Unit 22 - Nonqualified Accounts

3 People involved in Trust Accounts

1) Grantor/Settler: Places assets into trust (Transfers ownership essentially) 2) Trustee: Selected by the Grantor; manages the assets for the benefit of a beneficiary 3) Beneficiary: Selected by the Grantor; assets in the trust are managed for the beneficiary's benefit.

2 Types of Joint accounts

1) Joint Tenants with Rights of Survivorship (JTWROS) 2) Tenants in Common (TIC)

Custodial Account

A custodial account is simply an investment account that's in a child's name but managed by an adult. -Hence, the account has the SSN of the child, and the assets are owned by the child.

Transfer on death (TOD)

A designation that an owner(s) may ADD to an account that allows the owner to pass ALL/or a portion of the account to a named beneficiary or beneficaries

Tenants in Common (TIC)

A form of joint ownership that provides a deceased tenant's fractional interest in the account that's retained by that tenant's estate and is NOT passed to the surviving tenant(s).

Revocable Trust

A living trust that can be altered until the death of the individual for whom it was established -So long as the grantor has this level of control, the assets in the trust are still considered pat of the grantor's assets and will be included in the estate.

Partnership accounts

A partnership is an unincorporated association of two or more individuals. Partnerships frequently open accounts necessary for business purposes. The partnership must complete a partnership agreement stating which of the partners can make transactions for the account. If the partnership opens a margin account, the partnership must disclose any investment limitations. An amended partnership agreement (similar to a corporate resolution) must be obtained each year if any changes have been made.

What happens to the contents of a custodial account in the event of the death of the beneficial owner (the minor child)? I The account's contents are returned to the donor(s). II The custodian's fiduciary responsibility ceases. III The account passes to the minor's estate. IV The custodian remains fiduciary. A) II and III B) I and II C) III and IV D) I and IV

A) II and III Explanation The custodian's fiduciary responsibility is for the benefit of the minor and ceases upon the minor's death. The account passes to the minor's estate for distribution to the minor's heirs.

Which of the following statements are true of an irrevocable trust? I The grantor may change the terms of the trust II The grantor must give up ownership of items placed in the trust III The structure of the trust may reduce estate taxes IV The grantor may retain ownership of items placed in the trust A) II and III B) I and II C) II and IV D) I and IV

A) II and III Explanation The grantor may be able to avoid some of the tax consequences because he gives up ownership of items in the trust and cannot change the terms of the trust once established.

An investor has opened an individual brokerage account for use in a small business and has given a business partner a power of attorney (POA) over the account. Which of the following persons may have access to the account for trading purposes? I The attorney who administers to the business's legal needs II The investor's partner who was given the POA III The investor who opened the account IV A secretary at the business, but only in an emergency A) II and III B) II and IV C) I and IV D) I and III

A) II and III Explanation The owner of an individual account and anyone who has power of attorney (POA) over the account are the only persons who may have access. This would exclude the business's attorney, secretary, or anyone else not having the POA.

Many investors like to put a transfer on death (TOD) designation on their brokerage accounts. Which of these are benefits of doing so? I The TOD designation avoids estate taxes. II The TOD designation avoids probate. III The account holder is relieved of decision making in the account. IV There is flexibility to change beneficiaries as conditions dictate. A) II and IV B) I and III C) II and III D) I and IV

A) II and IV Explanation The transfer on death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account's assets upon death. Those named persons may be changed whenever the account holder wishes. Although this bypasses probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.

Craig and Judy have just married. It is a second marriage for both of them and they both have kids from a prior marriage. Craig would like his portion of their account to go to his kids when he dies and Judy would like her portion to go to her kids when she dies. As new partners in marriage, while they are both alive they would both like to have full access to the account. What type of account(s) should they set up? A) Joint tenants in common (JTIC) B) Each should set up their own individual transfer on death (TOD) account with limited power of attorney (POA) C) A partnership account D) Joint tenants with rights of survivorship (JTWROS)

A) Joint tenants in common (JTIC) Explanation The JTIC account does exactly what the clients requested. The JTWOS does not separate their assets at death; instead the whole account would go to the surviving spouse. Individual accounts with limited POA and TOD would not give both full access to the account. The partnership account is for business accounts.

