Ch. 10: Investment Advisory Clients

Which of the following is dissolved when an owner dies? a. A corporation b. A trust c. An S Corporation d. A general partnership

d. A general partnership Explanation: General partnerships generally dissolve when an owner becomes mentally incapacitated or dies. All of the other entities listed have continuity of life.

A 70-year-old retiree is very risk-averse, but needs to generate investment income. She is not wealthy and is in a low tax bracket. Which of the following investments will BEST meet her needs? a. A certificate of deposit b. A growth mutual fund c. A long-term municipal bond fund d. A diversified portfolio of stocks with covered calls written against them

a. A certificate of deposit Explanation: Since the client is risk-averse, needs income, and is concerned about her principal fluctuating, the best choice is a certificate of deposit. All of the other choices are unsuitable because they are either too speculative or they are tax-free, which provides her with little benefit since she is in a low tax bracket.

Under ERISA, all the following are prohibited between the plan and parties of interest, EXCEPT: a. Charging the plan an advisory fee b. Selling property to the plan c. Using plan assets for their own benefit d. Lending money to the plan

a. Charging the plan an advisory fee Explanation: All choices are strictly prohibited under Rule 404(c), except charging an advisory fee for services rendered to the plan.

Henry is a trustee for an account that has beneficiaries ranging in age from 2 through 17. Under the Uniform Prudent Investor Act (UPIA), how should the assets of the trust be managed? a. All beneficiaries' interests should be weighed prior to making any investments b. The investment profile of the oldest beneficiary is the determining factor, since she will need the money for college within one year c. All assets should be invested based on the investment recommendations of the grantor d. The trust should be managed based on the most conservative beneficiary profile

a. All beneficiaries' interests should be weighed prior to making any investments Explanation: Under the Uniform Prudent Investor Act (UPIA), a trustee managing an account that has multiple beneficiaries must act impartially when investing and managing the trust's assets. When making investments, a trustee must take into account the different interests of all beneficiaries.

Which of the following is NOT a required element of a trust? a. An attorney b. Trustee c. A settlor's intention to create the trust d. Specific subject matter

a. An attorney Explanation: A trust always consists of several elements. The first is the settlor's intention to create the trust. This could be done through a written or oral trust agreement. In addition, all trusts require a subject matter, which is often referred to as the "trust res" or corpus. In many trusts, the subject of the trust is a financial asset, real estate, or money that the settlor wants to give to the beneficiary. The last two elements of a trust are the trustee to act as a fiduciary and the beneficiary who will benefit from the trust. Although attorneys often write trust agreements, a trust can be created without an attorney.

All of the following choices are typical characteristics of a 401(k) plan, EXCEPT: a. Employers must match employee contributions b. Employee contributions are fully and immediately vested c. Employee contributions grow on a tax-deferred basis d. An employee's taxable income is reduced by employee contributions

a. Employers must match employee contributions Explanation: In a 401(k) plan, an employee can usually make a pretax contribution to the plan and reduce taxable income. Employee contributions and growth in the account are tax-deferred. Employers are not required to match contributions, but may do so.

An adviser is considering a recommendation that a customer sell uncovered options. The recommendation would NOT be suitable if the adviser: a. Failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks b. All of the above c. Failed to receive written approval to make the recommendation by his branch manager d. Failed to receive written approval to make the recommendation by the firm's registered options principal

a. Failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks Explanation: The recommendation would not be a suitable one if the adviser failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks. Written approval from the firm's registered options principal or branch manager is required to open an account. There is no requirement to receive written approval prior to making a recommendation to a client.

Under Section 404(c) of ERISA, which of the following statements regarding fiduciaries is TRUE? a. Fiduciaries are not liable for investment losses if certain requirements are met. b. Fiduciaries are relieved of the responsibility for monitoring the plan since it is the obligation of the sponsoring employer. c. Fiduciaries are treated in the same manner as the plan participants. d. Fiduciaries are prohibited from buying stock in the sponsoring employer.

a. Fiduciaries are not liable for investment losses if certain requirements are met. Explanation: If a retirement plan meets the requirements of ERISA section 404(c), the plan fiduciary will not be held liable for any loss that is the direct result of a participant's exercise of control over the investment of her plan account. However, plan fiduciaries are responsible for the selection or retention of particular investment options and for investments required by the plan or directed by the plan sponsor.

Jill has created a revocable trust to provide for the support of her adult child. The trust has generated $20,000 in income during the year and is invested in a wide variety of stocks and bonds. Which of the following statements concerning this trust is NOT TRUE? a. Jill reduces her potential estate tax liability by the amount of the gains in the trust. b. Jill controls the assets in the trust c. The trust must be structured as a living trust d. The trust will become irrevocable upon Jill's death

a. Jill reduces her potential estate tax liability by the amount of the gains in the trust. Explanation: A revocable trust must be established as a living trust since the donor retains control over the assets. This type of trust does not reduce the donor's potential estate tax liability. With an irrevocable trust, the donor loses control of the assets, but the assets will not be included as part of the donor's estate. This is the trade-off between the two types—retain control and potentially pay more taxes (revocable trust) or lose control and potentially pay less in taxes (irrevocable trust).

If an investment adviser representative is reviewing a client's IRA portfolio, she would be most concerned with the inclusion of which of the following investments? a. Municipal bonds b. Shares of an REIT c. ADRs d. Shares of a growth fund

a. Municipal bonds Explanation: Although it is not prohibited to place municipal bonds in an IRA, a review of the appropriateness must be performed. Since an IRA is a tax-deferred account, the tax-exempt nature of the municipal bond loses its effectiveness. Instead, the placement of a higher yielding investment is more suitable.

Under Section 404(c) of ERISA, fiduciaries are: a. Not liable for investment losses provided that certain requirements are met b. Relieved of all responsibility for monitoring the plan and its investment options c. Able to engage in prohibited transactions d. Considered the same as the plan participants

a. Not liable for investment losses provided that certain requirements are met Explanation: Section 404(c) provides a limited exception to the normal rules governing fiduciary responsibility under ERISA for plans that provide for individual, self-directed accounts, such as 401(k) plans. Fiduciaries are not held responsible for investment losses if certain conditions are met.

For estate purposes, which of the following ensures that no grandchild will receive a different amount of the estate than another grandchild? a. Per capita b. Per stirpes c. Inter vivos d. Testamentary

a. Per capita Explanation: A per capita distribution of an estate ensures that each member of a generation will receive the same amount as any other. Per stirpes distributions are done per branch of a family and, in some instances, members of the same generation of a family will receive different amounts from an estate. Inter vivos and testamentary are terms that are associated with trust accounts, but not estates.

Which of the following statements is a disadvantage of investing in a C Corporation? a. Shareholders pay tax on income that was already taxed to the company b. Shareholders have no personal responsibility for the company's debts c. Shareholders claim the company's losses on their own tax returns d. Shareholders have personal responsibility for the company's debts

a. Shareholders pay tax on income that was already taxed to the company Explanation: A disadvantage of investing in a C Corporation is the double taxation of income that's paid to shareholders in the form of a cash dividend. Since a C Corporation is a taxable entity, the income was first taxed at to the corporation. Thereafter, the shareholders must also pay income tax on the portion they receive as a cash dividend. For individuals, the maximum tax rate on this double-taxed income is usually 20%. C Corporations do offer limited liability to their shareholders, but it is an advantage rather than a disadvantage.

The advantages of investing in a limited partnership include: a. The ability to limit risk b. Tax losses that can reduce taxes on other portfolio income c. Lack of control d. The potential for assessments

a. The ability to limit risk Explanation: A limited partner is risking only the amount she invests in the partnership. The potential for assessments (demands for more money from investors) and the lack of control over the management of the venture are considered disadvantages of limited partnerships. Tax losses generated by the partnership are passed on to investors, but they may only be used to reduce income generated by other passive activities. They may not be used to reduce earned income (wages and salaries) or income from most other types of investments.

When analyzing a client's personal balance sheet, which of the following items is classified as an asset? a. The amount of cash the client has in a checking account. b. The client's monthly mortgage payment. c. The client's weekly paycheck. d. The remaining balance on the client's mortgage.

a. The amount of cash the client has in a checking account. Explanation: On a personal balance sheet, the amount of cash that a client has in a checking or savings account is included with his assets. The remaining balance on a mortgage is included on the balance sheet, but as a liability, not an asset. The client's income, including his weekly paycheck, is included on his income statement. The client's monthly mortgage payment is also included on the income statement, but as an expense.

All of the following factors are disadvantages for a limited partner, EXCEPT: a. The conduit (flow-through) treatment for income and loss b. Lack of voting power c. Lack of liquidity d. Possible adverse changes in the Internal Revenue Code

a. The conduit (flow-through) treatment for income and loss Explanation: Limited partnerships are not a liquid investment. Investors should have staying power if they are considering a purchase of a limited partnership interest. Another risk would be changes in the Internal Revenue Code, which could cause the tax benefits from the program to be invalid. Also, a limited partner has no voice (vote) in the operation of the program. A major advantage is that the partnership is not a taxable entity. All income and losses flow through to the partner for treatment on the partner's own tax return.

An investor has granted power of attorney over his account to his daughter. Whose objectives and related investment experience should be considered when making a determination of suitability? a. The father's b. The daughter's c. Both the father's and daughter's d. Investment experience should not be considered when making a suitability determination

a. The father's Explanation: If a person grants power of attorney of his account to another person, it does not change the ownership status of the account. In this question, the investor (father) remains the owner of the account. Since all investments and strategies must be suitable for the account owner, it is the father's investment experience that is relevant.

Which of the following statements is TRUE regarding the grantor of a trust? a. The grantor may be the trustee and/or the beneficiary of a trust if desired b. The grantor may not be the trustee of a trust c. The grantor may not be both the trustee and the beneficiary of a trust d. The grantor may not be the beneficiary of a trust

a. The grantor may be the trustee and/or the beneficiary of a trust if desired Explanation: The grantor of a trust may be the trustee and/or the beneficiary of a trust.

For an investor in the 35% federal tax bracket who is looking to minimize tax liabilities, what would be of LEAST interest? a. The investment ideas and methodologies of a prospective mutual fund manager b. The percentage of the fund's portfolio that is kept in cash c. Whether to invest in actively managed funds or index funds d. The benefits of taxable versus tax-free bonds

a. The investment ideas and methodologies of a prospective mutual fund manager Explanation: If a client in a high tax bracket is concerned about tax liability, analyzing the ideas and trading methods of a prospective manager would be the least important concern. However, for an investor interested in minimizing taxes, index funds would be a better choice than actively managed funds. An index fund's portfolio is passively managed with little turnover. Also, if a large percentage of a fund's portfolio is held in cash, it may be indicative of a passive manager who is attempting to minimize capital gains.

What is the liability for loss for an investor in a limited partnership? a. The investor's basis b. The initial investment requirements c. A percentage of liabilities allocated by the general partner d. The amount determined by the general partner

a. The investor's basis Explanation: A limited partner's liability when investing in a partnership is referred to as the investor's basis. An investor's basis consists of her initial investment plus any recourse loans (cosigned loans) or profits retained by the partnership that are not distributed. If a partner receives a cash distribution or loss, this would reduce her basis or capital at risk. The general partner may not arbitrarily assign liabilities to investors in a partnership.

Which of the following investments would NOT be appropriate for an estate account? a. Treasury bonds b. Commercial paper c. 3-month CDs d. T-bills

a. Treasury bonds Explanation: An estate is only expected to exist for a limited amount of time (i.e., one or two years at the most). By this time, the executor should have distributed all of the assets to the heirs and completed the estate's affairs. Treasury bonds are long-term investments with maturities exceeding 10 years. All of the other choices represent short-term investments, which are suitable for an estate. Treasury bills mature in one year or less and commercial paper matures in 270 days or less.

A married couple would like to invest and begin saving for their 8-year-old son's college education. Which of the following options would be the most suitable investment recommendation? a. Coverdell ESA b. 529 plan c. Diversified bond portfolio d. Diversified stock portfolio

b. 529 plan Explanation: The most suitable recommendation for a couple saving for a child's college education would be a college savings Plan. The best answer would be a 529 Plan since investors may save substantially more money each year than with a Coverdell ESA.

Which of the following is TRUE of a Qualified Domestic Relations Order (QDRO)? a. A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a non-qualified retirement plan b. A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan c. A QDRO is a court order that divides all jointly held property in the event of a divorce d. A QDRO is a court order that requires one person involved in a divorce to provide for the payment of alimony or child support

b. A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan Explanation: A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant's benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.

