operate, since that clock exists purely to stop a converted amount being withdrawn before age 59 and a half without the penalty that would have applied to a direct traditional IRA distribution, and it becomes irrelevant once the owner reaches 59 and a half.

Why D is wrong: This confuses the two clocks, because the five-year contribution period governs whether earnings come out tax free, and converted principal has already been taxed in the year of conversion, so recovering it can never produce a second income inclusion regardless of either clock.

Helen, aged 48 and in good health, is the sole named beneficiary of her brother's traditional IRA. Her brother died in 2025 at age 76, having already begun taking his lifetime required minimum distributions. Helen is not disabled or chronically ill and is more than ten years younger than her brother was. She would like to leave the money invested for as long as the rules permit. Which distribution pattern applies to her inherited IRA?

• AShe may leave the account untouched with no annual withdrawal required and then withdraw the entire balance by 31 December of the tenth year following the year of death
• BShe may take annual distributions over her own single life expectancy, with the divisor reduced by one each year, for as long as she lives with no emptying deadline
• CShe must take an annual distribution in each of years one to nine based on her single life expectancy and empty the account by 31 December of the tenth year following the year of deathcheck_circle Correct
• DShe must take an annual distribution in each of years one to four and empty the account by 31 December of the fifth year following the year of death

Why A is wrong: This is the version of the ten-year rule that applies when the owner dies before the required beginning date, so it is a reasonable answer for a slightly different client, but because Helen's brother had already begun lifetime distributions the annual distribution requirement continues through the ten-year window.

Why B is wrong: This is the pre-SECURE Act stretch treatment and it is now available only to eligible designated beneficiaries, a category Helen does not enter because she is neither a surviving spouse, nor a minor child of the owner, nor disabled or chronically ill, nor within ten years of the owner's age.

Why C is correct: Helen is a designated beneficiary who is not an eligible designated beneficiary, so the ten-year rule applies, and because her brother died after his required beginning date the annual distribution requirement he had already triggered continues, giving both yearly withdrawals over her single life expectancy and a hard emptying deadline at the end of the tenth year.

Why D is wrong: The five-year rule is reserved for beneficiaries that are not designated beneficiaries, such as an estate or a non-qualifying trust, and it never carries an annual distribution requirement, so this answer combines the wrong window with a condition that does not belong to it.

Priya, aged 46, holds her entire investment portfolio in three technology shares accumulated through her employer's share purchase plan. She asks her planner which single statistic best captures the total risk she is currently bearing on that portfolio. Which measure should the planner use?

• ABeta, because beta scales the portfolio's return volatility to that of the broad market and so expresses the risk she is bearing in a single comparable figure.
• BThe average correlation coefficient between the three shares, because correlation is what determines how much risk a concentrated holding carries.
• CThe Sharpe ratio, because it converts the portfolio's excess return into one figure that expresses the risk she is taking on.
• DStandard deviation, because a portfolio that is not diversified still carries substantial unsystematic risk and standard deviation measures total risk, systematic plus unsystematic.check_circle Correct

Why A is wrong: Tempting because beta is the most familiar risk statistic and it does produce one comparable number. It is wrong here because beta measures systematic risk alone. Priya's dominant exposure is company specific, so beta would understate the risk she actually carries.

Why B is wrong: Tempting because correlation genuinely drives diversification benefit. It is wrong because correlation is an input to a risk calculation rather than a measure of magnitude. A correlation figure alone says nothing about how far her returns can swing.

Why C is wrong: Tempting because the Sharpe ratio contains standard deviation in its denominator. It is wrong because it reports return per unit of risk, not the amount of risk. Two portfolios with very different volatility can share a Sharpe ratio.

Why D is correct: Correct. Standard deviation measures the dispersion of the portfolio's own returns, which for a three share concentrated holding is driven largely by company specific events. Because unsystematic risk has not been diversified away, total risk is the relevant quantity and standard deviation is the measure of it.

Daniel's portfolio holds 45 shares spread across nine sectors together with a global bond fund, and his planner is considering adding one further mid cap share. Daniel asks how the risk of that new holding should be judged in the context of the portfolio he already owns. Which measure is appropriate?

• AThe beta of the new share, because within a well diversified portfolio the share's unsystematic risk is largely diversified away and only its systematic risk adds to portfolio risk.check_circle Correct
• BThe standard deviation of the new share on its own, because the total variability of the share is what it will contribute to the variability of the whole portfolio.
• CThe coefficient of variation of the new share, because it standardises the share's total risk per unit of expected return before the holding is added.
• DThe semivariance of the new share below the risk free rate, because downside variability is the part of risk that matters once a portfolio is already diversified.