One of your clients wants to set aside some money for her nephew, who just turned 30, but she has some reservations. She does not wish his numerous creditors to have access to the money until after she dies, but she wants him to have easy access to the money at that time. You recommend that she open A) a TOD registration on an account in her name. B) a custodial account. C) a TIC account. D) a joint tenants with rights of survivorship account.

A) a TOD registration on an account in her name. Explanation The acronym TOD stands for transfer on death. It is used to facilitate the transfer of assets in an account upon the death of the account holder (your customer, in this case) without the need for probate. While the owner is alive, the account remains her property. The nephew is chronologically too old for a custodial account. She should not have a joint account because of creditor and control issues.

All of the following are true of a revocable living trust except A) its primary purpose is to avoid estate taxes for the grantor. B) the grantor can add items to the trust. C) the grantor can remove items from the trust. D) the grantor is subject to the tax consequences of the trust while alive.

A) its primary purpose is to avoid estate taxes for the grantor. Explanation In a revocable living trust the grantor has complete control over the trust while alive, and because of this, the grantor is also subject to any tax implications of the trust.

The primary use for a revocable living trust is to A) use as a substitute for a will. B) limit the grantor access to items in the estate. C) avoid tax consequences for the grantor. D) prevent the grantor from liquidating their estate prior to death.

A) use as a substitute for a will. Explanation While the grantor is alive they have full control of the trust it is mainly use in place of a will.

Corporate account 2 required docs to open corporate account?

An account held in a corporation's name. The corporate agreement, signed when the account is opened, specifies which officers are authorized to trade in the account. 2 Required docs to open corporate account: 1) corporate charter (Proof the corporation exists) 2) corporate resolution (Authorizes BOTH the opening of the account and officers designated to enter orders)

Which of these is not correct? A) There is no annual contribution limit for a 529 plan. B) A 529 plan's assets must be used by age 30, an ESA does not. C) Both a 529 College Savings Plan and an ESA may be used to pay for pre-college education expenses. D) There are no earnings limits for those contributing to a 529 plan.

B) A 529 plan's assets must be used by age 30, an ESA does not. Explanation An education savings account (ESA) must be used by age 30, a 529 plan has no such limit. As of January 1, 2018, both plans may be used for pre-college education costs.

Which of the following are characteristics of a revocable living trust? I It is established before the grantor dies. II The grantor can change beneficiaries. III The grantor can add or remove items from the trust. IV The grantor is subject to tax on income that remains in the trust. A) I, II, and III B) I, II, III, and IV C) I and II D) I only

B) I, II, III, and IV Explanation In a revocable living trust the grantor has complete control over the trust while alive and because of this, the grantor is also subject to any tax implications of the trust.

A customer wants to save some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is true? A) The customer may take a deduction for the amount contributed. B) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over. C) The customer may make annual contributions until the grandson graduates from college. D) The maximum contribution permitted is $3,000 annually.

B) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over. Explanation The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.

Under whose Social Security number is the custodial account established? A) The parent, whether the parent is custodian or not B) The minor's C) The person who established the account for the minor, whether the parent or not D) The custodian's

B) The minor's Explanation Assets in a custodial account are the minor's property, so the minor's Social Security number is used.

Under the Uniform Transfers to Minors Act (UTMA), a custodian may invest in all of the following except A) U.S. Treasury notes with less than one year to maturity. B) blue-chip stocks on margin. C) non-investment grade (junk) bonds. D) mutual funds in growth shares.

B) blue-chip stocks on margin. Explanation A custodian may not purchase securities in an account on margin or pledge them as collateral for a loan.

Sam Malloy owns a small business and has built a substantial estate both with his business success and his early career as a pro athlete. He wants to set up his estate in a way that he will control the assets until he passes away or becomes incapacitated. Once that time comes, he wants control to transfer easily and he wants to avoid probate. Sam should A) place his assets in a transfer on death account. B) establish a revocable living trust. C) establish an irrevocable living trust. D) create a last will and testament.

B) establish a revocable living trust. Explanation A revocable living trust will accomplish his goals for his estate. An irrevocable trust takes away his control of his assets. The business cannot be placed in a transfer on death account. A will must go through probate.