When a limited partnership is formed, which of the following documents is filed with the state in which the partnership operates? a. A private placement memorandum b. A certificate of limited partnership c. A subscription agreement d. The articles of incorporation

b. A certificate of limited partnership Explanation: To establish a limited partnership, most states require the filing of the certificate of limited partnership. The certificate of limited partnership discloses the existence of the partnership, the nature of the business, and the names of all partners. The articles of incorporation is filed to establish a corporation, not a partnership. The subscription agreement is used to establish the investor's suitability for investing in a limited partnerships, such as the income and net worth standards; it ultimately serves as a confirmation of their investment. A private placement memorandum is the disclosure document for partners that invest in a private placement.

While gathering information from a married couple, an investment adviser asks them to disclose all of the investments that they currently own. Which of the following would be considered an investment? a. The family's health care plan b. A money-market account that is registered in their names at a bank c. A new car that the family recently purchased d. A term life insurance policy that is sufficient to meet their current capital needs

b. A money-market account that is registered in their names at a bank Explanation: Money-market accounts, money-market mutual funds, and CDs are all considered investments. Although term life insurance, health care plans, and automobiles are assets that have value, they are generally not considered investments.

ERISA prohibits a fiduciary from engaging in which of the following activities? a. Selling investments to the pension fund like stock or property b. All of the choices above are prohibited. c. Buying investments at prices below current market prices d. Borrowing funds for liquidity purposes

b. All of the choices above are prohibited. Explanation: Fiduciaries are not allowed to put their best interests ahead of their clients'. ERISA generally prohibits fiduciaries from engaging in transactions with the portfolios that they administrate. Buying and selling investments directly with the portfolio, especially at below market prices would be a serious violation of fiduciaries' responsibilities.

Which of the following statements BEST describes the similarities between an S Corporation and a general partnership? a. Both require full personal liability b. Both provide flow-through of losses c. Both do not provide flow-through of losses d. Both provide limited personal liability

b. Both provide flow-through of losses Explanation: An S Corporation provides limited liability to its shareholders, but a general partnership involves full liability of all the partners. (A limited partnership would provide limited liability to the limited partners.) However, both an S Corporation and a general partnership offer the tax advantage of flow-through treatment of profits and losses, where a share of both is passed through to each owner every year.

An investment adviser representative is preparing a financial plan for a client. As part of this process, he's helping her create a personal balance sheet and income statement. The income statement should include all of the following items, EXCEPT: a. Commissions and bonuses b. Depreciation on the primary residence c. Interest income d. Mutual fund dividends

b. Depreciation on the primary residence Explanation: Any appreciation or depreciation in real estate that the client owns is included on the client's balance sheet, not her personal income statement. Commissions, bonuses, interest, and dividends are all sources of income that should be included on the client's income statement.

A client of an IA owns his own home and the title is in his name. If he wants to avoid probate when the property is transferred upon his death, the adviser may recommend which of the following? a. Do nothing since property is not subject to probate b. File a transfer on death (TOD) deed which identifies a specific beneficiary c. Transfer the title to a named beneficiary d. Transfer the title to his two children

b. File a transfer on death (TOD) deed which identifies a specific beneficiary Explanation: In order to avoid probate upon the clients death, the IA may recommend filing a transfer-on-death (TOD) deed which names one or more specific beneficiaries.

According to Reg. T, if a client fails to pay for securities by the fifth business day following the trade date, the client's account will be: a. Closed b. Frozen for 90 days c. Restricted for 90 days d. Suspended for 90 days

b. Frozen for 90 days Explanation: According to Reg. T, if a client fails to make payment for securities being purchased by the fifth business day following the trade date, and an extension has not been granted by FINRA, the client's account will be frozen for 90 days. During the 90-day frozen period, trading may occur in the client's account; however, any purchases that are made during the frozen period must be fully paid for in advance. In other words, no credit (margin) may be extended to the customer for 90 days.

A group of investors are forming a start-up company. The business will have approximately five investors. The investors want the most tax efficient business structure and to avoid paying taxes twice on company profits. Which business structure would allow them to protect their personal assets and also avoid double taxation? I. An S Corporation II. A C Corporation III. A limited liability company IV. A closed corporation a. I, II, III, and IV b. I and III only c. II and III only d. I only

b. I and III only Explanation: S Corporations and limited liability companies (LLCs) are flow-through entities. Therefore, profits are passed through to the owners and reported on their individual tax returns. C Corporations, however, are subject to two levels of taxation, since they are considered separate entities for tax purposes. They must pay corporate income taxes and their shareholders must also pay individual income taxes on dividends that they receive. Closed corporations (also termed privately held corporations) are companies whose shares do not trade publicly. A closed corporation could be organized as either an S Corporation or a C Corporation. (Note, however, that S Corporations are almost always closed corporations since they may only have a maximum of 100 shareholders.)

Manny is an active septuagenarian who would like to create a living trust. This trust is referred to as a(n): a. In vitro trust b. Inter vivos trust c. Prewilled trust d. Testamentary trust

b. Inter vivos trust Explanation: A living (inter vivos) trust is established during the donor's lifetime. A testamentary trust is established through instructions left in the donor's will. In vitro and prewilled are not types of trusts.

A loss from a limited partnership's operations is passed through to a limited partner. On the limited partner's personal tax return, this loss: a. May only be deducted with the permission of the general partner b. Is considered a passive loss and may only be deducted against passive income c. Is fully deductible against the individual's income from all other sources d. Is only deductible when the individual sells the partnership interest

b. Is considered a passive loss and may only be deducted against passive income Explanation: A limited partnership interest is considered a passive activity because limited partners don't materially participate in the operations of the business. Therefore, the losses that are passed through to limited partners are considered passive and may only be offset against passive income. Passive losses are deductible in any year that a taxpayer has passive income, not just when the individual sells the partnership interest.

One of the most common uses for a bypass trust is to: a. Bypass capital gains taxes but pay ordinary income taxes on the assets b. Pass assets from the second deceased parent to his children c. Bypass all tax obligations on income paid to the beneficiaries d. Provide capital to pay estate taxes

b. Pass assets from the second deceased parent to his children Explanation: One of the most common uses for a bypass trust is to pass assets from parents to their children upon the death of the second parent.

Which of the following is a qualified education expense for a 529 plan? a. College application fees b. Student loans c. Travel expenses d. Health insurance

b. Student loans Explanation: Section 529 plans are savings accounts that are used to pay for "qualified education expenses." Tuition is the largest qualified expense, but in some cases, 529 plan savings can be used to pay for student loans after college. Travel expenses (e.g., plane tickets), health insurance, and application fees are NOT considered qualified education expenses.

For a qualified dividend, what's the minimum and maximum tax rate? a. Both the minimum and maximum rates are 20%. b. The minimum rate is 0% and the maximum rate is 20%. c. The minimum rate is at the person's ordinary income rate and the maximum rate is 20%. d. The minimum rate is 15% and the maximum rate is 20%.

b. The minimum rate is 0% and the maximum rate is 20%. Explanation: For U.S. taxpayers in the lowest tax bracket, qualified dividends are not taxed. Only taxpayers in the highest brackets are taxed at the maximum rate of 20% on their qualified dividends. Some investors in the middle tax brackets are taxed at 15%. Bond interest payments, not dividends, are taxed at a person's ordinary income rate.

John and Chris are a married couple in their forties with two children. They have an annual income of $100,000. Their main assets are their house and John's 401(k) plan. They also have approximately $25,000 available for investment. Which of the following choices should the investment adviser representative recommend? a. They should open Roth IRAs b. They should give the adviser a list of their investment objectives and goals c. They should open 529 plan accounts for their children d. They should increase their insurance coverage

b. They should give the adviser a list of their investment objectives and goals Explanation: The investment adviser needs more information about this couple's investment objectives before she can recommend a suitable strategy. All of the investment options could all be appropriate recommendations for this couple depending on their goals.

An investor is interested in finding a pass-through investment in which the investors are able to take an active role in the company as members and the company is able to raise an unlimited amount of capital. What investment would meet these requirements? a. A real estate investment trust b. A master limited partnership c. A limited liability company d. A Subchapter S corporation

c. A limited liability company Explanation: A limited liability company is a pass-through investment that is similar to the structure of a limited partnership. A limited liability company is able to raise an unlimited amount of capital and the capital is provided by members who may take an active role.

The trustee is responsible for reporting all income, gains, and losses of a trust to the IRS on Form: a. 1065 b. 1040 c. 1041 d. 1040EZ

c. 1041 Explanation: On an annual basis, a trustee must report the trust's income, gains, and losses to the IRS on Form 1041. Regarding the other forms, Form 1040 is used for personal tax returns, Form 1065 is an informational return that is filed by partnerships, and Form 1040EZ is used by single person or those who are married, filing jointly with less than $100,000 of taxable income.

A father makes a gift of XYZ stock to his daughter. Two years ago, the father purchased the stock for $5,000 and, at the time of the gift, the stock was worth $10,000. If the daughter sells the stock 10 months later for $12,000, what is the tax implication? a. A short-term capital gain of $2,000 b. A long-term capital gain of $2,000 c. A long-term capital gain of $7,000 d. Since the gifted amount is under the gift tax limit, it is a tax-free event.

c. A long-term capital gain of $7,000 Explanation: When a person receives a gift of stock, the recipient's cost basis is the donor's cost basis or the stock's current market value, whichever is less. The stock was originally purchased by the father for $5,000, but was then given as a gift to the daughter when its current market value was $10,000. Since the original cost basis ($5,000) was less than the current market value ($10,000), the original cost basis is used to determine the gain or loss when the stock is sold. In this question, the daughter subsequently sells the stock for $12,000; therefore, she has a resulting capital gain. To determine the ultimate tax implication, the daughter's holding period is based on the donor's holding period. Since the donor had held the stock for two years prior to the gift, the daughter's holding period is considered long-term. By using the original cost basis of $5,000 and comparing it to the proceeds of $12,000, the result is a long-term capital gain of $7,000 ($12,000 - $5,000).

Of the following factors, which one would be the most important to consider when analyzing the investment portfolio of a client who has retirement as her primary investment objective? a. Previous investment history b. Education level c. Age d. Net worth

c. Age Explanation: When analyzing a client's existing portfolio to determine how it affects recommendations you might make, it is important to consider a client's investment objectives and the length of time available to try to meet those objectives. When retirement is the primary objective, it is very important to know the client's age. The other items mentioned are also valuable for an RR to know, but they are not as critical as knowing the client's age.

All of the following items are considered earned income, EXCEPT: a. Commissions b. Net earnings from self-employment c. Alimony d. Tips

c. Alimony Explanation: According to the IRS, alimony is not included in the definition of earned income. The IRS defines earned income as compensation received for personal services that have actually been rendered.

Which of the following statements is TRUE regarding general partnerships? a. They are usually taxed like C Corporations b. They may only be established by filing a written agreement with the appropriate state agency c. All the general partners have the authority to bind the partnership d. None of the partners is personally liable for the partnership's debts

c. All the general partners have the authority to bind the partnership Explanation: Unless the partnership agreement specifies otherwise, all the partners in a general partnership have the authority to transact business on the partnership's behalf. A general partnership is formed by an agreement among the partners. No specific filing with the state is necessary. All the partners are personally responsible for the partnership's debts. Most partnerships qualify for flow-through taxation, which means that they are not taxed as individual entities unlike C Corporations, which are taxed as separate entities.

Which of the following statements is TRUE regarding the receipt of Social Security benefits? a. A person must start receiving benefits at age 68 1/2. b. If a person starts receiving benefits at age 66, he forgoes cost of living increases. c. At age 62, a recipient receives a lower initial benefit, but he will receive benefits for more years. d. A person can no longer work if he receives benefits at age 62.

c. At age 62, a recipient receives a lower initial benefit, but he will receive benefits for more years. Explanation: At age 62, eligible workers are permitted to start receiving benefits at a reduced level. The reduced level is partially offset by the fact that they will receive benefits for a longer period. If a person waits until his full retirement age (either 66 or 67), he will start with a higher payout. However, at age 70, a person must start receiving benefits. Keep in mind, no recipient forgoes cost of living increases.

Required minimum distributions (RMDs) from a traditional IRA account must: a. Begin by April 1 of the year following the one in which the individual turns 59 1/2 b. Begin within one year of when the individual retires c. Be completed within a ten-year period d. Begin by April 1 of the year following the one in which the individual turns 72

c. Be completed within a ten-year period Explanation: Required minimum distributions (RMDs) from a traditional IRA must begin by the year following the calendar year in which the individual turns 72.