Why A is correct: Correct. Once a portfolio holds enough imperfectly correlated securities, adding one more share brings company specific risk that is offset by the rest of the portfolio. What survives is the share's covariance with the market, and beta is exactly that measure.

Why B is wrong: Tempting because standard deviation is the right answer for a concentrated portfolio. It is wrong here because most of the new share's own variability is company specific and will be absorbed by the 45 existing holdings, so its standalone figure overstates what it adds.

Why C is wrong: Tempting because the coefficient of variation is useful for ranking investments of different scale. It is wrong because it is built on total risk, and total risk is not what an additional holding contributes to an already diversified portfolio.

Why D is wrong: Tempting because downside measures appeal to how clients describe risk. It is wrong because semivariance is still a total risk measure applied to the share in isolation, and it does not describe the share's marginal contribution to a diversified portfolio.

Mei, aged 58, must fund a 250,000 dollar lump sum in exactly seven years and wants the amount available at that date to be insulated from a move in interest rates in either direction. She is buying investment grade corporate bonds today. Which approach best achieves that objective?

• ABuy bonds whose final maturity is seven years, because matching the maturity date to the date of the goal removes the effect of a rate change on the amount available.
• BBuy a bond portfolio whose duration is seven years, because price risk and reinvestment rate risk then move in opposite directions and roughly offset each other at the horizon.check_circle Correct
• CBuy bonds maturing in one year and roll the proceeds each year, because short maturities carry the least price sensitivity to a rise in market yields.
• DBuy bonds with a duration of fifteen years, because the higher yield available on longer bonds compensates for the extra price volatility over the period.

Why A is wrong: Tempting because maturity matching sounds like the obvious fit and it does fix the redemption date. It is wrong because coupons received before year seven must still be reinvested at unknown rates, so the accumulated sum remains exposed to a rate fall.

Why B is correct: Correct. Setting duration equal to the investment horizon is immunisation. A rate rise cuts the capital value but raises the return on reinvested coupons, and a rate fall does the reverse, so the two effects broadly cancel at year seven.

Why C is wrong: Tempting because short maturities do minimise price volatility. It is wrong because it maximises the other half of the problem: every roll is a reinvestment at whatever rate then prevails, so a sustained fall in rates leaves Mei short of the target.

Why D is wrong: Tempting because a longer bond usually offers more yield. It is wrong because duration far above the horizon leaves price risk dominant, so a rate rise before year seven would force a sale at a loss with no offsetting reinvestment benefit.

Tomas, a CFP professional, has agreed to provide Financial Planning to a new client aged sixty-one who supports a disabled adult daughter. At the second meeting the client announces that he wants to buy a joint life annuity with most of his rollover balance. Tomas prepares a written recommendation for that annuity the same week, before he has collected the client's debts, employer benefits, health status, risk tolerance or objectives for his daughter's long-term support. Which statement best describes the defect in how Tomas has proceeded?

• AHe has recommended a product before obtaining the client's qualitative and quantitative information and analysing the client's current course of action, so the recommendation rests on an incomplete picture of the client's situation.check_circle Correct
• BHe has failed to present his recommendation orally as well as in writing, which the Practice Standards require whenever a product is recommended during a Financial Planning engagement.
• CHe has simply followed the client's instruction, which the duty to follow client instructions requires of him, so no Practice Standard has been breached at this stage of the engagement.
• DHe has breached the duty of confidentiality by taking into account benefits payable to the client's disabled adult daughter without first obtaining her own separate written consent to the planning work.

Why A is correct: Correct. The Practice Standards require the planner to understand the client's personal and financial circumstances and to analyse the current course of action before developing and presenting any recommendation.

Why B is wrong: Tempting because Financial Planning does carry documentation obligations, but there is no rule that a recommendation must be delivered in both forms. The defect here is sequencing, not the medium of delivery.

Why C is wrong: Tempting because following reasonable client directions is genuinely one of the fiduciary duties, but that duty covers lawful directions about the client's affairs. It does not authorise skipping the analytical steps the Practice Standards require.

Why D is wrong: Tempting because a third party is affected by the plan, but the daughter is not the client and no confidential information of hers has been disclosed. Considering a dependant's needs is part of understanding the client's circumstances.

Priya, aged 44, has met her planner three times. The planner has gathered her income, assets, liabilities, tax return and risk tolerance, has agreed with her a written retirement income target and a university funding goal, and has just finished modelling her existing savings plan against two alternative contribution strategies. Under the CFP Board Practice Standards for the Financial Planning Process, what must the planner do next?