If the beneficiary of a custodian account dies, the securities in the account pass to A) the custodian's estate. B) the minor's estate. C) the Securities Investor Protection Corporation (SIPC) trustee's account. D) the parents.

B) the minor's estate. Explanation If the beneficiary of a custodial account (minor) dies, the securities in the account must pass to the minor's estate, not to the parents' or custodian's estate.

Alan and Barbara Collins have three minor children; Dan, Ellen, and Frank. Which of the following UTMA accounts could be opened? A) Alan and Barbara Collins as custodians for Ellen Collins B) Alan Collins as custodian for Dan and Frank Collins C) Barbara Collins as custodian for Ellen Collins D) Frank Collins as custodian for Dan Collins

C) Barbara Collins as custodian for Ellen Collins Explanation In an UTMA account, one adult is custodian for one minor. There is no such thing as joint custodians or joint beneficiaries.

In an irrevocable trust a grantor may or must do which of the following? I May change the terms of the trust II Must give up ownership of items placed in the trust III May reduce estate taxes IV May retain ownership of items placed in the trust A) II and IV B) I and IV C) II and III D) I and II

C) II and III Explanation The grantor may be able to avoid some of the tax consequences because he gives up ownership of items in the trust and cannot change the terms of the trust once established.

The benefits of designating a brokerage account as transfer on death (TOD) are that I The designation eliminates estate taxes. II The designation avoids probate. III The account holder no longer has to make investment decisions regarding the account. IV The account holder may still make beneficiary changes for the account. A) I and IV B) I and III C) II and IV D) II and III

C) II and IV Explanation The transfer on death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account's assets upon death. Those named persons may be changed whenever the account holder wishes. Although this designation allows the account to bypasses probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.

A registered representative is appointed the fiduciary for a trust account. Which of the following is true? A) Trading on margin is always permissible as a safe and efficient way to employ leverage for the account. B) A RR, as fiduciary, may share in the account's profits and charge a reasonable fee for services. C) Investment decisions must be made in accordance with the prudent investor rule. D) It is expected that speculative positions should be taken to enhance the performance of the account for the benefit of the trustee.

C) Investment decisions must be made in accordance with the prudent investor rule. Explanation When acting as a fiduciary, all investment decisions must be made in accordance with the prudent investor rule, which mandates that only wise and safe investment decisions be made. Speculative positions, such as selling short or writing uncovered call options, are almost always prohibited. Margin trading can only occur if it has been specifically designated as being allowed in the trust documents. Fiduciaries may charge a reasonable fee for their services but may not be compensated based on, or share in, profits.

Which of the following is a benefit of 529 plans but not Coverdell Education Saving Accounts? A) Withdrawals are tax free if used for qualified education expenses B) Available for use for K-12 C) No income restrictions D) Can be transferred to a sibling if not used by the original beneficiary

C) No income restrictions Explanation Coverdell plans have income restrictions; 529 plans do not.

One difference between an UTMA account and an UGMA account is A) UTMA assets are considered an irrevocable gift, an UGMA account allows the custodian to reclaim the assets. B) an UTMA account transfers at the age of majority, an UGMA account can go until the beneficiary turns 30 year of age. C) an UTMA account has a wider set of allowed investments. D) an UGMA account is tax deferred and a UTMA account is not. Explanation

C) an UTMA account has a wider set of allowed investments. Explanation UTMA accounts allow real estate holdings, an UGMA account does not. Neither accounts are tax deferred and both accounts are irrevocable. The UGMA transfers at the age of majority, the UTMA may transfer as late as age 25.

Sam Malloy owns a small business and has built a substantial estate both with his business success and his early career as a pro athlete. He would like to begin to move assets out of his estate in a way that will allow him to benefit from the assets, but also allows for an easy transfer to his heirs when he dies. He needs to lower the size of his estate before he passes and hates the idea of a public hearing that is part of probate. Sam should A) place his assets in a transfer on death account. B) establish a revocable living trust. C) establish an irrevocable living trust. D) create a last will and testament.

C) establish an irrevocable living trust. Explanation An irrevocable living trust will accomplish his goals. The assets in a revocable trust remain part of his estate as do the assets in a TOD account and a will. Also, a will must be probated.