How is a person's marginal tax bracket determined? a. By examining her pay stub b. By examining the amount of withholdings on her dividends c. By reviewing the IRS schedule d. By applying the taxable equivalent yield formula

c. By reviewing the IRS schedule Explanation: A taxpayer can research the tax tables on the IRS website. The tax bracket into which a person falls is determined by examining her income less her deductions.

If an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called? a. Day trading strategy b. Investment income strategy c. Capital appreciation strategy d. Buy-and hold-strategy

c. Capital appreciation strategy Explanation: Capital appreciation would best fit the strategy being described. Capital appreciation involves buying and selling equities in an attempt to obtain as much growth as possible and is generally considered a risky strategy.

Maria wants to open a 529 savings plan for her daughter. The advantages of this type of account include all of the following factors, EXCEPT: a. There are no limits on the contributor's income b. Earnings grow on a tax-deferred basis c. Contributions may be deducted from the donor's federal and state income taxes d. Distributions are not subject to federal income taxes provided they are used to pay for education expenses

c. Contributions may be deducted from the donor's federal and state income taxes Explanation: Contributions to 529 savings plans are not tax-deductible as far as the federal government is concerned. Some states do allow their residents to deduct part or all of their contributions to 529 plans from their state income taxes, provided they invest in a plan sponsored by the state in which they live.

Which of the following statements is TRUE regarding a 403(b) plan? a. Distributions from the plan will be taxed as long-term capital gains b. Only earnings will be taxed at ordinary income tax rates c. Distributions from the plan will be subject to taxation at ordinary income tax rates because of the zero cost basis d. All distributions in excess of contributions will be taxable at ordinary income tax rates

c. Distributions from the plan will be subject to taxation at ordinary income tax rates because of the zero cost basis Explanation: Contributions to a 403(b) plan are made on a pretax basis, resulting in a zero cost basis. Therefore, all distributions are taxed as ordinary income.

An income statement of an individual would contain: a. Liabilities b. Savings accounts c. Expenses d. Real property

c. Expenses Explanation: The income statement of an individual contains all income (salary and investment income) and expenses that a person has had during a given period. It also contains any gains or losses on sales of assets by the individual as well as any interest paid on borrowed funds. The balance sheet includes the assets owned, the liabilities owed, and the person's net worth, which is assets minus liabilities.

In order to form a limited partnership, two or more people must: a. Elect to be taxed under Subchapter S b. Agree to operate a business together c. File a certificate with the appropriate state or local official d. File a registration statement with the SEC under Regulation A+

c. File a certificate with the appropriate state or local official Explanation: The only way to create a limited partnership is by filing a certificate (or other document) with a state or local agency. A general partnership, in contrast, is created whenever two or more people agree to form a partnership. The agreement does not even need to be in writing.

A group of investors is starting a business to explore and drill for oil. All want to be actively involved in the business, but none wants to be personally liable for the venture's debts. Which of the following business structures would meet their objectives? I. A limited partnership II. A general partnership III. A limited liability company IV. An S Corporation a. I, III, and IV only b. I only c. III and IV only d. I and II only

c. III and IV only Explanation: Since none of the group is willing to be liable personally for the business's obligations, they cannot form a general partnership or a limited partnership. All general partners have unlimited liability for any obligations that the business incurs. A limited partnership requires at least one general partner. Also, they all want to be involved in management and a limited partner who becomes actively involved in management loses the shield of limited liability. A partnership is not an option for them. Either a limited liability company (LLC) or an S Corporation would allow all of them to take an active role in running the venture without incurring personal liability.

Which of the following is NOT included in a customer's adjusted gross income (AGI)? a. Salary, tips, and bonus b. Interest received from corporate bonds c. Interest received from municipal bonds d. Dividends received from stock

c. Interest received from municipal bonds Explanation: A client's federal adjusted gross income (AGI) consists of her taxable income. Examples of taxable income include a client's salary, tips, bonuses, dividends, and corporate bond interest. However, municipal bond interest is tax-free and not included in person's AGI.

An investor may purchase interests in a limited partnership for all of the following reasons, EXCEPT: a. Potential tax credits b. Potential depreciation expenses c. It is an illiquid investment d. The revenue generated by the partnership is not subject to corporate taxes

c. It is an illiquid investment Explanation: Limited partnerships offer investors many potential advantages, including the ability to deduct non-cash expenses (e.g., depreciation and depletion) against any passive income that is generated by the partnership. Unlike corporations, partnerships are not subject to income taxes; therefore, any tax consequences flow through to the investors.

The last dollar that a client earns would be taxed at their: a. Internal tax rate b. Base rate c. Marginal tax rate d. Capital gains rate

c. Marginal tax rate Explanation: Earned income is taxed at an individual's personal income tax rate or marginal rate. The last dollar that you earn each year is taxed at your marginal rate.

An advantage of a Coverdell ESA over a 529 plan is: a. Higher annual contributions b. Stronger tax incentives c. More investment options d. No income limit on contributors

c. More investment options Explanation: The maximum annual contribution to a Coverdell ESA is $2,000; however, contributions to a 529 plan are substantially higher. Although there's no annual limit on a 529 plan, contributions that exceed the annual gift limits may be subject to gift taxes. There are income limitations that apply to Coverdell ESA contributors, but not to 529 plan contributors. Qualified distributions from both Coverdell and 529 plan accounts are tax-free. In a 529 plan, investments are not self-directed; instead, investors must choose from a list of investments that are approved by the state in which the plan is created. On the other hand, Coverdell accounts are self-directed (like IRAs) and are not limited to investments which have been approved by the state.

Which of the following distribution methods will ensure that each branch of family receives an equal share of an estate? a. Per capita b. Inter vivos c. Per stirpes d. Testamentary

c. Per stirpes Explanation: Per stirpes distributions are done per branch of a family and, in some instances, members of the same generation of a family will receive different amounts from an estate. A per capita distribution of an estate ensures that each member of a generation will receive the same amount as any other. Inter vivos and testamentary are terms that are associated with trust accounts, but not estates.

The disadvantages of limited partnerships include: a. Inflation risk b. Double taxation of distributions c. Potential assessments d. Limited liability

c. Potential assessments Explanation: An investor in a limited partnership may receive an assessment (i.e., a demand that he contribute additional capital to the partnership). Many partnerships invest in assets, such as real estate, that may actually be a hedge against inflation, which addresses inflation risk. One of the advantages of limited partnerships compared to C Corporations is that they are not subject to double taxation, which eliminates that choice. For tax purposes, limited partnerships are pass-through entities. This means that all income, losses, and gains are passed through to the partners, who must declare the income on their own tax returns. When investing in LPs, limited liability is considered an advantage, not a disadvantage.

Which of the following statements about testamentary trusts is NOT TRUE? a. The trust goes into effect after the creator dies. b. The trustee manages the assets in the trust. c. The donor manages the assets in the trust. d. The assets must go through probate before they're placed in the trust.

c. The donor manages the assets in the trust. Explanation: A testamentary trust goes into effect after the donor passes away. The assets are required to go through the probate process. Once the assets are put into the trust, the trustee (not the donor) manages the assets for the beneficiaries.

Which of the following should NOT be considered by an investment adviser that is managing the assets of a trust? a. The beneficiary's investment needs and other financial resources b. The general condition of the stock and bond markets c. The grantor's tax situation d. How inflation may impact the value of the trust's investments

c. The grantor's tax situation Explanation: The trustee has a fiduciary duty to manage the assets in a reasonable manner and to act in the best interest of the beneficiaries. The grantor endows the trust and, unless he is a beneficiary, is not considered a client. Therefore, the trustee would not consider the grantor's tax needs.

After years of managing his own money, a client approaches an investment adviser representative seeking some financial advice regarding his IRA account. The IAR notices that the client's current investments include stocks, bonds, Treasury inflation-protected securities (TIPS), and a municipal bond fund. Also, the client is holding a small amount of cash that has not been invested. Which of the instruments in this client's IRA would be the biggest concern for the IAR? a. The TIPS b. The cash position c. The municipal bond fund d. The stock position

c. The municipal bond fund Explanation: In an IRA, the investment creating the greatest concern would be the municipal bond fund. Interest earned in an IRA is deferred, so, there is no need to purchase a tax-free security. Including municipal securities in an IRA is not advisable since the tax-free income received from the municipal bond fund becomes taxable if purchased in an IRA and later distributed.

You are the executor of your parents' estate. Which of the following investments would be the most suitable for the estate? a. Insured bonds b. Credit default swaps c. Treasury bills d. A diversified portfolio of hedge funds

c. Treasury bills Explanation: The executor of an estate must liquidate the estate and disperse the assets to the estate's beneficiaries. The only suitable investment would be one that provides liquidity. Of the choices given the most liquid, short-term debt instrument would the T-bill.

Two clients of an IAR are forming their own business entity and plan to incorporate. Which of the following entities has the MOST tax disadvantages? a. A limited liability partnership (LLP) b. An S Corporation c. A limited liability company (LLC) d. A C Corporation

d. A C Corporation Explanation: Please note that the question is asking not asking about tax advantages; it is asking about tax disadvantages. From a tax perspective, a C Corporation is the least advantageous. The corporation is first required to pay corporate taxes on any profits it generates; thereafter, its shareholders (owners) are required to pay personal income taxes on anything that is distributed to them in the form of dividends. All of the other choices are flow-through entities for tax purposes, which makes them more tax efficient.

When acting as the trustee for a family trust, who does an investment adviser consider for termination benefits? a. The grantor b. The trustee c. An income beneficiary d. A contingent remainder beneficiary

d. A contingent remainder beneficiary Explanation: Trust accounts can have different types of beneficiaries. An income beneficiary is one who only has claims on the income, but not the property (i.e., corpus) in the trust. Remainder beneficiaries have the right to receive property if a trust is being dissolved (i.e., terminated). Typically, primary beneficiaries have the first claim to assets if a trust is broken up. Contingent beneficiaries are given property only after the primary beneficiary cannot accept the assets (e.g., the primary beneficiary passed away). Since this question didn't mention a primary beneficiary, the best answer is a contingent remainder beneficiary.

Generally, the identity of an estate's executor can be determined from which of the following documents? a. A power of attorney b. A trust instrument c. An insurance policy d. A will

d. A will Explanation: Normally, the deceased has named an executor (executrix) in her will.

The owner of a sole proprietorship is responsible for which of the following activities? a. The hiring of a chief financial officer b. Filing K-1 Forms with the SEC c. Reporting quarterly performance to stockholders d. Accurately maintaining all of the necessary business records

d. Accurately maintaining all of the necessary business records Explanation: A sole proprietorship does not have stockholders, federal reporting requirements, or a chief financial officer. Partnerships and S Corporations file Form K-1, not sole proprietorships. The owner is required to maintain all necessary books and records in the event of an audit by the IRS or State Department of Revenue.

All of the following must be obtained by an agent opening a new account for a customer, EXCEPT: a. A street address b. Tax identification number c. Date of birth d. An e-mail address

d. An e-mail address Explanation: There is no requirement to obtain a customer's e-mail address. All the other information must be obtained to open the account.

In order for an individual to be eligible for a Health Savings Account (HSA) the individual must be: a. Enrolled in Medicare b. Covered under a qualified retirement plan c. A joint owner with their spouse d. Covered under a high deductible health plan (HDHP)

d. Covered under a high deductible health plan (HDHP) Explanation: To be eligible for a Health Savings Account (HSA), a person must be covered under a high deductible health plan (HDHP), not a qualified retirement account. Individuals cannot be enrolled in Medicare or be claimed on another individual's income taxes. Each eligible spouse must open a separate HSA. Joint HSAs are prohibited. Withdrawals from an HSA are tax free provided the funds are used to pay qualified medical expenses.

A durable power of attorney: a. May take the place of a will in many states b. Is automatically revoked if the grantor is adjudicated incompetent c. Generally may not be revoked by the grantor d. Gives a person the authority to manage the grantor's finances even if the grantor becomes incapacitated

d. Gives a person the authority to manage the grantor's finances even if the grantor becomes incapacitated Explanation: A durable power of attorney gives a person the power to manage the grantor's financial affairs even if the grantor becomes incapacitated. Conversely, a regular (standard) power of attorney terminates if the grantor becomes incapacitated. A registered representative (RR) must have durable power of attorney in order to exercise discretion in the event his client becomes incapacitated.

The potential loss for a limited partner in a real estate limited partnership is limited to: a. Only her initial investment b. Her initial investment plus any real estate that is shared by the partners c. Only the amount of money that is borrowed by the partnership d. Her initial investment plus any unpaid amounts to which she had committed to pay

d. Her initial investment plus any unpaid amounts to which she had committed to pay Explanation: In a limited partnership, the liability for a limited partner may not exceed her initial investment amount plus any unpaid amounts to which she has agreed to pay. Generally, limited partners are not liable for the debts that are incurred by the partnership. However, when a limited partner cosigns a loan for the partnership and agrees to be responsible for a portion of the loan, the limited partner's liability is increased.