• APresent the preferred strategy to Priya and obtain her agreement before any further analysis is done.
• BReturn to identifying and selecting goals so that Priya can rank the retirement and university targets.
• CDevelop the recommendation by selecting the course of action most likely to meet Priya's agreed goals.check_circle Correct
• DImplement the higher contribution strategy for Priya and then monitor her progress at each quarterly review.

Why A is wrong: Presenting is tempting because the modelling is finished and the planner has something to show, but presentation is the step that follows development. There is no recommendation to present until the planner has selected and formulated one.

Why B is wrong: Revisiting goals is reasonable when the analysis shows the goals conflict, but nothing in the facts says they do. Repeating a completed step without cause delays the engagement rather than advancing it.

Why C is correct: Analysing the current course of action and the alternatives is the step that immediately precedes developing the recommendation, so selecting and formulating the recommendation from that analysis is the correct next action.

Why D is wrong: Implementation follows development and presentation, and it also requires an agreement about who does what. Acting on a strategy Priya has not seen or accepted skips two steps of the process.

A planner has been engaged to prepare a comprehensive financial plan for the Okonkwos. They supply bank, pension and insurance statements but decline to disclose the balance of a joint brokerage account that the planner considers material to the retirement projection. Under the CFP Board Practice Standards for the Financial Planning Process, how should the planner proceed?

• AEstimate the missing balance from the dividend income shown on the couple's tax return and complete the projection.
• BDecline the engagement, since a retirement projection built on an incomplete asset picture will misstate the result.
• CComplete the plan as drafted, on the basis that responsibility for the shortfall rests with the clients who withheld it.
• DExplain to the clients how the missing balance limits the analysis, then restrict the scope, terminate, or continue on that stated basis.check_circle Correct

Why A is wrong: Reconstructing a figure looks resourceful and may even land close, but an assumption invented by the planner is not client information. The clients would then be relying on a projection built on a number they never confirmed.

Why B is wrong: Terminating the engagement is one permitted response, which is what makes this attractive, but it is not the required one. Treating it as mandatory ignores the alternatives of restricting the scope or proceeding with the limitation made clear.

Why C is wrong: The clients did choose to withhold the figure, which makes this feel even handed, but the planner cannot transfer the duty of care back to the client. Delivering a projection the planner knows is unsupported is the defect here.

Why D is correct: The standard requires the planner to obtain the qualitative and quantitative information needed, and where that information is unavailable or inconsistent, to discuss the limitation with the client and then limit the scope, terminate the engagement, or continue with the limitation disclosed.

A planner is reviewing a proposed transaction for a client. The client's cousin obtained a private letter ruling from the Internal Revenue Service two years ago approving an almost identical transaction, and the client now wants the planner to treat that ruling as settled law. A final Treasury regulation issued after the ruling reaches the opposite conclusion on the same point. How should the planner weigh these two authorities?

• AThe private letter ruling controls, because a ruling issued on identical facts binds the Service as to every taxpayer whose facts match those in the ruling.
• BThe Treasury regulation controls, because a private letter ruling binds the Service only as to the taxpayer who requested it and may not be cited as precedent by anyone else.check_circle Correct
• CThe two authorities rank equally, so the planner may adopt whichever position produces the lower tax provided the return is filed by its original due date.
• DNeither authority is binding until a court of original jurisdiction rules on the point, so the planner should advise the client to file the position and litigate it.

Why A is wrong: Tempting because a private letter ruling is genuine written guidance from the Service and does bind it, but that binding effect runs only to the taxpayer who requested the ruling and only on the facts submitted.

Why B is correct: Correct. A final Treasury regulation is an interpretation of the Internal Revenue Code with general application, while a private letter ruling answers one taxpayer's question and carries no precedential weight for a third party.

Why C is wrong: Tempting because both documents come from the same agency, but the sources of tax authority are ranked, and timely filing has no bearing on which authority governs a reporting position.

Why D is wrong: Tempting because litigation can settle a contested point, but a final Treasury regulation is authoritative from the moment it is issued, and advising a client into a dispute that the regulation already resolves against him is poor planning.

A client has received a statutory notice of deficiency asserting 48,000 dollars of additional federal income tax. She disputes the entire amount, has the cash but does not want to part with it while the matter is contested, and asks her planner which court will hear the dispute before she pays anything. Which court can take the case on that basis?

