Financial Profile / Ret. and Educ. Savings Plans: Client Financial Profile

A charitable lead trust is an irrevocable gift to a trust where the income generated goes to a named charity (or charities) for a fixed number of years. After the income steam ends, the remainder goes to a named beneficiary (or beneficiaries).

A charitable remainder trust is just the opposite. It provides a steam of income to a named beneficiary (or beneficiaries) over a fixed number of years. After the income stream ends, the remainder goes to a named charity (or charities).

Capital needs analysis

A determination of the amount of life insurance that a customer should purchase, looking at their insurance needs versus their existing coverage.

Per Stirpes

a Latin term used in a will to leave assets to heirs "by the branch." If a named heir predeceases the testator (the person making the will), that person's share goes to his or her children in that family branch.

General partnership

a business form where each partner is an active management participant that shares in income and loss in the business venture. Each general partner has unlimited liability.

Limited liability company

a non-taxable business entity that gives the "flow-through" benefit associated with S Corporations, without the 100 shareholder limitation.

S corporation

a non-taxable business entity with 100 or fewer stockholders. Distributed income is taxed only at the shareholder level at the stockholders' individual tax rates, rather than the corporate tax rate.

Revocable trust

a trust that may be changed or canceled by its grantor or by another person. This type of trust does not avoid estate taxes (as an irrevocable trust does). Income is taxed at the grantor's tax bracket (since the grantor still has control of the assets that generate the income).

Irrevocable/Non-revocable trust

a trust which cannot be changed or canceled once it is set up without the consent of the beneficiary. Irrevocable trusts enable a person to give money and assets away even before death, so that these assets are excluded from that person's estate. Income in an irrevocable trust is taxed at the rates scheduled for trusts.

TOD

acronym for Transfer On Death, a relatively new type of securities registration that allows the registered owner to specify the person to whom the securities will be transferred upon the owner's death. Thus, on death the securities do not go into the name of the estate, and bypass probate.

A married couple buys a house for $150,000. After living in the house for10 years, they sell it for $750,000. The taxable gain is: A $100,000 B $250,000 C $350,000 D $500,000

answer: A) $100,000 When a residence is sold, the first $500,000 of gain (for a married couple) is excluded from tax ($250,000 is excluded for an individual). The sale of this residence resulted in a capital gain of $600,000 ($750,000 sale proceeds - $150,000 cost basis). Since $500,000 of the gain is excluded from tax, $100,000 is taxable.

An investor's securities portfolio has depreciated by $3,000 this year. How much of the loss can the investor deduct on this year's tax return? A 0 B $1,500 C $3,000 D $6,000

answer: A) 0 An investor cannot deduct depreciation of an asset that is currently held as a capital loss. To take the loss, he must first sell those securities. Investors can only deduct $3,000 of net realized capital losses per year. Any losses above this amount are carried forward to future tax years.

Family limited partnerships

used for estate tax planning, where the family members are the partners of the venture. Typically the parents are the general partners who contribute assets to a trust over which they control. The children are the limited partners (the "passive" investors) and take on no management role.

donor advised fund (DAF)

A donor advised fund (DAF) allows investors to donate directly to a charitable fund but retain control over the assets. DAF administrators qualify as public charities under Section 501(c)(3) of the tax code. Donors get an immediate tax deduction for amounts contributed, but contributions are irrevocable. The donor decides when and how much to contribute from the fund to various charities. Any assets not donated grow tax free and the donor decides how they should be invested. DAFs can be administered by community foundations or religious organizations and are also administered by non-profit organizations associated with financial institutions such as Schwab, Fidelity and Vanguard. Aside from the fees charged by the underlying investments (e.g., operating expenses for mutual funds and ETFs), there is an additional layer of administrative fees imposed by the broker. DAFs can be set up with small dollar amounts - often as little as $5,000. In contrast, very wealthy individuals are more like to set up their own charitable foundation. These are separate legal entities that are expensive to establish and that require tax filings. However, they offer a much broader range of tax-deductible giving opportunities than do DAFs. Furthermore, the donor is usually a controlling person on the foundation's Board of Directors or Board of Trustees.

The parties to a trust are the:

Grantor: The person who owns property that is to be managed, controlled, protected and ultimately transferred to heirs by a trust. Trustee: The legal administrator of the trust and the holder to the title of the property of the trust. Beneficiary: The individual(s) to receive benefits or income from the trust property and ultimately to receive the trust property itself.

Totten trust

an account opened at a deposit taking institution that names the beneficiary at the time of account opening, misnamed because it is not a legal trust account. It is similar to a TOD account registration at a brokerage firm. There is no tax deduction and the customer maintains full control over the account and can use the funds as he or she sees fit. When the customer dies, any assets in the Totten trust go to the named beneficiary.

When comparing the characteristics of a General Partnership to a Limited Liability Company (LLC), which statements are TRUE?

answer: Flow through taxation: GP = yes; LLC = yes Limited Liability: GP = no; LLC= yes Limited Liability Companies (LLCs) have both the characteristics of a partnership and a corporation. LLC owners have limited liability, as compared to general partners, which have unlimited liability. As compared to C Corporations, LLCs allow for flow through of income and loss directly to the owners, whereas C Corporations must compute taxable income at the corporate level and pay tax on it before making dividend distributions to shareholders.

