Chapter 18: Type of Client

Which of the following accounts could be opened with a TOD designation? Individual Joint tenants in common Joint tenants with rights of survivorship UTMA

-Individual -Joint tenants with rights of survivorship The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.

Difference between LLC and S corporation

-LLCs not restricted to 100 stockholders -LLCs have fewer restrictions on who can be a stockholder

Who is excluded in opening a joint account?

A minor

An estate account is opened with Family Asset Protectors (FAP) a registered investment adviser. Management decisions regarding the account must be made at the direction of the A) estate's executor or administrator B) attorney with guardianship over the surviving children C) estate creditors D) investment adviser

A) Estate's executor Only the estate executor (or administrator when the individual dies intestate) can make investment management and distribution decisions. This does not mean that the executor must make the investment decisions for the account, only that decisions as to who will do the management are within his purview. A guardian with authority over the children does not necessarily have power over the estate unless the guardian is also the administrator or the executor of the estate.

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can A) have a check drawn on the account payable to the trustee for expenses B) arrange to have the trust's funds pledged to support a loan for the trustee C) have funds withdrawn from the account at the direction of the beneficiary D) place the securities in the trust fund in a noncustodial brokerage account

A) Have a check drawn on the account payable to the trustee for expenses The trustee can be reimbursed for expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts.

If a new joint tenants with rights of survivorship account is opened by two related individuals, all of the following statements are true EXCEPT A) checks may be drawn in the name of either party B) in the event of death, the decedent's interest in the account goes to the other party C) mail may be sent to either party (with the permission of each party) D) orders may be given by either party

A) checks may be drawn in the name of either party While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.

Which of the following are governed by the prudent investor rule? Trustee Executor Custodian Agent who has been granted discretionary authority

All of the above The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. In these accounts, the fiduciary must act prudently. An agent who has been granted discretionary authority is acting in a fiduciary capacity.

Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? 150 new investors buy into the corporation during the year. 1 new member is a nonresident alien. 50% of the corporation's income is derived from passive investments in limited partnerships. The corporation issues several classes of stock.

All of them S corporations must not have more than 100 stockholders, and each stockholder must be a citizen or resident of the United States. The corporation can only have 1 class of stock, and no more than 25% of the corporation's income can come from passive activities. If you were not sure of this last fact, a useful test-taking technique is recognizing that all the other choices are correct and there is no way to select them without this one.

Which of the following documents would aid an investment adviser in its responsibility to fully understand the needs of a client when making investment recommendations?

An investment policy statement. The IPS is the key document that defines an investor's risk and return objectives and any constraints for their investment.

When does a customer have to receive the OCC Options Disclosure Document?

At or prior to the time the account is approved for options trading

When does a customer have to receive the OCC Options Disclosure Document?

Before accepting the customer's first order to trade options covered by the ODD When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account or accepts the customer's first order to trade the listed options covered by the ODD.

One of your clients dies. You could legally take instructions regarding the individual's estate from A) the spouse of the deceased B) a person with durable power of attorney C) the administrator in intestacy D) a CPA who prepared the deceased's tax return

C) the administrator in intestacy If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power.

Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that A) the partnership form of business structure would be the easiest for ultimate transfer of ownership B) the partnership form of business structure would enable Suzie to maximize her sale price C) the corporate form of business structure would be the easiest for ultimate transfer of ownership D) the corporate form of business structure would be the least expensive to form

C) Corporate form of business structure would be easiest for ultimate transfer of ownership In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can A) have funds withdrawn from the account at the direction of the beneficiary B) place the securities in the trust fund in a noncustodial brokerage account C) have a check drawn on the account payable to the trustee for trustee expenses D) arrange to have the trust's funds pledged to support a loan for the trustee

C) Have a check drawn on the account payable to the trustee for trustee expenses The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.

In an account opened by 2 individuals as joint tenants with rights of survivorship, all of the following are true EXCEPT A) in the event of death, the other party assumes full ownership of the account B) mail may be directed to the joint owner agreed upon by both parties to the account C) stock certificates may be delivered in the name of either party D) orders may be entered by either party

C) stock certificates may be delivered in the name of either party In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of 1 party in a 2-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.