• AThe United States District Court for her district, which takes the dispute only after she has paid the deficiency in full and then sued the government for a refund of that amount.
• BThe United States Court of Federal Claims, which takes the dispute only after she has paid the deficiency in full and filed a claim for refund of the tax with the Service.
• CThe United States Tax Court, which takes the dispute on a timely petition filed after the statutory notice, with no requirement that she pay the asserted deficiency first.check_circle Correct
• DThe United States Court of Appeals for her circuit, which reviews the asserted deficiency directly once the statutory notice has been issued to the taxpayer.

Why A is wrong: Tempting because the District Court is a court of original jurisdiction in tax cases and is the only forum offering a jury, but it hears the matter as a refund suit, so payment comes first.

Why B is wrong: Tempting because this court is also a court of original jurisdiction for federal tax refund suits, but like the District Court it requires the tax to be paid before the claim can be brought.

Why C is correct: Correct. The Tax Court is the only one of the three trial forums that hears a deficiency case before payment, which is why a taxpayer who wants to keep the money while litigating petitions there.

Why D is wrong: Tempting because appellate courts do decide federal tax cases, but they hear appeals from a trial court and are not a court of original jurisdiction, so no taxpayer starts there.

A client's husband died in March 2023. She has not remarried. Her 12 year old son, whom she claims as a dependent, has lived in her home for the whole of every year since, and she pays more than half the cost of keeping up that home. She is preparing her federal income tax return for the 2026 tax year. Which filing status is available to her for 2026?

• AQualifying surviving spouse, because she has a dependent child in the home and has not remarried, which extends the joint return rates for as long as the child remains a dependent.
• BMarried filing jointly, because a widow may continue to file a joint return with her deceased husband while a dependent child of the marriage remains in the household.
• CSingle, because more than two tax years have passed since her husband died and the surviving spouse status she had been using has now expired.
• DHead of household, because the surviving spouse status runs only for the two tax years following the year of death and her dependent son is a qualifying child living in her home.check_circle Correct

Why A is wrong: Tempting because she does meet the dependent child and unmarried conditions, but the status is limited to the two tax years after the year of death, so it was unavailable from 2026 onwards.

Why B is wrong: Tempting because a joint return is permitted for the year of death itself, but a joint return can be filed only for 2023 here, and marital status for every later year is determined without the deceased spouse.

Why C is wrong: Tempting because the first half of the reasoning is right, but expiry of the surviving spouse status does not force single filing when the taxpayer still meets the head of household conditions.

Why D is correct: Correct. The surviving spouse status covered 2024 and 2025, and for 2026 she is unmarried, maintains the household and has a qualifying child living with her, which is exactly the head of household test.

A client aged 52 owns a coastal holiday house with a replacement cost of 900,000 dollars and no mortgage. Local records show a storm surge severe enough to destroy a house on that street happens roughly once every 40 years, and the client has no other liquid assets beyond an emergency fund of 60,000 dollars. Applying the frequency and severity framework of the risk management process, which treatment should the planner recommend for the storm surge exposure?

• ARetain the exposure and fund it from the emergency reserve, because a once in 40 years event is an infrequent loss
• BAvoid the exposure by selling the holiday house and renting comparable accommodation each season
• CTransfer the exposure to an insurer through a policy covering storm surge damage to the dwellingcheck_circle Correct
• DReduce the exposure by fitting storm shutters and raising the foundations, with no insurance purchased

Why A is wrong: Retention is tempting because the frequency really is low, but retention is appropriate only when the severity is also low enough that the client can absorb the loss; a 900,000 dollar loss against a 60,000 dollar reserve would be financially ruinous.

Why B is wrong: Avoidance does eliminate the exposure completely, but it also destroys the client's stated objective of owning the property, and avoidance is reserved for exposures that cannot be economically insured or reduced.

Why C is correct: Low frequency combined with high severity is the classic quadrant for risk transfer, because the premium is small relative to a loss the client could not absorb, and the insurer can pool the exposure across many similar properties.

Why D is wrong: Loss reduction is a sensible supplement and may earn a premium credit, but on its own it lowers the size of a loss rather than removing the catastrophic tail, so the client is still exposed to a loss far beyond the reserve.

A client's home has a replacement cost of 500,000 dollars. Her property policy carries a limit of 320,000 dollars, an 80 percent coinsurance clause and a 1,000 dollar deductible, and it settles losses on a replacement cost basis. A kitchen fire causes a partial loss with a replacement cost of 100,000 dollars. The deductible is subtracted after the coinsurance calculation is applied. How much will the insurer pay?

• A63,000 dollars
• B80,000 dollars
• C99,000 dollars
• D79,000 dollarscheck_circle Correct

Why A is wrong: This divides the 320,000 dollar limit by the full 500,000 dollar replacement cost to get 0.64, applies that to the 100,000 dollar loss and deducts 1,000; the denominator must be the amount of insurance required by the clause, not the whole replacement cost.