A father has two adult sons, Joe and John. Both are named as equal co-beneficiaries in the father's IRA beneficiary designation. Joe has 2 young children and John has 2 young children. If Joe predeceases his father, the IRA assets will now be distributed upon the father's death: A 100% to John B 50% to John; 50% to John's 2 children C 20% to John; 40% to John's 2 children; 40% to Joe's 2 children D 100% to Joe's estate

answer: A) 100% to John When an IRA beneficiary designation specifies "co-beneficiaries," any named beneficiary who predeceases the account owner is simply eliminated from inheritance. Because Joe predeceased his father, he is eliminated from inheritance and now all 100% of the IRA will go to John. Note that this type of distribution is "per capita" distribution of assets.

The maximum tax rate on cash dividends received for an individual who is not in the maximum tax bracket is: A 15% B 25% C 35% D 50%

answer: A) 15% A lower tax rate, 15%, is imposed on cash dividends received from both common and preferred stocks. The intent of this tax benefit is to promote long term equity investment. The 15% rate applies to individuals who are beneath the maximum tax bracket of 37%; for those in the maximum bracket, the rate increases to 20%.

What is a capital needs analysis when referring to life insurance? A A determination of the amount of insurance coverage that must be purchased to meet the desired living standards of the beneficiaries upon the death of the insured B A determination of the annual premium that the insured can afford to pay in order to meet the desired insurance coverage amount C Life insurance software that is internal to the product that will calculate current and future capital needs D A standardized computer program created by the Insurance Company Institute that is used to estimate the amount of life insurance that needs to be purchased

answer: A) A determination of the amount of insurance coverage that must be purchased to meet the desired living standards of the beneficiaries upon the death of the insured A "capital needs analysis" is performed to determine the amount of insurance that should be purchased. It is based on the cash needs upon the insured's death - how much will the funeral cost, how much money is needed to meet the needs of the dependents, how much money is needed to pay estate taxes, etc. existing assets available to pay these expenses, including existing insurance coverage. This calculation is unique to each individual. There is no "standardized computer program" to do this, but each insurance company typically has its own "capital needs" calculator on its website for potential clients to use.

Which business form does NOT allow for flow through of income and loss? A C Corporation B S Corporation C Sole Proprietorship D General Partnership

answer: A) C Corporation A C Corporation must compute net income (or net loss) at the corporate level and pay tax on it. Any distributions to shareholders are made from after-tax income and are then taxed again at the shareholder level. In contrast, S Corporations, sole proprietorships and general partnerships are all not taxable entities. Each item of income and loss from these flows through onto the owner's tax return and is only taxed at the owner level.

A younger female customer, in the highest tax bracket, already has a substantial investment portfolio that is invested in a balance of quality stocks and bonds. She wants an investment that will provide rapid asset growth and is willing to assume risk. The BEST recommendation would be: A Emerging markets fund B Single stock C Municipal bond D Index fund

answer: A) Emerging markets fund Since this customer already has a balanced quality portfolio and is looking for rapid growth, an emerging markets fund would give the customer the rapid growth she is seeking (along with greater risk).

What is a difference between a Limited Partnership and a C Corporation? A Flow through of income and loss B Limit on the number of owners C Unlimited liability for owners D Ability of owners to make management decisions

answer: A) Flow through of income and loss Limited partnerships allow for flow though of income and loss to owners - they are not taxable entities. In contrast, C Corporations are taxable entities and do not allow for such flow through. There is no limit on the number of owners for both (either shareholders or limited partners). Both have limited liability for owners (either limited partners or shareholders). And both do not allow owners to make management decisions.

All of the following business forms have an unlimited life EXCEPT: A General partnership B Limited liability company C S corporation D C Corporation

answer: A) General partnership All corporations have an unlimited life; a change in ownership does not dissolve the corporation. Also, limited liability companies have an unlimited life. Any partnership has a limited life; if there is not a fixed life stated in the partnership agreement; then the life of the partnership ends when the partnership composition changes. If a partner leaves, or a new partner is added; the old partnership is dissolved and a new partnership is formed.

All of the following would be defined as "earned income" under IRS regulations EXCEPT: A Interest payments B Commission payments C Royalty payments D Bonus payments

answer: A) Interest payments Earned income includes wages, salary, tips, commissions, royalties received (such as royalties earned for writing a book), and bonuses. Interest income received is classified as "portfolio" income.

Two individuals are starting a business, where they expect to have losses in the first 3 years, after which the business is expected to be profitable. The BEST business form for these individuals is a: A LLC B Partnership C Sole proprietorship D C corporation

answer: A) LLC A C corporation cannot flow through losses to the business owners, so that business form does not work. A sole proprietorship can only consist of 1 person, so that business form cannot work. So we are left with either a partnership or a limited liability company. If the term partnership is used, this means it is a "general" partnership (the specific wording "limited partnership" is used for limited partnerships). General partnerships allow for flow-through of gain and loss to the business partners, but each partner takes on unlimited liability. In contrast, either a limited partnership or an "LLC" - Limited Liability Company, allows for both flow-through and limits the liability of owners. So the better choice is a limited liability company, since it limits liability.