What's the benefit to creating a will? a. It eliminates estate taxes and appoints an intestate administrator for the estate b. It reduces estate taxes and protects property solely for the benefit of minors c. It eliminates estate taxes and avoids the probate process d. It reduces estate taxes and speeds up the probate process

d. It reduces estate taxes and speeds up the probate process Explanation: Wills are legal documents that provide directions for managing an estate after a person's death. Although wills make the probate process quicker and easier, all estates must go through probate. By distributing assets, wills can minimize estate taxes; however, they may not always be able to be avoided altogether.

The expenditures section of a personal income statement should include all of the following information, EXCEPT: a. Insurance premiums b. Mortgage payments c. Taxes d. Life insurance policy dividends

d. Life insurance policy dividends Explanation: Dividends from all sources, including life insurance policies, would be included in the income section of a personal income statement, not in the expenditures section.

Paul and Todd are starting their own business. They are trying to decide whether to organize this new business as a partnership or an S Corporation. What are some of the advantages of an S Corporation compared to a partnership? a. More transparency b. Fewer start-up costs c. Favorable tax treatment d. Limited liability

d. Limited liability Explanation: In a partnership, the general partners are liable for the partnership's debts. (Limited partners are not liable; however, there's no indication in the question stem that either Paul or Todd is a limited partner.) In an S Corporation, the owners are not liable for any of the company's debts. Instead, they have only limited liability. Both the S Corporation and LP are pass-through entities and receive favorable federal tax treatment. For these entities, all losses and profits are passed through to the owners.

In determining the loan value of marginable securities, the agent should: a. Use the percentage allowed by the state Administrator b. Refer to ADV Part 2 c. Use the 20% Rule under the Uniform Securities Act d. Multiply the market value by 50%

d. Multiply the market value by 50% Explanation: The loan value of most marginable securities is determined by multiplying the market value of the securities by Regulation T of the Federal Reserve Board, which is 50%. There is no provision in the Uniform Securities Act that discusses the margin requirement on securities. The percentage is set forth by either the FRB or by certain self-regulatory organizations (SROs) such as the NYSE or FINRA.

An investor lives in New Jersey and is opening a 529 college savings plan that's sponsored by the state of Montana for his daughter's benefit. His initial contribution is $75,000. Which of the following statements is TRUE? a. The investor will be able to deduct the $75,000 from his state income taxes. b. The investor will be required to pay federal gift taxes on the $75,000, since the amount exceeds the annual gift exclusion. c. Any earnings generated in the account will be taxed at the daughter's tax rate. d. Neither the investor nor his daughter will be liable for gift taxes on the $75,000 contribution.

d. Neither the investor nor his daughter will be liable for gift taxes on the $75,000 contribution. Explanation: The investor may contribute up to $75,000 at one time to his daughter's 529 plan without incurring federal gift taxes. The IRS allows donors to aggregate five years' worth of gifts under the annual gift exclusion ($15,000) into one lump-sum contribution (5 x $15,000). Some states do allow donors to deduct a portion of contributions made to 529 plans from their state income taxes, but only if the donor contributes to a plan that's sponsored by his home state.

The primary advantage of establishing a trust is: a. Tax-free income for the beneficiaries b. Tax-free income distributions by the grantor c. The grantor will realize tax benefits when establishing himself as beneficiary to the trust d. Separate tax status of the trust, which is distinct from the party that establishes the trust

d. Separate tax status of the trust, which is distinct from the party that establishes the trust Explanation: A trust is created when one person (a trustee) is put in charge of managing property for the benefit of another person (a beneficiary). The trustee has legal control of the trust property (corpus), but must manage it in the interests of the beneficiary. For tax purposes, the trust is a separate taxable entity; therefore, taxes are the responsibility of the trust (or potentially the beneficiary), not the trustee or the person who created the trust.

A business with only one owner, who is responsible for all of the liabilities of the business and management decisions, is called a(n): a. S Corporation b. C Corporation c. Limited partnership d. Sole proprietorship

d. Sole proprietorship Explanation: A sole proprietorship is a type of business with only one owner who is wholly responsible for the management decisions, as well as all of the company's debts. A limited partnership must have at least a general partner and a limited partner. Although an S Corporation and a C Corporation may have only one principal, that person is not personally liable for the corporation's debts.

Under what form of ownership may a husband and wife ensure that their property is not able to be attached by the creditors of either spouse? a. A qualified domestic partnership order b. Tenants in common c. Joint tenants with right of survivorship d. Tenancy by the entirety

d. Tenancy by the entirety Explanation: Tenancy by the entirety, which is only available to married couples, allows spouses to own property as a single legal entity. With this form of ownership, a creditor of one spouse is unable to make a claim to the account's assets. However, if the creditor has a claim against both spouses, it may make a claim to the assets.

If an agent of a broker-dealer is granted a durable power of attorney over a client's account, all of the following statements are TRUE, EXCEPT: a. The broker-dealer is considered to have discretion over the client's account. b. The agent has the authority to manage the grantor's finances even if the grantor becomes incapacitated. c. The durable power of attorney must be established in writing. d. The client must be an institution.

d. The client must be an institution. Explanation: A durable power of attorney provides the agent with the power to manage the grantor's financial affairs even if the grantor becomes incapacitated. With this authority (which must be in written form), the agent of the broker-dealer may make financial decisions on behalf of the grantor (discretion). A standard power of attorney is terminated if the grantor becomes incapacitated.

In the past year, a client reported earnings of $3,000 in dividends, $6,000 in long-term capital gains, and salary of $190,000. The client also had a loss of $8,000 from a limited partnership investment. For tax purposes, how is the limited partnership loss treated? a. The partnership loss is only deductible against the $6,000 long-term capital gain b. The partnership loss is only deductible against the salary of $190,000 c. The partnership loss is only deductible against other income, up to $3,000 d. The partnership loss is only deductible against passive income

d. The partnership loss is only deductible against passive income Explanation: A limited partner's share of profits from a limited partnership are considered a form of passive income and taxed as ordinary income. A partner's share of the partnership's losses are considered passive losses (not capital losses), which are deductible against passive income only. Since the client did not report any passive income, the loss is suspended and carried forward.

The Department of Labor requires that employer-sponsored plans adhere to the following guidelines, EXCEPT: a. Participants must be able to choose from at least three core investment alternatives b. A separate account is maintained for each participant c. Participants have the right to give instructions to the plan fiduciary d. The plan must offer a fixed number of investment options

d. The plan must offer a fixed number of investment options Explanation: Under Section 404(c) of ERISA, an employee sponsored plan has no maximum limitation as to the number of investment options that are available to the participants, but must have a minimum of three. The plan must maintain a separate account for each participant and participants must have the right to forward any requests to the fiduciary of the plan.

An annuitant has elected to annuitize using a 10-year period certain payout. His wife is the primary beneficiary and his brother is the contingent beneficiary. If the annuitant and his brother pass away three years after contract is annuitized, who will receive payments for the remaining seven years? a. The contingent beneficiary's estate b. Both the primary beneficiary and contingent beneficiary's estate will receive payments c. The annuitant's estate d. The primary beneficiary

d. The primary beneficiary Explanation: Annuitants can select more than one beneficiary on a period certain payout. The primary beneficiary is the first to receive payments, but only after the annuitant passes away. Contingent beneficiaries will only be paid after both the annuitant and primary beneficiary pass away. Since the annuitant's wife is the primary beneficiary and has not passed away, she will receive payments for the remainder of the period certain (seven years in this question).

The investment policy statement of a qualified retirement plan states that no more than 50% of the plan's assets may be invested in stocks. The investment manager places 65% of the plan's assets in stocks in order to take advantage of a bull market and increase the value of the plan's assets. Has the investment manager violated the fiduciary responsibility provisions of ERISA? a. Yes, the investment manager's decision did not follow the prudent expert rule b. No, since an investment policy statement is a guideline c. No, since the investment manager took advantage of changing market conditions, which benefited the plan's overall return d. Yes, since the investment manager did not follow the stipulations of the investment policy statement

d. Yes, since the investment manager did not follow the stipulations of the investment policy statement Explanation: This is an actual court case. The plan's trustees sued the investment manager who was held liable even though the plan's assets increased.

An asset on a personal balance sheet would include which of the following choices? a. Furniture b. Mortgage c. Student loans d. Credit cards

a. Furniture Explanation: Assets are items owned by the client, such as furniture. Student loans, credit cards, and mortgages are all liabilities.

Which of the following choices is a disadvantage of investing in a C Corporation? a. Shareholders pay tax on income that was already taxed to the company. b. Shareholders have personal responsibility for the company's debts. c. Shareholders claim the company's losses on their own tax return. d. Shareholders have no personal responsibility for the company's debts.

a. Shareholders pay tax on income that was already taxed to the company. Explanation: As taxable entities, C Corporations are required to pay corporate taxes on their income. Additionally, C Corporation shareholders (owners) are required to pay personal income taxes on any profits they receive in the form of cash dividends. In other words, a major disadvantage for C Corporation shareholders is that they are subject to double taxation. C Corporation shareholders have limited liability and do not share in any losses that are realized by the corporation.

According to NASAA's Statement of Policy Regarding Dishonest and Unethical Business Practices, which of the following statements regarding customer accounts is TRUE? a. An agent of a broker-dealer is not permitted to lend money to his parents. b. Margin agreements must be signed promptly following the first transaction. c. A broker-dealer must receive a written order ticket from the account owner before executing every trade. d. Conversion of customer's cash is acceptable; however, broker-dealers must segregate securities positions.

b. Margin agreements must be signed promptly following the first transaction. Explanation: Margin agreements must be signed by a client, but the signature may be received after the first transaction. Customers are able to place orders with their broker-dealers over the phone, they are not required to be written. Conversion, which is defined as the unauthorized use of client assets for personal use (e.g., theft), is always prohibited. An agent is allowed to borrow from or lend money to immediate family members.

What's a benefit to establishing a business entity as an LLC rather than as a sole proprietorship? a. Tax treatment is the same as for corporations b. The investor has greater control c. Owners can protect their personal assets d. Ease and simplicity of establishment

c. Owners can protect their personal assets Explanation: The primary difference between these two structures is that owners receive some liability protection by incorporating as an LLC. This is important for business owners who have personal assets — especially if they use those assets to conduct some of their business. With a sole proprietorship, if the owner defaults on his loans or is found liable for damages in excess of the business's assets, he may be forced to liquidate his personal assets. Both LLCs and sole proprietorships have flow-through of income for taxes purposes, which is not available to traditional corporations.

While meeting with a new client, an IAR is attempting to gauge the client's interest in investing funds in an IRA or buying a new car. This is the IAR's way of determining the client's: a. Risk tolerance b. Approach to risk management c. Understanding of the Modern Portfolio Theory d. Attitude toward money

d. Attitude toward money Explanation: Identifying whether a client would use available funds to invest for her future or buy a big ticket item is effective when determining her attitude toward money. For an IAR, this determination can be a complicating process. To make appropriate recommendations, an IAR must understand a person's fundamental approach to dealing with her finances. Family dynamics, personal beliefs, past experiences, and philosophical convictions can all influence a person's attitudes about money.

A sole proprietor desires to set up their business as a separate entity, but retain the same flow-through tax treatment with full ownership. Which of the following business entities would be BEST? a. A Subchapter S Corporation b. A limited partnership c. A C Corporation d. A general partnership

a. A Subchapter S Corporation Explanation: By establishing a Subchapter S Corporation, the business is not taxed. Instead, income and losses flow through to the shareholders, which in this case is one person. While partnerships also provide flow-through of tax treatment, they require more than one owner or investor. A C Corporation is a taxable entity that lacks flow-through tax treatment.

The major disadvantage to a limited partner in a DPP is: a. Lack of liquidity b. Limited liability c. Lack of control d. Flow through of income and expense

a. Lack of liquidity Explanation: An investor has limited control (management) in equity investments and no control (management) in bond or DPP investments. The major disadvantage of a DPP is the lack of liquidity, meaning that the investor cannot easily sell his portion of ownership.

Which of the following persons could contribute to a 457 plan? a. A Certified Public Accountant b. A local government employee c. A computer programmer who works for IBM d. A federal government employee

b. A local government employee Explanation: A Section 457 is a type of retirement plan established for state and local government employees. These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Series 66 students may encounter all three types on the examination. All have similar tax features and contribution allowances. The primary difference is in who may contribute to them. 401(k) plans are established for employees of for-profit companies, 403(b) plans are established by non-profit organizations and public school systems, while 457 plans are established by state government or local government agencies or subdivisions.