All of the following are true of a revocable living trust except A) the grantor can remove items from the trust. B) the grantor is subject to the tax consequences of the trust while alive. C) its primary purpose is to avoid estate taxes for the grantor. D) the grantor can add items to the trust.

C) its primary purpose is to avoid estate taxes for the grantor. Explanation In a revocable living trust the grantor has complete control over the trust while alive, and because of this, the grantor is also subject to any tax implications of the trust.

A broker-dealer firm opening a corporate account must establish all of the following except A) the legal right of the corporation to open a brokerage account. B) the names of those who will have access to or authority over the account. C) location of any account records the corporation will keep when received. D) any limitations the corporation has placed on account activities.

C) location of any account records the corporation will keep when received. Explanation Where the corporation keeps its records is of no concern to the broker-dealer. The broker-dealer will keep its own records on the account, in any event. All the other information noted must be ascertained before the account may be opened.

Test Q #1 A client and his spouse own shares in the KAPCO Fund as tenants in common. He has a 60% ownership interest in the account and the spouse has the balance. If the client dies, what happens to the shares in the account? A) His interest would automatically be transferred to the spouse. B) Ownership of the shares would be determined by probate court. C) 50% of the shares would belong to his spouse and the remaining half would be distributed to his estate. D) 40% of the shares would belong to his spouse and the remaining balance would be distributed to his estate.

D) 40% of the shares would belong to his spouse and the remaining balance would be distributed to his estate. Explanation In a TIC account, securities owned by the decedent pass to the deceased owner's estate—in this case, 60% of the assets. The 40% belonging to the spouse is retained by the spouse.

Which of these business structures would pass through the results of the business to the owners and protect the owners from the liabilities of the company? A) A General partnership B) A Sole proprietorship C) A C Corporation D) An LLC

D) An LLC Explanation The LLC is the only one of these that both passes the income and losses through while providing liability protection. C Corps protect but do not pass through losses. General partnerships and sole proprietorships passes results through, but offer no protection.

A married couple have equal 50% ownership interests in a tenants in common account (TIC). If one party to the account dies, what happens to the shares in the account? A) The deceased party's interest is transferred to the remaining party. B) All the shares are distributed to the heirs named in the estate of the deceased party. C) Ownership and distribution of all shares would be determined by probate court. D) Half, or 50% of the shares, would belong to the remaining party and the balance would be distributed to the estate of the deceased party.

D) Half, or 50% of the shares, would belong to the remaining party and the balance would be distributed to the estate of the deceased party. Explanation In a tenants in common (TIC) account, securities owned by the decedent pass to the decedent's estate—in this case, 50% of the assets. The other 50% is retained by any remaining living parties to the account.

Which of the following are characteristics of a revocable living trust? I It is established before the grantor dies II The grantor can change beneficiaries III The grantor can add or remove items from the trust IV The grantor is not subject to tax on income that remains in the trust A) I, II, III, and IV B) I and II C) I only D) I, II, and III

D) I, II, and III Explanation In a revocable living trust the grantor has complete control over the trust while alive, and because of this, the grantor is also subject to any tax implications of the trust.

A married couple have two children, both still minors. Which of the following UTMA accounts could be opened? A) Parent as custodian for both children in a single account B) One of the children as custodian for the sibling C) Both parents as custodians for one of the children D) Parent as custodian for one of the children

D) Parent as custodian for one of the children Explanation In an UTMA account, only one adult can be the custodian for one minor. Joint custodians or joint beneficiaries to a single account are not permitted.

Your customer, Jim, wants to deposit money into a 529 College Savings plan for his great-niece Penelope. He states four reasons why he likes the 529 plan. Unfortunately, you need to tell him he is incorrect on one point. Which of his following points is not considered a feature of a 529 College Savings Plan? A) The growth can be tax free if used for qualified education expenses. B) If she gets into a good prep school the money can be used for that as well as college. C) The money grows tax deferred. D) She has to use the money by the time she turns 30, so she will not be able to put it off too long.

D) She has to use the money by the time she turns 30, so she will not be able to put it off too long. Explanation 529 plans grow tax deferred and the funds may be withdrawn tax-free if used for qualified education expenses. These plans may be used to fund secondary education (pre-college). There is no age limit to when the funds must be used.