Income in a non-revocable trust is taxed at the: A corporate rate B individual rate C trust rate D AMT rate

answer: C) trust rate Income in a non-revocable trust is taxed at the rates scheduled for trusts - these are the similar to the rates as for individuals but the brackets "ratchet up" faster to a maximum rate of 40% (in 2023). In contrast, income in a revocable trust is taxed at the grantor's tax bracket (since the grantor still has control of the assets that generate the income).

A bypass trust would be used by: A a married couple B a divorced couple C grandparents for their grandchildren D a couple entering into a second marriage

answer: A) a married couple A bypass trust, also called an A/B trust, is only available to married couples. The intention is to minimize estate taxes. When one spouse dies, the estate's assets are split into 2 separate trusts. The A trust contains the surviving spouse's assets, which he or she can do with as they wish. Estate tax is deferred on this until the death of the surviving spouse. The B trust contains the decedent's assets, in the amount of the estate tax exemption. Thus, there is no estate tax due on the B trust assets. The B trust assets are typically used for the benefit of the surviving spouse, and when he or she dies, the B trust assets are distributed to a named beneficiary or beneficiaries. A Testamentary trust is simply a trust formed upon death (as in "last will and testament"), where the beneficiary is a child or disabled adult, and the trustee will manage the trust assets to provide for their living expenses. An irrevocable trust is just that - the trustor cannot revoke the trust after it is created - so potential control over the assets in the trust is lost. A generation skipping trust (GST) is a complex, difficult to form, trust that would be used by a grandparent to transfer assets to a young grandchild, skipping 1 level of estate tax. You do not need to know the details of a GST for the exam.

In order to establish a retirement financial plan to meet a customer's goals, the most important consideration is: A capital needs B investment objective C current income level D financial experience

answer: A) capital needs A "capital needs analysis" determines the amount of capital that a person needs to have at retirement in order to meet their anticipated standard of living. Most people need less income in retirement than at other stages of life. A "typical" capital needs analysis might project that to retire comfortably in, say, 20 years, an individual will need 75% of his or her current income level. Then the plan looks at the sources of retirement income that the individual will have 20 years in the future (e.g., social security, retirement plan income, annuity income) and subtracts it from that need. The shortfall (if any) is the income that must be "made up." Then the plan looks at that individual's current investment holdings, house value, other asset holdings such as variable annuity or whole life policies, and projects their likely growth 20 years hence. After subtracting loans against these assets, the net equity is the asset base that can be used to generate income in retirement to meet any shortfall. Finally, the plan determines the additional investments, if any, that must be made over the next 20 years to offset the current shortfall. Thus, a capital needs analysis is really looking at the future value of a client's current asset holdings; versus what they will really need as an asset base at retirement at a future date; to support their retirement standard of living.

A customer has $3,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has: A no taxable capital gain or loss B a $3,000 capital gain with no capital loss deduction C a $3,000 capital loss with a $3,000 capital gain carryforward D a $3,000 capital gain and a $3,000 capital loss carryforward

answer: A) no taxable capital gain or loss The tax law allows capital gains and losses to be netted each year. Net capital gains are fully taxable at the tax bracket. However, only $3,000 of net capital losses can be deducted in any year. Any losses above this amount can be carried forward to the next tax year. This customer has no net capital gain or loss. Here, the $3,000 loss is offset by the $3,000 capital gain, for no gain or loss.

A retired customer that has a portfolio of blue chip stocks is looking to supplement his retirement income. An appropriate recommendation would be to: A sell covered calls B sell naked calls C sell covered puts D sell naked puts

answer: A) sell covered calls Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. If the stock stays flat, the calls expire and the customer keeps the premium. If the stock rises, the calls are exercised and the stock is called away at no loss to the customer. If the market falls, the calls expire and the customer loses on the stock (which he would have lost on anyway!).

The parents of a high school student are planning to send the child to college in one year. The investment adviser representative (IAR) should recommend a portfolio that: A tiers Treasury notes over a 5-year time frame B emphasizes municipal bonds of the state where the customer resides C emphasizes investment grade preferred stocks paying a high dividend rate D allocates funds among aggressive growth stocks and large capitalization stocks

answer: A) tiers Treasury notes over a 5-year time frame This child starts college in 1 year, and has another 4 years beyond that to finish school. Since college tuition, books, room and board, etc. must be paid yearly, the best choice is to construct a portfolio that tiers very safe securities such as Treasuries, with each tier maturing annually over the time frame that the student will attend school.