One disadvantage of investing in a general partnership versus a limited partnership is that: a. There is a flow-through tax treatment of gains and losses b. All general partners have unlimited liability c. All limited partners have unlimited liability d. All general partners have limited liability

b. All general partners have unlimited liability Explanation: All general partners have unlimited personal liability for debts of the partnership. They also participate in management decisions and may bind the partnership, e.g., with contracts. Limited partners, in a limited partnership, have no personal liability nor may they participate in management.

All of the following methods of ownership will avoid probate, EXCEPT: a. Community property b. Estate c. Pay on Death d. Joint Tenants with Right of Survivorship

b. Estate Explanation: Probate involves the administering of a deceased person's will or the estate of a deceased person without a will. Due to court costs and the involvement of lawyers who collect fees from the estate, many people try to minimize the costs associated with the probate process. Holding assets as community property, joint tenants with right of survivorship, and pay on death will avoid probate since a beneficiary has been named in the event of death.

Sources of risk for investors in limited partnerships include all of the following situations, EXCEPT: a. The management ability of the general partners b. Unlimited liability c. Changes in tax laws and government regulations d. Possible loss of capital

b. Unlimited liability Explanation: Some other sources of risk could be unpredictability of income, rising operating costs, and the nonliquid nature of the limited partnership units.

Which of the following is a benefit of a transfer on death (TOD) account designation? a. The beneficiary has discretionary authority during the owner's lifetime. b. The beneficiary avoids the estate tax. c. The beneficiary avoids probate. d. The beneficiary is required to pay the estate tax.

c. The beneficiary avoids probate. Explanation: A transfer on death (TOD) account will pass to the beneficiary (or beneficiaries) upon the death of the account owner. The benefit of a TOD designation is that the transfer of ownership of the account's assets avoids probate. However, assets in a TOD account are still subject to the estate tax. This form of account is not considered a joint account since the beneficiary only receives control of the account after the death of the original owner.

As a group, limited partners may NOT: a. Sell assets to pay creditors b. Inspect the partnership's books c. Sue the general partner d. Vote to remove the general partner

a. Sell assets to pay creditors Explanation: Limited partners are not permitted to be involved in management and could not sell assets to pay a creditor (a management decision). They do have the right to inspect the books, as well as sue and/or remove the general partner.

If a client inherits $250,000 of GE stock, and that is his only asset, the adviser would be most concerned that: a. The client lacks diversification b. GE may be bought out at a discount to its Book Value c. GE may decline in value d. The client has a need for life insurance

a. The client lacks diversification Explanation: If GE declines in value, the client is at risk of losing his entire investment. Therefore, the adviser is most concerned that the client's assets are not diversified among other asset classes.

When investing in a 401(k), tax is deferred on which of the following? a. Medicare b. Income c. Unemployment for the state d. Unemployment for the IRS

b. Income Explanation: Qualified accounts, such as 401(k) plans, provide for a deferral of tax on income only. Participants are still required to pay any other applicable taxes in the year their contribution is made. Earnings, such as capital gains, dividends, and interest, will also be deferred until they are withdrawn.

Ten years ago a client transferred her 401(k), worth $80,000, into an IRA. Her account has grown to $120,000 and she takes a distribution of $10,000 at age 52. The tax consequences of her actions would be: a. $10,000 long-term capital gain plus a 10% penalty b. $40,000 of taxable ordinary income c. $10,000 of taxable ordinary income plus a $1,000 penalty d. $10,000 long-term capital gain plus a 15% penalty

c. $10,000 of taxable ordinary income plus a $1,000 penalty Explanation: Withdrawals from an IRA prior to age 59 1/2 will result in a 10% penalty and be added to income for tax purposes. The penalty will not be incurred if the withdrawal is made due to physical disability or death. Additionally, under specific circumstances, withdrawals used to pay medical expenses and qualified educational expenses, may be made penalty-free prior to the attainment of age 59 1/2.

A client contacts an investment adviser representative to discuss the advantages of incorporating. What are the disadvantages of forming a C Corporation? a. Flow-through taxation b. A limited life span c. Double taxation d. Unlimited liability

c. Double taxation Explanation: The major disadvantage of a corporate structure is that its shareholders (owners) are taxed twice. A C Corporation must first pay taxes at the corporate level. Its shareholders must then pay personal income taxes on any income they receive from the corporation in the form of dividends.

According to ERISA 404(c) guidelines, which of the following actions is considered a prohibited practice? a. Disposing of or liquidating plan assets b. Managing plan assets c. Failing to properly diversify the plan d. Exercising discretion over plan assets

c. Failing to properly diversify the plan Explanation: Plan fiduciaries provide services to the plan. They might manage plan assets or provide safekeeping services. Buying and selling plan assets is a normal business practice. Plan administrators are prohibited from engaging in a transaction in which they have an interest and must make sure that they diversify plan assets in a manner that protects against large losses.

A client had inherited an IRA from his mother. The client is able to: a. Take distributions over his lifetime b. Treat his mother's IRA as his own c. Use the 10-year rule for distributions d. Roll the IRA into a non-qualified annuity

c. Use the 10-year rule for distributions Explanation: An individual that inherits a non-spousal IRA must generally withdraw the funds in a 10-year period. The rules for a spousal IRA do permit withdraws to be taken over the surviving spouse's lifetime.

A client and his wife purchased their home for $300,000. They have occupied their home for the last 26 years and have made $80,000 of improvements over the years. The home was recently put on the market for $800,000, but eventually sold for $770,000. Upon sale, the taxable capital gains would be how much? a. $0 b. $390,000 c. $470,000 d. $500,000

a. $0 Explanation: Upon the sale of a primary residence, a portion of any capital gains are excluded from taxation. If filing a single tax return, the first $250,000 of gains from the sale are excluded. If filing a joint tax return, the first $500,000 in gains are excluded. In general, to qualify for the exclusion, both the ownership test and the use test must be met. For example, five years prior to the sale of the home you must have occupied the home as your primary residence for a minimum period of two years.

What are the advantages of a limited liability company (LLC) compared to an S Corporation? a. A simpler managerial structure b. Continuity of life c. Lower corporate tax rates d. Limited liability

a. A simpler managerial structure Explanation: Owners of S Corporations and limited liability companies have limited liability. Both entities also have a flow-through tax structure. Income, capital gains, and capital losses are passed directly on to the investors and reported on their personal income tax returns. Neither entity pays federal corporate taxes on income earned. The advantage of a limited liability company is that its managerial structure is much simpler. There is no need for a board of directors or annual meetings or the other formalities of a corporation. However, unlike an S Corporation that has continuity of life, LLCs are dissolved after an event (e.g., owner dies) or a specific period passes.

All of the following individuals do not have unlimited liability, EXCEPT: a. Owners of a limited liability company b. The shareholders of an S Corporation c. A sole proprietor d. A limited partner

c. A sole proprietor Explanation: A sole proprietor is personally responsible for the debts of the business. Shareholders in an S Corporation, owners of a limited liability company, and limited partners all enjoy the benefits of limited liability. They are not personally responsible for the debts of the business.

An aggressive growth portfolio would be suitable for an investor: a. With low risk tolerance who needs growth b. With a large amount of capital that must be kept fairly liquid c. Whose only investment experience lies with fixed annuities d. Who is financially secure, has a high income level, and has a high tolerance for risk

d. Who is financially secure, has a high income level, and has a high tolerance for risk Explanation: An aggressive growth portfolio is invested in growth companies that pay little income but have a great potential for capital appreciation. However, due to the emphasis on capital gains, aggressive growth funds carry a great deal of risk. These investments are most suitable for financially secure investors who are best able to absorb the risk of this type of portfolio.

A person is interested in investing in the oil and gas sector because she anticipates an increase in demand as the economy moves out of a recession. The person's IAR advises her on various vehicles to gain exposure to this sector, such as oil and gas mutual funds, oil and gas futures, options on the Oil and Gas Index, and oil and gas limited partnerships. When comparing these choices, what is one disadvantage of a limited partnership investment? a. A limited partnership's interest is less liquid. b. A limited partnership is subject to greater regulatory oversight. c. A limited partnership's interests can only be offered to high net worth individuals. d. A limited partnership's interest cannot be used as collateral for a loan.

a. A limited partnership's interest is less liquid. Explanation: Since limited partnership interests generally do not trade in the secondary market, investors may find it difficult to sell their interests if the need arises. On the other hand, mutual funds shares are redeemable, and options and futures can be closed out (traded) in the secondary market. Partnership interests can be used as collateral and can be offered to any type of investor. Only if partnership interests are offered through a private placement conducted under Reg. D is there is a limit on the number and types of investors that may participate.

Carrie has three children and recently lost her husband. Her children each have two children of their own. If Carrie wants to set up a trust which allocates an equal share of her assets to each branch of her family, she should set it up as: a. A per stirpes trust b. A per capita trust c. A sprinkling trust d. A bypass trust

a. A per stirpes trust Explanation: In a per stirpes distribution, each branch of a family receives an equal share of an estate. In this question, Carrie's three children represent separate branches of her family. If Carrie dies and her children are still living, each child will receive one-third of her estate. If one of Carrie's children dies before her, her deceased child's heirs will equally split the decedent's one-third of the estate. On the other hand, a per capital (by head) distribution allocates estate assets to all surviving members equally, regardless of how close or distant the relationship.

Which of the following investments pass through both income and losses to investors? a. A real estate limited partnership b. All SEC reporting companies c. A regulated investment company d. A real estate investment trust

a. A real estate limited partnership Explanation: A limited partnership is permitted to pass through both income and losses to its investors (partners). An SEC reporting company, a real estate investment trust, and a regulated investment company (e.g., a mutual fund) are able to pass through income, but are not able to pass through losses to its investors.

Which of the following statements is TRUE of using a UGMA or UTMA account to save for college tuition compared with using a 529 plan? a. Assets in the account are considered the property of the minor. b. Growth in the account is tax-deferred. c. Contributions are exempt from the gift tax limit. d. Withdrawals from the account are tax-free if they're used for qualified education expenses.

a. Assets in the account are considered the property of the minor. Explanation: Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts are a way for minors to own securities. Any money or investment directed to an UGMA or UTMA account is the property of the minor; however, UGMA or UTMA accounts are not provided with tax breaks. Since qualified withdrawals from 529 plans are not taxed, they're typically a better way to save for college. In a 529 plan, assets are owned by the donor (i.e., parent or grandparent who funded the account), not by the minor. Large gifts that are made to UGMA accounts, UTMA accounts, and 529 plans are subject to the gift tax.

The benefit of creating an irrevocable trust is that: a. Assets will be excluded from the donor's estate b. The donor maintains control over the assets c. Assets will remain in the donor's estate d. The donor loses control over the assets

a. Assets will be excluded from the donor's estate Explanation: In an irrevocable trust, the donor typically gives up all claims to assets that are placed in the trust. Also, assets in this type of trust are typically not included in the donor's estate. This reduction of assets will reduce any potential estate taxes that are payable by the donor's estate. Losing control of the assets is not a benefit to the donor, it is a drawback.

Which of the following statements is TRUE regarding Roth IRAs and Coverdell Education Savings Accounts? a. Both are only permitted for individuals whose income is below a certain amount. b. Both allow a catch-up provision if the contribution is made by a person who is over a certain age. c. Both have the same maximum annual contribution amount. d. Both allow tax-deductible contributions.

a. Both are only permitted for individuals whose income is below a certain amount. Explanation: Contributions that are made to either a Roth IRA or Coverdell Education Savings Account (ESA) are only permitted for persons whose income is below a certain level. Both allow for tax-free growth if certain conditions are met; however, the contributions are made in after-tax dollars (non-deductible). A Roth IRA allows a catch-up contribution if the person is age 50 or older. A Roth IRA allows for a maximum annual contribution of $6,000, while the maximum annual contribution for a Coverdell ESA is $2,000.

Which feature of a deferred compensation plan is generally considered to be a disadvantage? a. Deferred compensation is not deductible to the employer. b. Plans don't impose contribution limits. c. Plan benefits are not taxed until the employee receives them. d. Employees are guaranteed an above market return.

a. Deferred compensation is not deductible to the employer. Non-qualified deferred compensation plans allow employees to wait to receive a part of their compensation (e.g., salary, bonus, etc.) in the current year. The employee is not required to pay taxes on their deferred income immediately; instead, they pay taxes when they're paid, often in retirement (i.e., the income is tax-deferred). Unlike the employer match in a qualified plan, employers are not permitted to deduct the deferred income. Deferred compensation plans can offer employees a rate of return, but it's set by the employer and there's no guarantee that it will be above the market return. Unlike qualified plans, non-qualified deferred compensation plans don't impose dollar limits for permitted employees to save more for their retirement.