Why B is wrong: This applies the coinsurance fraction correctly but then forgets to subtract the 1,000 dollar deductible that the stem says is taken after the coinsurance calculation.

Why C is wrong: This treats the loss as fully covered because it sits under the policy limit and only subtracts the deductible, ignoring the coinsurance penalty that applies whenever the limit carried is less than the required percentage of replacement cost.

Why D is correct: The required amount of insurance is 0.80 multiplied by 500,000, which is 400,000; the ratio carried is 320,000 divided by 400,000, which is 0.80; 0.80 multiplied by the 100,000 dollar loss is 80,000; subtracting the 1,000 dollar deductible gives 79,000, which is below the policy limit and so is payable in full.

During an annual review, a planner learns that since buying a motor policy with a low deductible and full theft cover, a client has taken to leaving her car unlocked on the driveway overnight with the keys in the console, saying that the insurer would simply replace it. She has made no attempt to profit from a loss and has filed no claim. Which hazard does the client's behaviour best illustrate?

• AMorale hazard, because the existence of the cover has made the client careless about preventing a losscheck_circle Correct
• BAdverse selection, because the client is more prone to loss than the average insured in the pool
• CPhysical hazard, because an unlocked vehicle is a tangible condition that raises the chance of theft
• DMoral hazard, because the presence of insurance has created an incentive to bring about a covered loss

Why A is correct: Morale hazard is the indifference or carelessness that arises precisely because a loss would be paid by an insurer, which is exactly the attitude the client expresses, with no dishonest intent involved.

Why B is wrong: Adverse selection describes the tendency of higher risk applicants to seek insurance more readily than lower risk ones, so it concerns who buys the cover at underwriting; here the client already holds the policy and the issue is how her conduct changed afterwards.

Why C is wrong: The unlocked car is indeed a physical condition increasing the chance of loss, which makes this attractive, but the question asks what the client's conduct illustrates, and the physical condition here is the product of her indifference rather than an independent feature of the property.

Why D is wrong: Moral hazard turns on dishonesty or a deliberate attempt to cause or exaggerate a loss for gain, and the stem states the client has not sought to profit and has made no claim, so the defining element of intent is missing.

Helena, aged 78 and widowed, signed a general power of attorney ten years ago appointing her daughter as agent over her bank and investment accounts. The instrument grants broad financial authority, takes effect on signing, and says nothing at all about what is to happen if Helena loses capacity. Helena has since been diagnosed with advanced dementia and two physicians have certified in writing that she can no longer manage her own affairs. Her daughter presents the instrument to the bank and asks to move funds to pay for residential care. Assume the governing state follows the common law rule that a power of attorney is not durable unless the instrument says so. What is the legal position of that instrument now?

• AThe power terminated when Helena lost capacity, so her daughter will probably need a court-appointed conservatorship or guardianship of the estatecheck_circle Correct
• BThe power remains fully effective, because a general power of attorney reaches every financial matter until the principal revokes it or dies
• CThe power springs into effect only now, because an agent's authority under a general power begins when the principal is certified as incapacitated
• DThe power survives as to health care decisions only, because a general power's financial authority lapses once two physicians certify incapacity

Why A is correct: A power of attorney that lacks durability language ends by operation of law at the principal's incapacity, leaving a court-supervised conservatorship as the remaining route to authority over her assets.

Why B is wrong: The breadth of the powers granted is tempting, but breadth of subject matter and survival of incapacity are different questions; a common law agency ends when the principal loses capacity unless the document says it endures.

Why C is wrong: This describes a springing power, which is a separate drafting choice that names an incapacity trigger; this instrument took effect on signing and carries no springing clause, so nothing was waiting to be triggered.

Why D is wrong: Authority over medical decisions comes from a separate health care instrument and is never implied by a financial power, so an instrument covering accounts cannot convert itself into a medical authority on incapacity.

Ronan, aged 66, signed a living will four years ago. It states that if he is in a terminal condition with no reasonable prospect of recovery he does not want mechanical ventilation or artificial nutrition. He has signed no other incapacity document. He suffers a severe stroke and is now unconscious but is not terminally ill and may recover some function. His physicians need consent for a feeding tube and for a course of surgery, and his wife and adult son disagree about what Ronan would have wanted. Which document should his planner have recommended to resolve a situation of this kind?