A trust account is opened by an 88-year old uncle who is in declining health. The elderly man is the donor to the account and the terms of the trust state that the assets are to be managed for the benefit of the uncle to provide income until death, at which point the trust assets become the property of the uncle's 31-year old nephew. The nephew is an aggressive investor that is looking for growth. The trustee is obligated to manage the assets of the trust: A with an income objective B with a growth objective C with an objective of both income and growth D as would a prudent man

answer: A) with an income objective This trust is set up for the 88 year old uncle who has an income objective, so the trustee must follow these instructions. Once the uncle dies, then the assets are willed to the nephew and his investment objective would be followed.

An elderly grandfather wants to make sure that, upon death, his 5 year old grandson receives the assets in his brokerage account. The best strategy is to have the grandfather: A open a joint account with the grandson with rights of survivorship B name the child as the POD payee C name a custodian for the child under UTMA as the POD payee D give the account assets to the child now

answer: C) name a custodian for the child under UTMA as the POD payee The issue here is that the kid is very young. Children have no legal capacity and cannot be owners of accounts. If the account is titled as "POD" - Payment On Death - with the child as the payee, then the assets will go to the child upon the grandfather's death, but the child's parents will have to go to court and be appointed as guardians to be able to actually receive the funds. It is much easier to make the POD payee a parent of the child in a custodial account under UTMA. This avoids court involvement to transfer the assets to the grandchild upon the grandfather's death.

Under Internal Revenue guidelines, a short term profit on securities is one which results from a: A short sale of securities that are subsequently repurchased at a higher cost at any date in the future B long sale, at a price higher than the security's cost basis, made within one year following purchase C sale of securities within 30 days of purchase D sale of securities by an insider at a profit within 6 months of purchase

answer: B ) long sale, at a price higher than the security's cost basis, made within one year following purchase Under Internal Revenue rules, a profit (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. Short term capital gains are taxed at a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15% (this increases to 20% for individuals in the highest tax bracket). Anytime you sell short a security, and subsequently repurchase the shares at a higher cost, you would have a short term loss (all gains and losses whenever you sell short are considered "short term"). Do not confuse the IRS definition of short term with the SEC definition for purposes of the insider trading rules. Under the Securities Exchange Act of 1934, "short swing" profits by insiders are those derived within a 6 month period and must be paid back to the issuer.

A customer in the 28% tax bracket has $6,000 of capital gains and $10,000 of capital losses. How much unused loss is carried forward to the next tax year? A 0 B $1,000 C $2,000 D $3,000

answer: B) $1,000 The customer has a capital gain of $6,000 and a capital loss of $10,000 for a net capital loss of $4,000. Only $3,000 of net capital losses can be deducted in a tax year, so $1,000 of the loss is carried forward to the next tax year.

All of the following are considered when evaluating a customer's tax status EXCEPT: A Age B Citizenship C Total earnings as of the last day of the tax period D Residency

answer: B) Citizenship Part of a suitability determination is making inquiry about the customer's "tax status." The higher the customer's income, the higher the tax bracket, making Choice C true. A customer's state of residency is important (Choice D, though "State" is not mentioned) because the customer might live in a State with a high income tax rate, such as California or New York; or might live in a State with no income tax such as Florida or Texas. A customer's age (Choice A) also affects tax status. For example, when a customer turns age 65, his or her personal exemption amount increases. It also affects the taxation of income in a custodial account if the parent is the custodian and the child is age 18 or less. Regarding citizenship, this does not really affect tax status - the customer must pay U.S. income tax on all U.S. income, whether or not he or she is a U.S. citizen (as long as the income is earned in the U.S.).

Which item is NOT included in a client's income statement? A Salary B Insurance policy amount C Interest from municipal bond investments D Property taxes

answer: B) Insurance policy amount The cash value of whole or universal life insurance is included on the client's balance sheet as an asset. The income statement of the client reflects income (wages, commissions, bonuses, dividends, interest on investments) and expenses (living expenses, taxes, interest paid on loans on a mortgage, insurance expenses, etc.). Note that municipal bond interest received is income - it is just tax-free income.

What is the time horizon to be used for the construction of a portfolio that will be used to pay for a child's college education? A Number of years until the child enters college B Number of years until the child finishes college C Number of years until the child can maintain a part-time job D Number of years until the child can maintain a full-time job

answer: B) Number of years until the child finishes college Since payments must be made to cover the entire time that the child will be in college, the portfolio time horizon should be the number of years until the child finishes college.

A divorced man, age 58 has 2 adult children. He is going to marry a widow, age 45, who also has 2 adult children. They decide that when each dies, the assets of that individual will go to that person's children. In addition, the husband wants to make sure that the wife has sufficient income for her remaining life, since she is considerably younger. What type of trust should be established? A Testamentary trust B QTIP trust C Bypass trust D Revocable trust

answer: B) QTIP trust A QTIP trust is a Qualified Terminable Interest Property Trust. It allows the grantor to provide for the surviving spouse, and to also determine how the assets are distributed after the surviving spouse dies. Commonly used in second marriages, this is an irrevocable trust. The surviving spouse receives the income from the trust, and upon his or her death, the remaining assets are distributed to the named beneficiaries of the trust (which would be the children from both (now dead) parents).