Which of the following is a benefit of forming a limited partnership? a. Ease of establishment b. Liquidity c. Continuity of life d. Ease of raising additional capital

a. Ease of establishment Explanation: A partnership is one of the easiest business entities to form, especially when compared to establishing a corporation. However, limited partnership interests are illiquid, since a general partner's approval may be required to sell them. Another difficulty for partnerships is raising capital due to the fact that the general partner is often limited to selling to institutional and accredited investors only. In some cases, a partnership will disband due to the death of a partner; in other words, they don't have continuity of life.

A complex trust: a. Is permitted to retain some of its annual investment income b. Uses derivatives as part of its assets c. Must have multiple beneficiaries d. Uses an outside portfolio manager

a. Is permitted to retain some of its annual investment income Explanation: A complex trust is permitted to retain some of its investment income. (In a simple trust, this income must be distributed to the beneficiaries in the year received.) Trustees of a complex trust are also empowered to distribute principal. The term complex has nothing to do with the number of beneficiaries of the trust, the use of derivatives within the trust, or the employment of an outside portfolio manager by the trustee.

Which of the following business structures allows the pass-through of income and loss to its members on a Form K-1? a. Limited liability company (LLC) b. Sole proprietorship c. Limited partnership (LP) d. S-corporation

a. Limited liability company (LLC) Explanation: Each of the answer choices provide for the pass-through of income for tax purposes to investors. However, only limited partnerships, LLCs, and S-corporations will report their income on a Form K-1. The reason that LLCs is the answer is because they refer to their owners as members. Owners of an S-corporation are referred to as shareholders, while owners of a limited partnership are referred to as partners.

Which of the following statements is NOT TRUE regarding limited liability companies? a. Only a limited number of states permit them b. They have more flexible management structures than regular corporations c. They are taxed similar to partnerships d. Their owners are not liable for the company's debts

a. Only a limited number of states permit them Explanation: Limited liability companies may now be established in any state by filing the appropriate documents with the secretary of state or another state authority. All the other statements are true.

An IAR is meeting with a prospective client. The client is in his late 20s, has a higher-than-average income, has several valuable assets, and little debt other than his home mortgage. The client indicates that his main goal is to retire at age 55, but that the stock market makes him very nervous, and that he has never been comfortable investing in any assets other than CDs and money-market funds. Which of the following statements is TRUE regarding this situation? a. Regardless of whether the client is capable of financially bearing some risk, the IAR must take his low-risk tolerance into account when making recommendations. b. Since the client is financially capable of bearing some risk, the IAR may not recommend conservative strategies to him. c. The client's low risk tolerance is inappropriate for a person in his situation and the IAR should ignore it. d. Once the client reveals his low-risk tolerance, the IAR may not attempt to convince him that assuming a moderate level of risk might be suitable for him.

a. Regardless of whether the client is capable of financially bearing some risk, the IAR must take his low-risk tolerance into account when making recommendations. Explanation: An investment adviser must take into account a client's willingness to tolerate risk, regardless of the level of the client's financial resources. However, this does not prevent the adviser from attempting to convince the client that a higher level of risk might be appropriate.

Investments used to calculate liquid net worth would exclude all of the following choices, EXCEPT: a. The S&P 400 Index Fund b. Commercial real estate c. Shares of stock in a thinly traded company d. Interest in an oil and gas drilling program

a. The S&P 400 Index Fund Explanation: Liquid net worth excludes assets that cannot be converted easily into cash . When developing a client's financial profile, advisers must consider her liquid net worth (stocks, bonds, mutual funds, and savings accounts) to evaluate her financial condition accurately.

A mother creates a trust and deposits funds that will be used to pay for her children's college educations. The IAR managing the assets will NOT take into consideration: a. The amount of money that the grantor makes. b. Expected college tuition levels at the time of withdrawal. c. Market conditions that are expected over the life of the trust. d. When each beneficiary will be going to college.

a. The amount of money that the grantor makes. Explanation: The key variables that an IAR should consider are the timing of the outlays, the expected cost of higher education, and how market conditions will influence potential returns. The grantor is the person who created the trust and her income is not a factor that warrants consideration.

Which of the following statements is TRUE concerning family limited partnerships? a. They must have a legitimate business purpose in order to receive the full potential tax benefits b. They were recently disallowed by the IRS c. Unlike other limited partnerships, the general and limited partners have equal authority to manage the partnership's assets d. Only intangible personal property such as stocks and bonds may be placed in a family limited partnership

a. They must have a legitimate business purpose in order to receive the full potential tax benefits Explanation: Practically any type of property may be placed in a family limited partnership (FLP). However, the FLP must have a legitimate business purpose (other than avoiding taxes) in order to receive the full potential tax benefits.

Mr. Brown is a client who must fulfill a $300,000 obligation in two years. He currently has the $300,000 and would like your advice as to how to invest these funds temporarily. Which of the following securities is most suitable? a. U.S. government securities maturing in two years b. AAA municipal bonds with a 15-year average maturity c. High-grade, blue-chip equity securities d. High-quality corporate debenture bonds maturing in two years

a. U.S. government securities maturing in two years Explanation: U.S. government securities are the safest investment. In two years when the securities mature, Mr. Brown is assured of having his $300,000 to fulfill his obligation. The other choices are incorrect even though they are high-quality securities. There is no guarantee that the price of these securities will be at the same level two years after they have been purchased. Since debentures are unsecured bonds, the government securities would be safer and, therefore, more appropriate.

When trading on margin, clients are required to deposit: a. 25% of the market value of the security b. 50% of the market value of the security c. 25% of the amount of money borrowed d. 50% of the amount of money borrowed

b. 50% of the market value of the security Explanation: The 1934 Securities Exchange Act, Regulation T, provided the Federal Reserve with the power to establish equity requirements when trading on margin. The current initial requirement when purchasing common stock is 50% of the market value of the security at the time of the transaction.

The following persons would be allowed to trade the account of an incapacitated individual, EXCEPT: a. A joint tenant b. A relative named in a living will c. The holder of a durable power of attorney d. A court-appointed conservator

b. A relative named in a living will Explanation: A living will is related to medical decisions that may need to be made in the event of an individual's incapacity. All the other choices would allow the individual to trade in the account of an incapacitated person, providing proper documentation is provided. A durable power of attorney gives someone the authority to make financial and healthcare decisions on another's behalf should that person become incapacitated.

Your client dies and leaves a sizable investment portfolio. Within two weeks of his death, the executor of his estate presents the proper documentation to you. She has you sell off the decedent's portfolio, investing the proceeds in money-market instruments in anticipation of the distribution to the heirs of the estate. The value of the holdings declines substantially in the period between his death and their sale. For estate tax purposes, the assets will be valued: a. At the time of sale b. At the time of death c. Nine months after death, or at the time of death, whichever is less d. At the time of death or sale, whichever is greater

b. At the time of death Explanation: For estate tax purposes, assets are normally valued at the time of death. The date on which the assets are sold is not relevant.

Which of the following investments would be MOST suitable for an estate account? a. Preferred stock b. Commercial paper c. Nonnegotiable CDs d. Treasury bonds

b. Commercial paper Explanation: Estates are intended to last only for a short time (a year or two). The executor or administrator of the estate has a fiduciary responsibility to safeguard the estate's assets until they can be distributed to the heirs. Estates should generally invest only in short-term, safe, liquid assets such as money-market instruments. Money-market instruments include T-bills (not Treasury notes or bonds), commercial paper, and negotiable CDs.

A client has a traditional IRA and she just turned 75. She must take the required minimum distribution (RMD) no later than: a. The end of 10 years b. December 31 of the current year c. The end of five years d. April 1 of the following year

b. December 31 of the current year Explanation: The first Required Minimum Distribution (RMD) must be taken by April 1 after the IRA owner turns 72. Subsequent RMDs must be withdrawn by December 31 each year. Since the client is 75, she has already taken the initial RMD, so her deadline for the current year is December 31st.

An 81-year-old father is establishing a bypass trust for his two adult children who are both in their 40s. His investment adviser is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is MOST appropriate investment in a bypass trust? a. Bonds with short-term maturities due to the grantor's age b. Growth stocks, since the beneficiaries will not need the funds for several years c. Municipal securities, since the income that will be provided to the beneficiaries is tax-free d. Government securities, since they preserve the value of the assets that will be passed to the beneficiaries

b. Growth stocks, since the beneficiaries will not need the funds for several years Explanation: A Bypass Trust (or Credit Shelter Trust) is a type of irrevocable trust and is most commonly used to pass assets from parents to children at the time of the second parent's death. The key to this specific question is to identify the ages of the beneficiaries. Since both children are in their 40s, a growth investment is the most appropriate. The focus must be on the beneficiaries, not the grantor.

The person in charge of the day-to-day operations of a limited partnership is NOT referred to as a(n): a. Sponsor b. Investment adviser c. Manager d. General partner

b. Investment adviser Explanation: The general partner is responsible for managing a limited partnership. General partners may also be referred to as managers or sponsors. Remember, investment advisers are firms that provide investment advice for a fee.

Your clients have a sizable estate, which they wish to leave to their children upon their death. Which of the following trusts would remove assets from their estate and potentially reduce their estate tax? a. Revocable b. Irrevocable c. Simple d. Testamentary

b. Irrevocable Explanation: An irrevocable trust must be established by the grantors in order to remove their assets from the estate thus avoiding estate taxes.

Which of the following statements is TRUE regarding a client's occupation as it relates to her financial status and the suitability of recommendations? a. It is generally irrelevant when evaluating the client's financial needs. b. It can influence the liquidity needs of the client's portfolio. c. Its importance relates solely to the amount of income it produces. d. It is only relevant if the client works in the securities industry.

b. It can influence the liquidity needs of the client's portfolio. Explanation: Some clients have stable jobs that provide a steady, reliable income, while others may have jobs that provide volatile and unpredictable income. Obviously, a person's occupation represents how she makes money, but it is also an important factor in determining her liquidity needs. If a client's income is somewhat unstable, an adviser should be mindful of this when making investment recommendations since she has greater liquidity needs.

Tony had three children — Susan, Mark, and James. Susan has a son and daughter, but Susan passed away at an early age. Mark has a daughter, but Mark also died before his father, Tony. James doesn't have children and has outlived his father Tony. What's the result if Tony's will called for a per capita at each generation distribution? a. James receives 1/3rd of the estate, Mark's estate will receive 1/3rd, and Susan's estate will receive 1/3rd. b. James receives 1/3rd of the estate, and each of Tony's three grandchildren will receive 2/9ths of the estate. c. James will receive 1/3rd of the estate, Mark's daughter will receive 1/3rd of the estate, and Susan's two children will receive 1/6th of the estate. d. James will receive the entire estate.

b. James receives 1/3rd of the estate, and each of Tony's three grandchildren will receive 2/9ths of the estate. Explanation: With a per capita (by head) at each generation distribution, all surviving members of a generation are entitled to an equal share. In this question, since James is still alive and there were three members of his generation, he will receive 1/3rd of the estate. Since Mark and Susan have died, their children (i.e., Tony's grandchildren) will receive equal benefits. In that generation, there are three total members, Susan's son and daughter, as well as Mark's daughter. Since James received 1/3rd of Tony's estate, 2/3rds of the estate remains. Each of Tony's grandchildren will receive an equal share of their generation's inheritance, which is 2/9ths per grandchild (i.e., 2/3rds of estate ÷ 3 grandchildren = 2/9ths).

Two lifelong friends intend to open a joint trading account, with each contributing $30,000 to the account. Upon the death of either owner, each wants her share of the account to revert to her individual estate. The type of account the friends should open is: a. Fractional interest b. Joint tenants-in-common c. Discretionary d. Joint tenants with right of survivorship

b. Joint tenants-in-common Explanation: The friends should open a joint tenants-in-common (JTIC) account. In a JTIC account, each owner's interest in the account will pass to her estate upon death.

The major advantage of an S Corporation versus a C Corporation is that an S Corporation: a. Has greater access to the capital markets b. May elect to be treated like partnerships for federal tax purposes c. Is exempt from state corporate income taxes d. Provides its owners with limited liability

b. May elect to be treated like partnerships for federal tax purposes Explanation: For most businesses, the major advantage of forming an S Corporation (or a limited liability company), rather than a regular C Corporation, is that S Corporations may elect to be taxed like partnerships under Subchapter S of the Internal Revenue Code. S Corporations must meet certain restrictions in order to qualify for this special treatment. The owners of both types of corporations have the protection of limited liability.