• AA more detailed living will setting out his treatment preferences at greater length, since a fuller written statement of wishes governs whatever medical situation later arises
• BA durable power of attorney for health care, often called a health care proxy, naming one agent with authority to make medical decisions for him whenever he cannot make them himselfcheck_circle Correct
• CA durable power of attorney over his property and financial affairs, since the agent already trusted to manage his money may also give consent to medical treatment on his behalf
• DA do-not-resuscitate order lodged with his treating physicians, since a physician order sits in the medical record and directs the clinical team whenever consent to treatment is needed

Why A is wrong: Adding detail is tempting because the gap looks like a drafting omission, but no written statement can anticipate every clinical situation, and a living will is a set of instructions rather than a person able to answer a question the document did not foresee.

Why B is correct: Appointing an agent supplies a decision maker rather than a fixed instruction, so the agent can consent to the feeding tube and the surgery, and the appointment settles which family member has authority when relatives disagree.

Why C is wrong: The same agent is often chosen for both roles, which makes this plausible, but financial and medical authority come from separate instruments and a property power confers no authority to consent to a feeding tube or surgery.

Why D is wrong: A do-not-resuscitate order is genuinely a physician order in the record, but it addresses only whether resuscitation is attempted at cardiac or respiratory arrest and says nothing about consenting to surgery or nutrition.

Priya, aged 61, signed a revocable living trust and a pour-over will three years ago, telling her planner that her main objective was to keep her estate out of probate. She retitled her brokerage account and her main residence into the name of the trust at the time. Last year she bought a holiday cottage worth 320,000 dollars and took title in her own individual name, and it was never transferred to the trust. The cottage has no co-owner and no beneficiary designation attached to it. Priya dies this year. What happens to the cottage?

• AIt passes to the trust automatically outside probate, because a pour-over will transfers any individually owned property into the trust at the moment of death
• BIt passes to Priya's heirs under the state intestacy statute, because a pour-over will disposes only of property already titled in the name of the trust
• CIt must be administered through probate, and the pour-over will then transfers it to the trust so that it is distributed under the terms of the trustcheck_circle Correct
• DIt is distributed under the dispositive terms written into the will itself without probate, because a properly executed will operates as a will substitute alongside a funded trust

Why A is wrong: This describes the outcome the pour-over will is designed to reach but skips the step that gets there; a will is an instrument of the probate court and can only move property once the estate is opened and administered.

Why B is wrong: This reverses the function of the two instruments, since trust-titled property never needs the will at all; intestacy applies only where there is no valid will, and Priya executed one.

Why C is correct: The cottage is individually owned with no survivorship feature or beneficiary designation, so it is probate property, and the pour-over will names the trust as the taker of whatever the probate estate holds.

Why D is wrong: A pour-over will carries no dispositive plan of its own beyond naming the trust as beneficiary, and calling a will a will substitute inverts the term, which describes arrangements such as joint tenancy or beneficiary designations that bypass the will.

Ravi, a CFP professional, is engaged by a new client for one narrow purpose: to review the client's existing disability income policy and advise whether to replace it. No financial planning engagement is agreed, and Ravi bills a flat hourly fee. One of the replacement policies he is considering pays his firm a materially higher commission than the others. Under the CFP Board Code of Ethics and Standards of Conduct, what standard of conduct governs the recommendation Ravi is about to make?

• ARavi owes a suitability obligation only, because the engagement is limited to a single insurance product and the client has declined financial planning.
• BRavi owes the fiduciary duty only from the point the client accepts the recommendation and the replacement policy is actually placed and paid for.
• CRavi owes the fiduciary duty at all times when providing Financial Advice, so the narrow engagement limits the subject matter he must consider but does not reduce the duty he owes on it.check_circle Correct
• DRavi owes the fiduciary duty only if the client later expands the engagement so that it requires integrated advice across several financial planning subject areas.

Why A is wrong: Tempting because insurance sales outside a planning engagement are often regulated on a suitability basis by state insurance law, but CFP Board sets its own higher bar for a CFP professional, and that bar does not drop to suitability for a narrow engagement.

Why B is wrong: Tempting because the commission is earned at placement, but the duty attaches when the advice is given, not when it is implemented. A recommendation the client rejects was still made under the fiduciary duty.

Why C is correct: Correct. The Code and Standards attach the fiduciary duty, comprising the duties of loyalty, care and following client instructions, to any Financial Advice, and a recommendation to replace an insurance policy is Financial Advice. Scope limits the breadth of the analysis, not the standard applied to it.

Why D is wrong: This confuses two separate tests. Whether the engagement requires integrated advice decides if the Practice Standards for the Financial Planning Process apply. The fiduciary duty applies to Financial Advice regardless of that answer.