The business form that has a limit on the number of owners is a: A C Corporation B S Corporation C General Partnership D Limited Partnership

answer: B) S Corporation S Corporations are limited to 100 shareholders. There is no limit on the number of shareholders in a C Corporation; and there is no limit on the number of partners in either a general or limited partnership.

Which statement is TRUE regarding sole proprietorships? A Sole proprietorships can have an unlimited number of owners B Sole proprietorships are the easiest business type to form C Sole proprietorships can issue different classes of securities D Sole proprietorships offer limited liability to owners

answer: B) Sole proprietorships are the easiest business type to form A sole proprietorship is simply an individual that goes into business for him- or herself. There can only be one owner - the sole proprietor. This is the easiest business to form - there are no State filing papers needed. They cannot issue securities and the sole proprietor has unlimited liability for business debts.

A Totten Trust opened in a deposit taking institution is most similar to a: A joint account B TOD account C LLC account D individual account

answer: B) TOD account A "Totten Trust" is an account that can be opened at a deposit taking institution, where the beneficiary is named on the account. It is the same idea as Transfer On Death (TOD) registration at a brokerage firm. The owner controls the account, can use the funds, can close the account, and can change the beneficiary at any time. When the owner dies, the named beneficiary receives the account's remaining assets. These are typically small accounts for people of modest means who cannot afford to hire a lawyer to set up a trust. Also note that there is no tax benefit to the account - there is no deduction for amounts contributed and all earnings in the account are taxable each year.

2 widowed elderly sisters have decided to jointly buy a retirement house in Florida, so that they can save on living expenses and have companionship. However, they want to make sure that upon death, each one's ownership share goes to her living adult children. How should the ownership of the house be titled? A Joint Tenants With Rights Of Survivorship B Tenants In Common C Transfer On Death D Tenants By Entirety

answer: B) Tenants In Common If the home is titled as Tenants in Common, then a percentage ownership is assigned to each tenant - in this case it would be 50/50. If one tenant dies, her share goes to her estate, and in her will, she can designate that the ownership interest goes to her children. this meets the clients' wishes. If the home is owned as Joint Tenants With Rights Of Survivorship, then each tenant 100% owns the home. If one sister dies, the other sister now 100% owns the home. The half share would not go to the other sister's children. Tenants By Entirety is a variation on JTWROS used in some states and operates the same way. Finally, TOD (Transfer On Death) registration is typically used on individual ownership and not joint ownership. This registration names the beneficiary to whom the asset is to be transferred on the owner's death. So this would seem to be a logical choice. However, if the home were owned jointly TOD, it operates just like the home being owned as JTWROS. If one owner dies, the other now 100% owns the home. When that tenant dies, the home ownership will be transferred to the named beneficiary. So this ownership option also does not meet the clients' wishes.

A trustee for a trust account wants to make an investment in a privately held limited partnership that manufactures flight simulators. The trustee has previously invested in other limited partnerships and has made money in some of the ventures and lost money on others. The trustee is also a pilot and will get a discount if he uses the company's flight simulators for required annual flight training. Which statement is TRUE? A The trustee is prohibited from making the investment because of the potential for a total loss B The trustee is prohibited from making the investment because he will derive a personal benefit C The trustee is prohibited from making the investment because limited partnerships are not publicly traded D The trustee is permitted to make the investment if this is in the best interests of the beneficiary

answer: B) The trustee is prohibited from making the investment because he will derive a personal benefit Trustees are fiduciaries that must manage the trust assets for the sole benefit of the beneficiary(ies) of the trust. The trustee has a "self-interest" here because he is getting discounted flight simulator time if he makes the investment. Such "self-dealing" by a trustee is fraudulent.

Which statement is TRUE regarding family limited partnerships? A At least 1 parent and 1 child must be general partners in the venture B The venture must have a legitimate business purpose other than tax avoidance C Both the general partner(s) and limited partner(s) can assume a management role D Only intangible financial assets can be held in the partnership

answer: B) The venture must have a legitimate business purpose other than tax avoidance Family limited partnerships, like all partnerships, must have a least 1 general partner and 1 limited partner - but there is no stipulation on who must be the general and who must be the limited partner(s). The partnership cannot be formed just to avoid taxes - it must have a legitimate business purpose. Only a general partner can assume a management role - the limited partner(s) remain as passive investors. Finally, any assets can be held in the partnership - real estate is common - not just financial assets.

A husband and wife wish to open a joint account. The husband is concerned that if he is sued, that the assets of the account could be subject to claim and wishes to avoid this. Which statement is TRUE? A This possibility is avoided if the account is opened as Joint Tenants with Rights of Survivorship B This possibility is avoided if the account is opened as Tenants by Entireties C This possibility is avoided if the account is opened as Tenants in Common D This possibility cannot be avoided

answer: B) This possibility is avoided if the account is opened as Tenants by Entireties Tenants By Entireties is a method of joint ownership that is only available to a married couple and which is only available in a limited number of states. Like JTWROS, if one dies, the surviving spouse becomes the sole owner of the property. The transfer of ownership bypasses the will and probate. The big difference is that Tenants By Entireties treats the ownership of the account as one entity. If one of the spouses is sued and a judgement is obtained, the assets in the account cannot be seized. In contrast, with JTWROS, the joint tenants are not considered to be a single legal entity. If a single spouse was sued and a judgement was obtained, the creditor could get 50% of the assets in the account (if the judgement was that large).