An elderly widow opens an account with an advisory firm. She tells her IAR that she has income of $20,000 a year and a total net worth (including her house) of $300,000. She has little previous investment experience. Her main objectives are income and preservation of capital. She also tells her IAR that she may need to access her funds on short notice for emergency medical expenses. Based on these circumstances, which of the following choices would be the MOST suitable investment for her account? a. High-yield bonds b. Money-market instruments and high-quality bonds c. Common stocks and covered calls d. Limited partnerships

b. Money-market instruments and high-quality bonds Explanation: Given this client's investment objectives--low risk tolerance and need for liquidity--high-quality bonds and money-market instruments would be the most suitable of the choices given.

Which of the following items is not included in an income statement? a. Taxes b. Retained Earnings c. Interest d. Sales

b. Retained Earnings Explanation: The income statement for a business will disclose its sales (revenues) less its expenses. Interest and taxes are both expenses which are reflected on a company's income statement. However, retained earnings reflects a company's historical earnings and is found on the company's balance sheet, not its income statement.

Which of the following customer accounts would be funded with pretax dollars? a. 529 plan b. Section 457 plan c. Universal life d. Nonqualified variable annuities

b. Section 457 plan Explanation: Section 457 Plans are a type of payroll deduction plan that is offered to employees of state and local governments. These plans are funded pretax and are not subject to taxation until the funds are distributed.

An advisory client owns a small business and inquires about whether he should set up his business as a partnership or as a C Corporation. Which of the following would be the BEST reason to set the business up as a partnership? a. The owners have limited liability b. Setting up a partnership is easier than establishing a corporation c. There is free and unrestricted transfer of shares d. It is easy to raise capital and attract new investors in a partnership

b. Setting up a partnership is easier than establishing a corporation Explanation: A partnership is easier to establish and operate than a C Corporation, which requires more reporting and administration. Partnerships generally do not allow for the free transfer of shares and if a partner manages the business, he may be liable for the debts of the partnership.

If a 62-year-old married woman is about to start taking Social Security payments, which of the following is TRUE? a. She can take a spousal benefit, which will grow until age 70. b. She locks in the payment she will receive. c. Since she started taking benefits at age 62, she will not receive cost of living adjustments. d. Her payment will decrease if she delays taking benefits.

b. She locks in the payment she will receive. Explanation: An individual may start taking Social Security benefits once she reaches age 62. However, if she waits, she will receive larger payments. Once an individual begins taking benefits, she locks in the base amount that she will receive. The age at which a person begins taking benefits doesn't prevent her from receiving cost of living adjustments.

Which of the following statements is TRUE concerning taxation of capital gains distributions from a Subchapter S Corporation? a. The gain would be taxable to both the corporation and individual as a capital gain b. The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain c. The gain would be exempt from corporate taxes, but would be taxable to the individual as ordinary income d. The gain would be taxed as a capital gain at the corporate level and shareholders would receive a tax-free distribution

b. The gain would be exempt from corporate taxes, but would be taxable to the individual as a capital gain Explanation: A Subchapter S Corporation is treated as a partnership for tax purposes. It avoids corporate taxation and its shareholders are taxed based on the distributions from the corporation. The gain would be taxed only once, at the shareholder's tax rate. A Subchapter S Corporation would report a proportional amount of the shareholder's net capital gains on a K-1 tax form. The S Corporation would not pay corporate tax, while the shareholder would pay a capital gains tax based on her individual tax rate. The gain would not be taxable as ordinary income.

Which of the following is a characteristic of a Subchapter S corporation, but is not a characteristic of a limited partnership? a. Losses are passed through to investors. b. The number of potential investors is limited. c. Earnings are not subject to double taxation. d. Management is centralized.

b. The number of potential investors is limited. Explanation: Both Subchapter S corporations and limited partnerships pass through both earnings and losses to their investors, which eliminates double taxation. Neither organization is responsible for paying taxes on its earnings; instead, their earnings are distributed to the owners for tax reporting purposes. Additionally, both S Corporations and limited partnerships have centralized management. However, unlike limited partnerships, S Corporations are limited to 100 shareholders.

An investor opens an account with a local advisory firm and deposits $100,000. Some of the employees in the office recognize the investor from her early work as a child actor and begin discussing the rumors of her substantial wealth and real estate holdings. The investor indicates that she wants to trade aggressively, but refuses to give additional information about her income or net worth. Under these circumstances, what is the MOST appropriate action for the investment adviser to take? a. To invest the client's account in growth stocks in order to earn the highest rate of return b. To presume that the client has no other assets except the $100,000 in her account c. To consider the client's rumored real estate holdings when making investment recommendations d. To invest the client's assets aggressively since that is her objective

b. To presume that the client has no other assets except the $100,000 in her account Explanation: The investment adviser cannot presume that the client has any assets or sources of income other than the $100,000 in her account. Rumors are not sufficient grounds on which to base suitability judgments. Until the client is willing to be more forthcoming with her financial background, there is little that the investment adviser is able to do for her.

Several years ago, a person received a gift of 300 shares of stock that were originally purchased for $10 per share. After the gift, the person then inherited 700 shares of the stock when the price was $20 per share. This year, the person sold all of the shares for $40 per share. What are the tax consequences? a. $14,000 short-term capital gain and a $9,000 long-term capital gain b. $30,000 long-term capital gain c. $23,000 long-term capital gain d. $14,000 long-term capital gain and a $9,000 short-term capital gain

c. $23,000 long-term capital gain Explanation: Capital gains are calculated by taking the sales proceeds (i.e., sale price of $40 in this question) and subtracting the cost basis. The cost basis for securities that are received as a gift is the lower of the donor's cost basis (i.e., $10) or the market value at the time of the gift, which was not provided in the question. As a result, the gain on the gifted securities is $30 per share ($40 - $10), or $9,000 total ($30 gain x 300 shares). Since the investor held the securities for more than one year, it's considered a long-term capital gain. For securities that are inherited, the cost basis is the market value at the time of previous owner's death (i.e., $20). As a result, the gain on the inherited securities is $20 per share ($40 - $20), or $14,000 total ($20 gain x 700 shares). On any securities that are inherited, gains and losses are always long-term, regardless of the decedent's or recipient's holding period.

The trustee for a trust is responsible for reporting income, gains, and losses of the trust to the IRS on Form: a. K-1 b. 1040 c. 1041 d. 1065

c. 1041 Explanation: The trustee would report the trust's income, gains, and losses on IRS Form 1041 each year. Form 1040 is used for personal tax returns. Form 1065 is used by partnerships and Form K-1 is an information statement distributed by a partnership to its partners, which they use in preparing their 1040s.

A court has appointed a person to be the guardian for an incompetent individual. To open a guardianship account with a broker-dealer, which of the following court-issued documents is required? a. A power of attorney b. A guardianship agreement c. A certificate of incumbency d. A durable power of attorney

c. A certificate of incumbency Explanation: A certificate of incumbency is a court-issued document that provides the legal authority of a court-appointed guardian to act on behalf of another person. The certificate serves as evidence that the listed person is authorized to act as a fiduciary for another person (the account holder) or any unincorporated entity (i.e., business, club, association, or organization). On the other hand, a durable power of attorney authorizes a person to manage the affairs of an individual who is in good health and remains in force if the individual is declared incompetent or becomes incapacitated. It is important to note that a power attorney is not issued by a court; instead, it is issued by one person to another person.

An advisory client is interested in starting a small business. After getting details from the client, it's obvious that he will not be required to obtain a specific license for his business activities and that there will be very limited liabilities. If he's interested in the simplest business form, what's the best recommendation? a. A limited liability company (LLC) b. A Subchapter S Corporation c. A sole proprietorship d. A C Corporationnbb

c. A sole proprietorship Explanation: For a person who's interested in establishing a small company that will carry few liabilities (i.e., debt), the best form of business is a sole proprietorship. Although a sole proprietor is liable for all of the business's liabilities in a bankruptcy, a business with few liabilities doesn't pose a significant financial risk. All of the other forms of business will require more extensive paperwork and administration than a sole proprietorship.

A married couple in their thirties, with two small children, owns a small business. They have already funded their retirement plans at work. They consult an investment adviser about the best way to save more money for their retirement. Based on this information, which of the following choices would be the most suitable recommendation? a. A hedge fund b. A 529 Savings plan c. A variable annuity d. A variable life insurance policy

c. A variable annuity Explanation: This couple's stated investment goal is to save more money for retirement. Annuities provide this feature. Although the couple's circumstances may indicate a need for life insurance coverage, this is not their focus at the moment. A 529 savings plan is used to save money for higher education expenses, not for retirement.

When does a person become eligible for Social Security benefits? a. When she reaches the age of 65 b. After she's worked for the same employer for more than 10 years c. After she's worked 40 quarters d. When she reaches the age of 62

c. After she's worked 40 quarters Explanation: Social Security eligibility is based on credits that taxpayers earn by working. Individuals become eligible for Social Security benefits if they have earned 40 credits. Taxpayers can earn up to four credits for every year they work (i.e., one per quarter) and taxpayers become eligible by earning 40 credits. If an individual is earning the maximum credits per year, she can become eligible after 10 years (4 credits per year x 10 years = 40 credits). Be careful, even if a person has earned enough credits, she cannot take benefits until she turns age 62.

A family trust in State A was established 35 years ago. There are now 15 beneficiaries. According to the Uniform Prudent Investor Act, the interests of which beneficiary(ies) are paramount in determining the trust's investment strategy? a. The oldest generational beneficiary b. The youngest generational beneficiary c. All beneficiaries regardless of generation d. Any generational beneficiary as determined by State A's Administrator and applicable securities laws

c. All beneficiaries regardless of generation Explanation: According to the Uniform Prudent Investor Act (UPIA), a trustee managing an account that has multiple beneficiaries has a duty to act impartially when investing and managing the trust's assets. When making investments, a trustee must take into account the different interests of all beneficiaries.

Which of the following statements best describes why an individual may choose to create a general partnership rather than a limited partnership? a. In a general partnership, income is only taxed once b. The owners of the business want to make sure it dissolves after a certain date c. All of the investors want to manage or operate the business d. The owners want to protect themselves from liability

c. All of the investors want to manage or operate the business Explanation: A business owner may create a general partnership because it allows all of the investors to manage or work in the business. The other items listed are not valid reasons to create a general partnership since both limited and general partnerships are taxed in the same manner, and general partners have more liability than limited partners.

All of the following entities provide for the direct flow-through of income to its owners, EXCEPT: a. S Corporations b. Limited partnerships c. C Corporations d. Limited Liability Companies

c. C Corporations Explanation: S Corporations, limited partnerships, and limited liability companies each directly distribute income to their owners. For that reason, these types of investments are considered tax efficient. On the other hand, C Corporations are taxable entities (tax inefficient). The income that is earned by a C Corporation is taxed at the corporate level and, if paid to investors in the form of a dividend, it is taxed again.

An IAR's client has inherited $10 million and wants to give it to a charity. The client wants to retain complete control of the money and be able to make all decisions regarding how the money is spent. What should the client establish? a. Testamentary trust b. Inter vivos or living trust c. Charitable trust d. Revocable trust

c. Charitable trust Explanation: As implied by their name, charitable trusts are established for charitable purposes. This is unlike a typical trust which is established for a specific beneficiary. In most cases, the person that creates the charitable trust can maintain control over the investments of the trust and make decisions regarding how the money is spent. As with other types of trusts, charitable trusts provide certain tax breaks.

All of the following statements are TRUE of a 529 plan, EXCEPT: a. There are no income limits placed on contributors. b. A married couple may give a lump-sum of $150,000 without incurring federal gift taxes. c. Contributions are unlimited. d. Withdrawals that are used for educational purposes are not subject to federal taxation.

c. Contributions are unlimited. Explanation: The contribution limits for a 529 plan are quite high (much higher than those for a Coverdell Education Savings Account, which is capped at $2,000 a year), but they're not open-ended. Each state establishes the maximum amount that may be contributed to all 529 plans that are maintained for one beneficiary (typically $200,000 to $300,000). All of the other statements are correct. However, note that an investor who contributes the maximum amount allowable to a 529 plan may incur federal gift taxes. A single investor may contribute up to $15,000 per year ($30,000 for a couple) for each beneficiary without incurring gift taxes. An investor may also aggregate five years' worth of annual contributions into one and give a $75,000 lump-sum amount ($150,000 for a married couple) without incurring federal gift taxes.