Amara, a CFP professional, is advising a married couple in their fifties on where to consolidate two former workplace retirement accounts. One candidate is a managed account programme operated by her own employer, from which she personally receives a share of the ongoing asset-based fee. She has compared it against three unaffiliated programmes and genuinely believes the in-house option is the strongest for this couple. What does the CFP Board Code of Ethics and Standards of Conduct require of her before she makes this recommendation?

• AShe must avoid the conflict altogether by recommending only unaffiliated programmes, because a CFP professional cannot recommend a product from which the firm earns ongoing revenue.
• BShe may proceed without disclosing the fee share, because she has concluded in good faith after comparing four programmes that the in-house option is in the couple's best interests.
• CShe must obtain a written acknowledgement of the conflict from the couple when the engagement begins, after which no further management of the conflict is required of her.
• DShe must disclose the conflict in terms specific enough for the couple to understand it, obtain their informed consent to it, and then manage the conflict so that it does not impair the advice she gives.check_circle Correct

Why A is wrong: Tempting because avoidance is the cleanest response to a conflict, but the Code and Standards do not prohibit recommending proprietary or affiliated products. They require the conflict to be disclosed, consented to and managed.

Why B is wrong: Tempting because her analysis is genuine and thorough, but a good-faith best-interest conclusion is not a substitute for disclosure. The client, not the adviser, decides whether the conflict is acceptable.

Why C is wrong: Tempting because written disclosure at onboarding is common practice, but a generic acknowledgement collected in advance is not specific enough for informed consent, and disclosure alone never discharges the separate obligation to manage the conflict.

Why D is correct: Correct. The Code and Standards set out a three-part obligation for material conflicts: full disclosure sufficiently specific that the client can understand and evaluate it, informed consent, and ongoing management of the conflict.

Priya, a CFP professional, charges each planning client a flat annual fee and takes no asset-based fee. She also part-owns a small insurance agency, and that agency pays her renewal commissions on policies she sold several years ago to a number of the same households she now plans for. She wants her new website to describe her practice as fee-only. How should she describe her compensation under the CFP Board Code of Ethics and Standards of Conduct?

• AShe may describe the practice as fee-only, because the renewal commissions relate to policies sold before the current planning engagements began and no new sale is involved in her present work.
• BShe may not describe the practice as fee-only, because she and a related party receive sales-related compensation, so her compensation must be represented accurately as a combination of fees and commissions.check_circle Correct
• CShe may describe the practice as fee-only provided she discloses the renewal commissions in the written terms of engagement she gives each client at the start of the relationship.
• DShe may describe the planning side of the practice as fee-only and present the insurance agency separately on the website, because the two businesses are legally distinct entities with their own accounts.

Why A is wrong: Tempting because the sales are historic, but renewal commissions are sales-related compensation received now. The test looks at what she and her related parties receive, not at when the policy was originally written.

Why B is correct: Correct. The fee-only label is available only where the CFP professional and any related party receive no sales-related compensation at all, and renewal commissions from an agency she part-owns are exactly that.

Why C is wrong: Tempting because disclosure cures many conflicts under the Code and Standards, but it does not cure an inaccurate compensation label. Disclosure and accurate representation are separate obligations.

Why D is wrong: Tempting because the entities really are separate at law, but an agency she part-owns is a related party. Splitting the description across two pages of the same website does not make the label accurate.

Helen, aged 68 and three years retired, holds a 1,400,000 dollar portfolio plus 180,000 dollars in bank deposits, receives 34,000 dollars a year of Social Security, and spends only 38,000 dollars a year. She grew up in a household that lost its home in a business failure, will not tell her adult children what she owns, describes any discretionary spending as wasteful, and cancelled a long promised trip because it felt reckless. Her planner's modelling shows the plan funds 70,000 dollars a year of spending with a very high probability of success. Which response by the planner best addresses the attitude driving Helen's behaviour?

• APresent the modelling output showing a very high probability of success at 70,000 dollars a year, and recommend that she raise her spending to that figure because the arithmetic settles the question
• BRecommend that she move the surplus capital into an irrevocable trust for her children now, on the reasoning that she will not spend it in her lifetime and the transfer removes the decision from her
• CExplore with her where her beliefs about saving and about secrecy around money came from, name the pattern openly with her, and agree one small trial increase in discretionary spending that she can test and reviewcheck_circle Correct
• DTreat her reluctance to spend as an accurate expression of low risk tolerance, and reallocate the portfolio into short dated bonds and cash so that the holdings match the caution she is displaying

Why A is wrong: The modelling is sound and a candidate may assume good data changes behaviour, but a belief formed in childhood is not dislodged by a probability figure, and a client told her caution is irrational usually defends it harder rather than spending more.