A customer wishes to open an account at a bank and name her son as beneficiary. She has $4,500 to deposit and wishes to maintain control of the account and be able to use the funds as she wishes. What type of account can be opened? A POD brokerage account B Totten trust account C Demand deposit account D Intervivos trust account

answer: B) Totten trust account A "Totten Trust" is an account that can be opened at a deposit taking institution, where the beneficiary is named on the account. It is the same idea as Transfer On Death (TOD) registration at a brokerage firm. The owner controls the account, can use the funds, can close the account, and can change the beneficiary at any time. When the owner dies, the named beneficiary receives the account's remaining assets. These are typically small accounts for people of modest means who cannot afford to hire a lawyer to set up a trust. An intervivos trust is a "living" trust, which is a legally set up entity that gives the settlor (the person who creates the trust and donates the assets to the trust) control during the settlor's lifetime. In contrast, a "testamentary" trust is one that goes into effect when the settlor dies. A POD account (Payment on Demand) is another name for a TOD account and is essentially the same thing as a Totten Trust. However, a POD account at a brokerage firm does not meet the customer's requirement to open the account at a bank.

Cash dividends received are: A taxable as short term capital gains B taxable as long term capital gains C taxable as ordinary income at a preferential rate D non-taxable if reinvested via a DRIP

answer: C) taxable as ordinary income at a preferential rate Cash dividends received are taxable as ordinary income - not as capital gains. They are taxed at a preferential 15% maximum rate instead of the regular maximum rate of 37%. The 15% rate applies to individuals who are beneath the maximum tax bracket of 37%; for those in the maximum bracket, the rate increases to 20%. Long term capital gains are taxed under the same rules. The difference is that capital losses can only be offset against capital gains; capital losses cannot be offset against ordinary income. Also note that a DRIP is a Dividend ReInvestment Plan, that many companies offer to shareholders. Shareholders can have their cash dividends automatically reinvested in the purchase of new shares directly from the company at no cost. However, taxes must still be paid.

When will the rules of intestate succession be followed? A Upon the death of the holder of an individual account - POD where the owner dies without leaving a will B Upon the death of a tenant in a joint account held as tenants in common where the tenant dies without leaving a will C Upon the death of a tenant in a joint account held with rights of survivorship where the tenant dies without leaving a will D Upon the death of any owner of an individual securities account or any tenant in a joint securities account

answer: B) Upon the death of a tenant in a joint account held as tenants in common where the tenant dies without leaving a will If an owner of an individual account or a tenant in a joint account held as tenants in common dies, then that person's assets are passed by will. If the individual dies without leaving a will, then the rules of "intestate succession" are followed. This is established by each State, and the estate's assets are distributed to the closest living relatives, with a surviving spouse being first in line to get the assets; then the children; then the siblings; etc. If an individual account is held as POD (payment on death, which specifies the name of the beneficiary to whom the account assets go on death), then the account assets are distributed based on the instructions in the deceased individual's will. If a tenant in a joint account held as "joint tenants with rights of survivorship" dies, then the other tenant now 100% owns the account.

A registered investment adviser has a client who is an exceptionally intelligent doctor of medicine. The doctor does most of his own investment research and makes many of his own investment decisions. The doctor is married, but his wife is not involved in the investment planning or decision-making process. When constructing a portfolio for this client, the investment adviser should: A choose the investments in the portfolio based solely on the research conducted by the doctor B balance the portfolio in a manner that addresses the doctor's investment strategy and that customizes the strategy to meet the needs of the spouse C charge fees on the assets held in the portfolio that were chosen by the investment adviser without using the doctor's research D disregard the doctor's research because the doctor is not properly licensed to act as an investment adviser

answer: B) balance the portfolio in a manner that addresses the doctor's investment strategy and that customizes the strategy to meet the needs of the spouse When constructing a portfolio for a client, the investment adviser can take into account a customer's special expertise in a given area when selecting specific investments. For example, a doctor might have a special insight into the sales prospects for a medical device manufacturer, and could tell the adviser that he wants to invest in this company. It is the role of the adviser to review this investment decision and, if appropriate, to make sure that it is not overweighted in the portfolio. Because the doctor is married, the adviser should construct the portfolio to meet both the needs of the doctor and his wife.

If an investment adviser is appointed by a trustee to manage the financial assets of the trust, the adviser has a fiduciary responsibility to the: A trustee B beneficiary C grantor D donor

answer: B) beneficiary A trustee has a fiduciary responsibility to the beneficiary of the trust.