The income level of a donor A) will not affect contributions into a Coverdell Education Savings Account (ESA) or a section 529 plan. B) will affect contributions into a Section 529 plan. C) may affect contributions into both Coverdell ESA's and Section 529 plans. D) may affect contributions into a Coverdell ESA.

D) may affect contributions into a Coverdell ESA. Explanation Contributions into a Coverdell Education Savings Account (ESA) are phased out at high income levels for a donor, whereas the income level of a donor has no impact on contributions made into a Section 529 plan.

How an account is registered determines A) ownership of the account only. B) control of the investments in the account only. C) the sole individual allowed to access the account. D) ownership and control of the investments in the account.

D) ownership and control of the investments in the account. Explanation Accounts can be registered in the name of one or more persons, as well as legal entities such as corporations or partnerships. Account registration determines the ownership of the account and who will have control of the investments in the account.

Marsha, Jane, Cynthia, Craig, Jim, and Robert are owners of an account JTWROS. If Craig, Jim, and Robert pass away then their interest in the account A) is identified and distributed with the decedent's estate. B) is divided in half and one half of the account is distributed evenly to the decedent's beneficiaries. C) is distributed through the probate process. D) remains in the account and is now the property of the surviving tenants.

D) remains in the account and is now the property of the surviving tenants. Explanation In a joint tenants with rights of survivorship (JTWROS), the assets of the decedent simply remain in the account and are property of the survivors. There is no probate process for these assets, but they are still a part of the decedent's estate for tax purposes.

Under the Uniform Transfers to Minors Act (UTMA) a custodian has control over the account and can do each of the following except A) liquidate, trade, or hold securities. B) exercise right or warrants. C) buy or sell securities. D) sell short and write uncovered call options.

D) sell short and write uncovered call options. Explanation Selling short and writing uncovered options may only be effected in a margin account. The UTMA forbid the establishment of a margin account. Furthermore, these investment strategies, though legal and appropriate in other settings, provides unlimited risk and is inappropriate in an account held for a minor and therefore not permitted.

Main difference between UTMA and UGMA accounts:

UTMA account allows for real estate to be TITLED in CUSTODIAL name; UGMA accounts do not UTMA accounts may be held in the custodial name until beneficiary turns 25 (21 in some stateS); UGMA accounts are available to the minor at age of majority for the state.

Joint Account -Checks made payable to..? -Checks endorsed by...?

A bank account held by more than one person, each individual having the right to deposit and withdraw funds. Checks made payable to the names in which the account is registered, and endorsed for deposit by ALL tenants

Sole Proprietorship

A business owned by one person

Irrevocable Trust

A trust that cannot be altered or ended by its creator -Assets placed in an irrevocable trust may be removed from the grantors estate

Key rules of custodial accounts

An account may have only 1 custodian and 1 minor/beneficial owner.

he primary use for a revocable living trust is to A) avoid tax consequences for the grantor. B) limit the grantor access to items in the estate. C) prevent the grantor from liquidating his estate prior to death. D) use as a substitute for a will.

D) use as a substitute for a will. Explanation While the grantor is alive he has full control of the trust. It is mainly used in place of a will.

Power of attorney ends with ____

Death of EITHER the person who granted the power (Account owner) or the person so appointed (The "Attorney")

Joint Tenants with Rights of Survivorship (JTWROS) -All parties have what interest in the account?

Stipulates that a deceased tenant's interest in the account passes to the surviving tenant(s). -All parties have an undivided interest in the account

For a Custodian account, who's SSN is on the custodial account?

The minor (Beneficiary)

Decedent's trust -When are assets placed in the trust?

Trust that is funded by a will or some other estate process where the assets are placed in the trust after the owner has passed away

Trust Account

When you create a trust, you transfer legal ownership of property, cash, and other assets to a trustee (a person or institution) who will be responsible for managing the trust. The trust document states the specific powers the trustee has over the trust assets. The trustee or co-trustees have a fiduciary duty to protect the assets of the trust and may do so through wise investment. -These assets are managed for the benefit of a third party, known as the beneficiary