Mr. and Mrs. Williams are a retired couple receiving most of their income from a diversified portfolio of high-quality bonds and preferred stock. One of the reasons that life insurance might be a useful addition to their overall planning is that A) dividends received on a life insurance policy are tax free B) the premiums can be paid directly from their brokerage account C) upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses D) the proceeds of a life insurance policy are free of income tax

C)upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses

Partnership vs. Corporation

Compared with a corporation, it is generally easier to form (and dissolve) a partnership. General partners have full liability and there is no 50% dividends received exclusion for partnerships; that only applies to corporations. C corporations are the entity for raising a lot of capital.

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use?

Complex trust Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses?

Corporation The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability.

If a client wishes the assets in her account to pass directly to specific beneficiaries after her death, her account should be titled A) TIC B) JTWROS C) testamentary account D) TOD

D) TOD Transfer on Death TOD (transfer on death) provides that, upon the death of the account holder, the assets pass to the named beneficiary or beneficiaries without going through probate.

When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as

Impact investing Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact.

If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate?

LLC

S corporation

Limited to 100 SHAREHOLDERS

Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to

Mr. Hawkins as the DONOR

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes

Name taxpayer identification number Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened?

Options

Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be

Options Account Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening.

Which of the following types of business owners has unlimited liability for the business's debts? A) Shareholder of a corporation B) Limited partner C) Owner of a sole proprietorship D) Member of a limited liability company (LLC)

Owner of a sole proprietorship

A client with a sizable estate would probably find it most efficient to pay estate taxes with

Proceeds from a life insurance policy

WHo is not required to file seperate tax return?

Sole proprietorship

A form of business structure that exposes all personal assets of the owner to creditors is

Sole proprietorship One of the reasons why few large businesses are organized as sole proprietorships is the fact that all personal assets, not just those of the business, are placed at risk if the business fails. In each of the other choices, the maximum potential loss is the amount of the investment.

A wealthy individual has set up a GRAT. Should she die during the time the trust is active, how are the remaining assets in the trust taxed?

The original value plus any appreciation is taxed as part of the grantor's estate. One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 3-10 years), the assets put in the GRAT, plus any appreciation, are included in her estate.

Your advisory client is an 86-year-old woman who is presently in the hospital, unable to communicate due to a severe stroke. For the past 6 years, she has followed the practice of making annual gifts of stock to her children and grandchildren on her birthday. Because her 87th is coming up later this month, her oldest son approaches you and asks you to continue the policy.

Without a proper durable power of attorney being produced, you cannot do anything. Unless proper written authorization has been provided, such as with a durable power of attorney, you cannot do anything without the client's consent. If she fails to recover and passes away, then the terms of the will must be followed by the executor.

A client of yours is getting older and is concerned about having her wishes met relating to medical issues when she is no longer capable of communicating them. The most appropriate vehicle for her would be

a living-will A living will, more commonly known as an advance health care directive or medical directive, is used to convey the individual's wishes for life support and other similar issues involving end-of-life matters. The other terms are bogus.

The type of trust created by a will that becomes operative at death is

a testamentary trust As in "last will and testament."

Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is

any losses flow through to the investors An S corporation offers the benefit of flow-through of both income and losses (losses being a particular benefit for a start-up because they usually take some time to become profitable). It is the S corporation rather than the C corporation that is limited to 100 investors. Both offer the benefit of limited liability. The C corporation is superior for raising large amounts of capital.

Under industry rules, customers who wish to trade options must receive a copy of the options disclosure document (ODD)

at or before account approval All prospective options customers must receive a copy of the ODD at or before the time the account is approved to trade options. It is the options account agreement that must be signed and returned to the broker-dealer within 15 days of account approval.

Dying intestate

dying without a will. Administrator assumes responisbilities

An S corporation is characterized by

flow-through tax treatment

As a registered investment adviser, you have managed $10 million of a customer's funds for several years. The customer asks you to prepare a trust for his children, to transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should

refer the customer to an attourney who can set up the trust

The federal legislation that requires broker-dealers to verify the identity of any person opening an account is

the USA PATRIOT Act of 2001

A major benefit of a revocable trust is that

the grantor retains control of the assets. Among the benefits of a revocable trust is that the grantor (settlor) retains all control over the assets. There are no tax benefits, and the grantor can be the beneficiary (and trustee) if the trust is set up that way.