Under an insurance approach to Capital Needs Analysis, the investment adviser would: A determine the securities to be selected based upon the customer's financial objectives, financial situation and risk tolerance B calculate the insurance coverage needed to complete the customer's financial objective should the customer die prior to the objective being met C invest in securities that have an insurance feature, such as insured municipal bonds and guaranteed investment contracts D only invest in securities issued by insurance companies that are highly rated by Best's

answer: B) calculate the insurance coverage needed to complete the customer's financial objective should the customer die prior to the objective being met An "insurance approach" to a customer's capital needs analysis factors into the investment plan the fact that if the client dies prematurely, then the plan may not be fully funded and the client's beneficiaries may suffer as a result. In such a case, life insurance would be purchased in an amount to complete the funding of the plan if the client dies prematurely. If the insurance policy is owned by someone other than the decedent (e.g., owned by an irrevocable trust or by the spouse of the decedent), then the life insurance proceeds are not included in the decedent's gross estate. In such a case, the amount of insurance needed does not have to be increased to cover additional tax liability.

A business would be formed as an LLC primarily because of the: A ease of formation B characteristic of limited liability C benefit of lower tax rates D characteristic of limited life

answer: B) characteristic of limited liability An "LLC" is a limited liability company. The principal benefit to the owners is that liability is limited in such a business form.

A medical student will complete her residency and go into medical practice in 4 years. She needs to purchase expensive medical equipment to start the practice. In order to determine the amount of money that must be invested today to meet this capital need, all of the following are needed EXCEPT: A current cost of medical equipment B expected level of outstanding student loans C assumed rate of return D expected inflation rate

answer: B) expected level of outstanding student loans In this example, we need to determine the capital need, 4 years from now, to pay for the purchase of the expensive medical equipment. To do so, we would take the current cost of equipment and inflate it over the next 4 years by the expected rate of inflation. Then we need to take this future dollar amount and discount it back by our assumed investment return, to get the dollar amount that must be invested today to fund this capital need. Also note that any student loans that must be repaid are not part of this formula for this specific capital need. However, they are part of the overall bigger picture of this customer's capital needs.

When preparing a financial plan for a client, you should inquire whether the client has considered the purchase of disability insurance if the customer tells you that: A the office where she works is a very stressful workplace B she works in a hospital as a nurse with patients that very ill C on weekends, she stays in shape by rock climbing in the nearby mountains D her husband's family has a history of heart disease on his father's side

answer: C) on weekends, she stays in shape by rock climbing in the nearby mountains Disability insurance replaces lost income if an individual can't work. In order to obtain it, the insurance company has an individual complete a questionnaire to assess the risk that he or she may become disabled. The questionnaire includes whether that person smokes, has a serious medical condition, risky activities (scuba, skydiving, rock climbing, bungee jumping, racing) and family history (age of relative, state of health, cause of death, medical conditions). Disability insurance only replaces lost income. It does not cover medical bills or long-term care costs.

A new client has been employed as a manager at XYZ Corporation (NYSE listed) for the last 20 years and has a defined contribution pension plan at his employer that he has chosen to invest 100% in XYZ Common stock. The value of the pension plan is now $750,000. The customer is 7 years from retirement and has asked for advice about what steps he should take regarding his retirement account. As the adviser to the customer, your IMMEDIATE concern should be the: A investment outlook for XYZ Corporation over the upcoming 7 years B fact that the customer is concentrated in one stock and lacks diversification in his portfolio C dividend rate paid by XYZ and whether it is sufficient to meet the customer's need for income in retirement D the possibility that XYZ Corporation could go bankrupt prior to the death of the customer

answer: B) fact that the customer is concentrated in one stock and lacks diversification in his portfolio This is the client's sole investment to fund his retirement. The immediate concern should be the customer's lack of diversification. If the customer were to sell a portion of the XYZ stock and reallocate it to other investments, the client will reduce overall risk. Choices A, C and D are also concerns, but they are longer term concerns in this situation.

When an agent of an investment adviser prepares a client balance sheet, which of the following is a personal possession? A residence B furniture C checking account D investments

answer: B) furniture A "personal possession" of a customer is an item that is typically kept in the customer's home. These include furniture, artwork, jewelry, clothing, etc. This is basically an "insurance" definition for items that would be covered under a personal possessions insurance policy. A client's home itself is insured separately and is not a "personal possession." Finally, checking accounts, savings accounts, and investment accounts are categorized separately as customer assets and are not included in the list of personal possessions.

Disability insurance coverage should be part of a customer's financial plan if the customer is concerned about the possibility of: A uncovered medical expenses B loss of income due to illness or injury C long-term health care costs D insufficient income in retirement

answer: B) loss of income due to illness or injury Disability insurance replaces lost income if an individual can't work. In order to obtain it, the insurance company has an individual complete a questionnaire to assess the risk that he or she may become disabled. It does not cover medical expenses or long-term health care costs. Most disability policies, since they are replacing earned income, do not cover an individual in retirement. Finally, most disability policies cover a fixed number of years (5, 10, 20 years of payments - the longer, the more expensive the policy).

All of the following would be found on a client's personal balance sheet EXCEPT: A cash in savings accounts B mortgage interest paid C equity in a brokerage firm account D mortgage loan payable

answer: B) mortgage interest paid A mortgage is a secured liability of an individual; savings account balances are an asset; and equity in a brokerage account is an asset. All would appear on an individual's balance sheet. On the other hand, mortgage interest paid would show on one's income statement; not on the balance sheet.