What's a benefit of establishing a general partnership compared to establishing an S-corporation? a. The business can own property b. Limited liability for owners c. General partnerships don't require incorporation with the state d. Efficient taxation

c. General partnerships don't require incorporation with the state Explanation: An advantage to establishing a general partnership compared to an S-corporation is that general partnerships are not required to file articles of incorporation. This filing is time consuming and expensive. Both types of business are tax efficient, since only the owners are required to pay taxes on the income (i.e., both are flow-through investments).

Harold has established a revocable trust. His son Stanley is the trustee and his daughter Dora and her children are the beneficiaries. The income is currently taxable to: a. Dora's children b. Dora c. Harold d. Stanley

c. Harold Explanation: Since this is a revocable trust, all the income produced by the trust must be included in Harold's (the grantor's) tax returns. The trust income would not normally be taxable to the trustee unless the trustee is also the grantor or one of the beneficiaries. Note, however, that the trustee would be responsible for making certain that the proper tax payments were made. If the trust is irrevocable, then the income is generally taxed to the trust or the beneficiaries.

Which form of business would offer limited liability and the flow-through of profits and losses? a. Sole proprietorship b. C Corporation c. Limited partnership d. General partnership

c. Limited partnership Explanation: The only choice that provides for the flow-through of income and the limited liability for some owners is a limited partnership. Unlike limited partners, the general partners in a limited partnership have unlimited personal liability. A characteristic of both general partnerships and sole proprietorships is that they create unlimited liability for all owners. Corporations do not have the benefit of the flow-through of income.

A client of a registered representative owns a small business. The business produces strong cash flow during the holiday season, but negative cash flow for the rest of the year. This may indicate a need for which of the following choices? a. Zero coupon bonds b. Capital preservation c. Liquidity d. Tax relief

c. Liquidity Explanation: Since the client may need to have access to capital when the cash flow from his business is negative, the portfolio should contain some investments that are liquid. Given the liquid nature of money-market instruments, they may be suitable investments for a portion of the portfolio.

With a simple trust, the trust: a. Allows only for a single beneficiary b. Is only allowed to invest in a single asset class c. Must distribute its annual investment earnings d. Has a predetermined asset allocation

c. Must distribute its annual investment earnings Explanation: A simple trust is required to distribute all its income to beneficiaries in the year received. The body (corpus or principal) of the trust may not be distributed by the trustee. The term simple has nothing to do with the number of beneficiaries in the trust or the investment profile of the assets contained therein.

One of your clients has heard that the use of leverage can increase his portfolio's return. This client normally buys securities that have high dividend payout ratios and uses the dividends to supplement his income. He wants to open a margin account and asks you to use his existing securities as collateral to purchase additional shares of the same stocks that you have in your portfolio. You should: a. Explain to the client that buying securities on margin would provide the account with downside protection b. Not recommend this strategy since buying on margin would increase the client's taxes c. Not recommend this strategy since buying on margin may not increase the return received by this client d. Explain to the client that this would only increase the return if interest rates increase

c. Not recommend this strategy since buying on margin may not increase the return received by this client Explanation: A margin account will allow a client to buy more securities by leveraging or borrowing additional funds. A client is only required to deposit half of the funds required to execute a transaction and profits if the stock rises. By purchasing more shares, a client can increase her profit, but will also be exposed to a larger loss if the stock purchased declines in value. This client purchased securities primarily for the dividend income, not for speculation or trading purposes. Therefore, buying stock on margin would not be suitable in this situation. A brokerage firm will charge a client interest on the funds the client borrows when trading on margin. The increased dividend income from the additional shares in a margin account would not be sufficient to pay for the interest expense on the borrowed funds.

Mrs. Smith sets up a grantor trust where the income is used to pay the premiums on her husband's life insurance policy. Mr. and Mrs. Smith file their taxes as married but filing separately. The tax on the income generated by the trust is: a. Paid by the trust b. Paid by the husband c. Paid by the wife d. Not taxable, since the proceeds of life insurance are not taxable

c. Paid by the wife Explanation: A grantor trust is one in which the grantor retains a right to any income generated by the trust, as well as the power to revoke the trust. The income generated by the trust must be included in the grantor's taxable income. The grantor is responsible for paying all taxes on any funds the trust distributes or retains for future distribution. For tax purposes, it is irrelevant that the income is used to pay the premiums on insurance policies owned by the grantor or the spouse.

If an advisory client is most concerned with minimizing her tax liability, common stocks may provide a greater benefit than corporate bonds because: a. The unrealized capital gains on some bonds is taxed each year as ordinary income b. Capital gains on stocks are taxed at a lower rate than the capital gains on corporate bonds to encourage investments in stocks c. Qualified cash dividends are taxed at a maximum rate that is less than the rate at which the interest on corporate bonds is taxed d. Stocks tend to offer a lower yield than corporate bonds

c. Qualified cash dividends are taxed at a maximum rate that is less than the rate at which the interest on corporate bonds is taxed Explanation: If an investor owns stock of a domestic corporation (or shares of a fund that contains these types of stocks) and has satisfied a holding period, any dividends that are distributed by the company (or fund) are considered a qualified cash dividends and are taxed at a maximum rate of 20%. On the other hand, the interest on corporate bonds is taxed as ordinary income (possibly as high as 39.6%). Capital gains are only taxable if they are realized (i.e., the investor sells the asset at a price that is higher than what he originally paid).

You have been approached by Steven to provide investment advice. Steven was recently named as executor of his uncle's estate and wants your assistance managing the investment portfolio pending disposition. Which of the following statements is TRUE? a. Your appointment requires approval of the beneficiaries b. The Uniform Securities Act prohibits executors from paying outside advisers c. You may accept the assignment d. Your appointment requires approval of the judge overseeing the estate

c. You may accept the assignment Explanation: You may accept the assignment. The executor is free to obtain any necessary outside advice in the exercise of his fiduciary duty. Permission of the court or heirs is not required. Regarding your advice, remember that the estate will be short-lived and, therefore, your focus should be mainly on safeguarding the assets for the benefit of the heirs. Long-term investments or speculative investments would generally not be suitable.

An investor purchased 100 shares of ABC stock at $40. After three years, the price of ABC has risen to $50. The investor waits another year and sells the shares when the price has fallen to $46. If the long-term capital gains rate is 20%, what's the investor's tax obligation? a. $2 per share b. $6 per share c. $10 per share d. $1.20 per share

d. $1.20 per share Explanation: The investor has a capital gain of $6 ($46 sales proceeds - $40 cost basis). Since the investor held the shares for longer than one year, she's required to pay 20% on the long-term capital gain. For that reason, her obligation is $1.20 per share ($6 gain x 20% tax rate).

Investments used to calculate liquid net worth would exclude all of the following choices, EXCEPT: a. Shares of stock in a thinly traded company b. Real estate c. A limited partnership interest d. A growth mutual fund

d. A growth mutual fund Explanation: Liquid net worth excludes assets that cannot be converted into cash easily. When developing a client's financial profile, advisers must consider their liquid net worth (stocks, bonds, mutual funds, and savings accounts) to evaluate his financial condition accurately.

Which of the following choices would be considered a prohibited transaction under ERISA? a. An investment in derivatives securities b. A delegation of investment authority by plan fiduciaries c. The purchase of an over-the-counter stock d. A loan to the plan's trustee from the plan

d. A loan to the plan's trustee from the plan Explanation: A trustee is clearly a fiduciary. ERISA prohibits plan fiduciaries and parties of interest from engaging in certain transactions with retirement plans. These prohibited transactions include: the sale, exchange, or lease of property, lending money or extending credit, furnishing goods, services, or facilities, and transferring or using plan assets for plan fiduciaries' own benefit. ERISA does not place a per se prohibition on any particular type of investment for retirement plans. A fiduciary may appoint an investment manager to oversee the investment of the plan's assets.

What are the elements of a trust? a. An analysis of the beneficiaries needs and a trustee to act as a fiduciary b. A trustee's intention to create the trust, financial assets, and a settlor c. A beneficiary's intention to create the trust, specific real estate, a trustee, and approval from the Administrator d. A settlor's intention to create the trust, a specific subject matter, a trustee, and a beneficiary

d. A settlor's intention to create the trust, a specific subject matter, a trustee, and a beneficiary Explanation: A trust always consists of several elements. The first is the settlor's intention to create the trust. This could be done through a written or oral trust agreement. In addition, all trusts require a subject matter, which is often referred to as the "trust res" or corpus. In many trusts, the subject of the trust is a financial asset, real estate, or money that the settlor wants to give to the beneficiary. The last two elements of a trust are the trustee to act as a fiduciary and the beneficiary who will benefit from the trust.

A limited partnership sells an asset for a capital gain in the current year; however, the gain is distributed to the partners in the following year. What is the tax consequence of the gain? a. As ordinary income in the year it is distributed to the partners b. As passive income the year realized by the partnership c. As ordinary income in the year it is distributed to the partnership d. As a capital gain in the year it is realized by the partnership

d. As a capital gain in the year it is realized by the partnership Explanation: The key to this question is to recognize that there is only one answer that recognizes the result as a capital gain. Any capital gains that are realized by the partnership are taxed to the partners in the year in which the gain is incurred, not when the distribution is made to the partners. When a partnership generates income, a tax liability is created for the partners in the year in which it is generated. All sources of partnership income are reported to the partners on Schedule K-1. Capital gains can be classified as either short-term or long-term.

Which of the following features is a characteristic of a Roth IRA? a. Any distributions of funds that were never taxed will be subject to capital gains tax b. Distributions from the plan are tax-free if the owner of the account is at least age 72 c. Any person who has earned income is eligible to fund a Roth IRA d. Contributions are made with after-tax dollars

d. Contributions are made with after-tax dollars Explanation: A Roth IRA is funded with after-tax dollars; therefore, there is no immediate tax benefit. Withdrawals from a Roth IRA are classified as qualified distributions only if it has been at least five years since the investor first opened and contributed to her Roth IRA. Qualified distributions may be withdrawn tax-free when the investor reaches age 59 1/2. Any person who has earned income is NOT eligible to fund a Roth IRA since income limitations apply to investors who establish Roth IRAs.

Which of the following is a characteristic of a Money Purchase Plan? a. Employer contributions are discretionary b. Employees must make mandatory contributions c. Employees and the employer must make mandatory contributions d. Employers must make mandatory contributions

d. Employers must make mandatory contributions Explanation: A Money Purchase Plan is a type of defined contribution plan to which an employer makes mandatory contributions, regardless of the company's profitability. For tax purposes, the employer is able to deduct the contributions.

Regarding the taxation of an estate, which of the following statements is TRUE? a. In an irrevocable trust, assets are included in the estate for federal estate tax purposes. b. Property that's inherited by a spouse is subject to estate taxes. c. If income from an estate is distributed, it's taxable to the beneficiary. d. In a revocable trust, assets are included in the estate for federal estate tax purposes.

d. In a revocable trust, assets are included in the estate for federal estate tax purposes. Explanation: In a revocable trust, assets are typically included in an estate for estate tax purposes. One of the advantages of an irrevocable trust is that its assets are excluded from the estate for estate tax purposes. Property that's left to a spouse is not subject to the estate tax. If an estate is subject to tax, taxes are paid by the estate itself, rather than the beneficiaries.

Emily has two accounts with a financial services firm. One is a managed account in which an investment adviser has been granted discretionary authority. Emily also has a nondiscretionary IRA that is 100% invested in equity securities. The minimum IRA distribution must be made today. If the customer is unavailable, what action should the investment adviser take? a. Liquidate shares in the managed account and transfer the funds to the IRA b. Liquidate enough shares in the IRA to generate enough cash for the distribution c. Send a check from the firm's account to the customer, and sell the required shares when the customer can be contacted d. Take no action until the customer can be contacted

d. Take no action until the customer can be contacted Explanation: The customer has two separate accounts: a managed account in which the adviser has been granted discretion, and the IRA that is nondiscretionary. The distribution must be made from the IRA, but since the customer cannot be contacted, no action may be taken.

When considering estate planning needs, what can be said regarding Section 529 plans? a. The beneficiary will pay federal gift taxes on any distributions b. The plan participant gives up ownership of the account c. Assets in the plan will be considered as part of the owner's estate for federal estate tax purposes d. The plan participant maintains control of how the funds are distributed

d. The plan participant maintains control of how the funds are distributed Explanation: One of the advantages of a Section 529 plan is that the plan participant, the parent, etc. is the account owner and maintains control of how the funds in the plan are distributed and to whom. The beneficiary does not have to pay federal taxes on qualified withdrawals and the assets in the plan are generally not considered part of the participant's estate for federal estate tax purposes.