Among the differences between C corporations and S corporations is

the number of allowable shareholders the tax treatment of the corporation's earnings residency requirements of shareholders Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.

One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a general partnership or a C corporation. Among the advantages of operating as a general partnership are

1. Ease of dillution 2. Flow through of income or loss. Unlike a C corporation, operating income or losses of a general partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.

Corporation

A corporation is an entity that has an existence separate from its owners. Therefore, the existence of a corporation does not terminate when an owner dies. Also, because the owners and the corporation are distinct entities, the owners are not personally liable for the corporation's debts.

Ms. Abbot has a joint account with her sister. She enters a sell order in the account and instructs that the proceeds check be made out to her only. If your firm sends the check but makes it payable to both Ms. Abbot and her sister, this is an example of

the proper joint account procedure In joint accounts, either party may act. However, by law, all checks must be made payable to all owners, so the firm is following required procedure.

In a trust account, the person who makes the account management decisions is

the trustee

If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form

a C corporation The investors would form a C corporation. The advantages of the C corporation are that stockholders are not liable for corporate debt; that it is easier to raise money by issuing stock; that it is easier to transfer ownership; and that unlike a partnership or a proprietorship, a C corporation has a continuous life because it does not terminate on the death of shareholders, officers, or directors. An S corporation is limited to 100 investors.

When a will calls for property to be distributed per stirpes, it means that

the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants When a will calls for a per stirpes distribution of assets, it provides that if any named beneficiary predeceases the testator (the maker of the will), surviving children of that individual share in the share that the individual would have received. For example, if the testator had 3 children and 1 of them died first, any children of the deceased would share in their parent's portion (they would split one-third of the estate between them).

Living-will

The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to "pull the plug." There is no such thing as an incapacitated will. A living trust deals with how assets are distributed, and a durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so.

Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? 1.An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer 2.An account opened by a sole proprietor in the name of the company 3.An account opened in the name of ABC Corporation, an S corporation by one of its shareholders 4.An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager

2. 3. Sole proprietorships and S corporations have their income and losses pass through to the owners. Therefore, an account opened in the name of the business will create tax consequences for the owners. Regular, or C corporations, pay taxes on their earnings and, even though a regulated investment company passes through at least 90% of its earnings to shareholders, the tax situation of each individual shareholder of the fund is of no consideration when making recommendations to the fund's portfolio manager.

The customer identification program (CIP) requires that certain information relating to new customers be obtained. Included in that requirement for individual clients who are citizens of the United States are all of the following EXCEPT

current employment status The 4 primary requirements of the CIP are the individual client's name, physical address, DOB, and SSN. Although current employment status would be asked as part of opening a new account, that is not a CIP requirement.

All of the following statements relating to an account registered as tenants in common are true EXCEPT A) cotenants can own unequal percentages of the assets in the account B) upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) C) this form of registration is less common for married couples than JTWROS D) each cotenant has an undivided interest in the entire account

B) Upon death of one of the co-tenants, that individual's share of the account passes through to survivor. Unlike an account registered JTWROS, when a cotenant in a TIC account dies, that individual's share of the account passes to the individual's estate, not the other cotenant(s). That would be the case with JTWROS (which is why that form is far more popular with married couples instead of TIC). In a TIC account, each cotenant has an undivided interest (specific securities in the portfolio are not designated to each cotenant—they share ownership in the entire portfolio). This is not to be confused with the fact that the ownership interests can be unequal. For example, one investor can own 40% of the account and the other 60%. U18LO2

Advantage for S corporation vs C corporation

avoiding double taxation Because an S corporation is taxed like a partnership, all earnings (or losses) flow directly through to the shareholders. This avoids the double taxation inherent in receiving a share of the profits (through dividends) from a C corporation. It is the S corporation that is limited to 100 shareholders. That is why it is not suitable for raising capital through a public offering. The shareholders of both S and C corporations enjoy the benefit of limited liability.