Why B is wrong: Lifetime transfers can be appropriate for a genuinely surplus estate, which makes this attractive, but it assumes a goal Helen has never stated and removes flexibility from a client whose central difficulty is a fear of running short.

Why C is correct: Working back to the origin of the belief and then testing it with a low stakes experiment is the recognised way to loosen a money script, because it gives Helen her own evidence rather than the planner's assertion.

Why D is wrong: Matching a portfolio to a client's expressed caution is normally good practice, so this reads as client centred, but it confuses a belief about spending with tolerance for investment volatility and would cut the real growth she needs over a long retirement.

Daniel is 59 and intends to retire at 62. He holds 900,000 dollars in a rollover Individual Retirement Account, 12,000 dollars of cash outside it, no defined benefit pension, and he will claim Social Security at 67. He needs 55,000 dollars a year from the portfolio for the five years between retirement and claiming. After three strong market years his risk tolerance questionnaire scores him as aggressive, and he asks his planner to move the account to 90 per cent equities. Which assessment should the planner give him?

• AThe questionnaire score should govern the allocation, because risk tolerance measures the client's own willingness to bear loss and the choice of how much loss to bear belongs to the client rather than to the planner
• BRisk perception and risk tolerance are two labels for the same attribute, so the sound course is to re-score the questionnaire after the next market fall and adopt whichever allocation the lower of the two scores supports
• CBecause risk tolerance is a stable personality trait, the planner should simply record the aggressive score and then set the allocation solely from the return the portfolio must earn to deliver 55,000 dollars a year for five years
• DHis risk capacity is limited by a three year horizon to the first withdrawal and by a cash reserve of only 12,000 dollars, so the allocation should be held below his stated tolerance and the reason for the constraint explained to himcheck_circle Correct

Why A is wrong: Client autonomy is real and tolerance is genuinely the client's own attribute, which makes this persuasive, but tolerance describes willingness only, and a plan built on willingness while ignoring the ability to absorb a loss leaves the withdrawal years unfunded.

Why B is wrong: Scores really do drift with market conditions, which makes the observation feel informed, but perception is the client's reading of how risky conditions are now while tolerance is a far more stable trait, and setting policy from the lowest reading locks in the worst moment.

Why C is wrong: Tolerance is indeed comparatively stable and a required return calculation is part of the analysis, but building an allocation from required return alone drives clients into more equity risk exactly when the plan is tightest and ignores capacity altogether.

Why D is correct: Capacity is set by the plan facts rather than by feelings, and a portfolio that must fund 55,000 dollars a year from year three cannot absorb a deep equity fall, so capacity binds and the constraint has to be explained rather than imposed silently.

Nadia, 34, and Tom, 36, are married with a combined income of 190,000 dollars and are new clients. They deadlock at the second meeting over the size of their cash reserve. Tom wants 60,000 dollars held on deposit and says his parents never discussed money at home before their business failed. Nadia wants 15,000 dollars and the balance invested, saying her family reviewed a written budget together every month and treated debt as a tool. Each dismisses the other's figure as obviously wrong. What should the planner do next?

• AAsk each of them separately what they were taught about money and about security while growing up, bring both sets of family messages into a joint conversation, and then agree a reserve figure that both can explain in their own wordscheck_circle Correct
• BCalculate the reserve that six months of their essential outgoings requires, present that single figure as the technically correct answer, and let the arithmetic close the disagreement so the meeting can move on to the investment recommendations
• CSuggest that they keep entirely separate accounts and separate reserves, so that each of them can hold the sum their own judgement supports and neither has to accept a figure that the other has argued for
• DScore both of them on a risk tolerance questionnaire, average the two results, and set the cash reserve at whichever figure the averaged score corresponds to, treating the deadlock as a straightforward difference in tolerance for volatility

Why A is correct: Naming the financial socialisation each partner brings turns a fight about a number into a comparison of two histories, which is the only route to a figure both will still support when the next shock arrives.

Why B is wrong: A months of expenses calculation is the standard technique and produces a defensible number, but the couple are not disagreeing about arithmetic, so a figure handed down without addressing the beliefs behind it will simply be relitigated at every later review.

Why C is wrong: Separate accounts genuinely reduce friction for some couples and the suggestion sounds respectful of both views, but it avoids the conversation rather than resolving it and leaves the household with no agreed plan for a shared emergency.

Why D is wrong: Averaging two scores looks even handed and questionnaires do have a place in the engagement, but an emergency reserve is a liquidity decision rather than a volatility decision, and averaging produces a number that neither partner actually holds.