Investor likes and dislikes that must be taken into account when making a recommendation to a customer is an example of: A financial considerations B non-financial considerations C investment horizon D investment style

answer: B) non-financial considerations When making a recommendation, taking into account investor likes and dislikes is an example of "non-financial" considerations. For example, a customer may refuse to invest in a gambling stock or a tobacco stock due to ethical concerns.

A customer has invested in a real estate business that is being managed by a third party. Any income from the investment would be characterized for tax purposes as: A portfolio income B passive income C earned income D alternative income

answer: B) passive income Passive income and loss is defined as that derived from real estate investments and limited partnership investments. Passive losses can only be offset against passive income. Passive losses cannot be offset against investment income or earned income.

An 80-year old client lives on his social security payments that total $25,000 per year. 3 years ago, on the advice of the broker, he invested in a technology fund where he lost most of his assets. The remaining balance in his brokerage account is $17,000. The client has annual living expenses of $30,000 and a net worth of $128,000. The customer approaches a new broker to take over management of his account. The representative that receives the account should: A do nothing B sell the holding in the account and invest the proceeds in a more conservative fund within the same family of funds C sell the holding in the account and invest the proceeds in a more conservative fund outside the family of funds D sell the holding in the account and invest the proceeds in a more conservative fund that has a deferred sales charge

answer: B) sell the holding in the account and invest the proceeds in a more conservative fund within the same family of funds This customer should be invested in a safe income fund that will provide the "extra" $5,000 in annual income needed to meet this customer's income shortfall (the customer is living on $25,000 of social security but has $30,000 of annual living expenses). The question does not give an option of selling the tech fund and investing the proceeds in an income fund! Of the choices offered, Choice B is best because there will be no (or a lower) sales charge for moving assets within a family of funds, as opposed to investing the proceeds in a new fund family. Choice D is not correct because this customer is elderly and has a high probability of dying before the contingent deferred sales charge would be depleted to "0" (this usually occurs over a 7-year time frame, and this customer is now 80 years old). If the customer died, say 2 years later, and the estate liquidated the holding, then the CDSC (Contingent Deferred Sales Charge) would have to be paid.

A married couple, the husband is age 27 and the wife is 25, have 2 young children, no retirement plan and no investments. Based on this information, an agent should: A tell the clients to establish a Roth IRA B tell the clients to establish 529 plans for their children C talk to the clients about their financial goals D determine that the clients have cash available for investment

answer: C) talk to the clients about their financial goals We certainly don't know much here from the information given. The best of the choices offered is to talk to the clients about their financial needs and goals and then establish an investment plan to get them there, based on the funds that they have available for investment, their risk tolerance, investment time horizon, etc. While determining that the customers have (or will have) cash available for investment is part of the process, Choice C is the better answer. Also note that specific investments (Choices A and B) cannot be recommended until the investment plan is completed.

A father is writing his will (the testator) and is naming as beneficiaries his 2 adult sons - Son A and Son B. Each one will get an equal share "per stirpes" of the father's estate upon the father's death. Each of the sons has children (the grandchildren of the testator) who are not yet adults. Son A has 2 children - A1 and A2. Son B has 1 child - B1. Son B predeceases the testator. This means that: A Son A gets 100% of the assets of the estate upon the death of the testator B the grandchild B1 gets 50% of the assets of the estate upon the death of the testator C the grandchildren A1, A2, and B1, each get 33% of the assets of the estate upon the grandfather's death D no assets will be distributed upon the death of the testator until the grandchildren become adults

answer: B) the grandchild B1 gets 50% of the assets of the estate upon the death of the testator When a will is created, the estate can be distributed either "per capita" or "per stirpes." These 2 ways deal with the issue of a named beneficiary dying before the testator. "Per stirpes" is Latin for "by the branch." What this means is that each family branch gets an equal share of the estate. So if the father has 2 sons, Son A and Son B, each gets 1/2 of the father's estate upon the father's death. If Son B dies before the father, the 1/2 share now goes to the children of Son B- since there is only 1 child - B1 - he or she gets the 50% share.

A customer has the following balance sheet: Cash: $ 30,000 Marketable Securities: $100,000 Market Value Retirement Portfolio: $200,000 Market Value - Cars:$ 40,000 Market Value - Home:$250,000 Market Value - Personal Items and Furnishings:$ 50,000 Bills Payable:$ 10,000 Car Loan: $ 20,000 Mortgage on Home:$100,000 The customer's net worth is: A $130,000 B $330,000 C $540,000 D $670,000

answer: C) $540,000 Net worth is all assets minus all liabilities. Assets Cash: $ 30,000 Securities: $100,000 Retirement Portfolio: $200,000 Cars:$ 40,000 Home:$250,000 Personal Items:$ 50,000 Liabilities Bills Payable:$ 10,000 Car Loan: $ 20,000 Mortgage:$100,000 Total Assets = $670,000; Total Liabilities = $130,000 Net Worth = $670,000 - $130,000 = $540,000

Which statement is TRUE about capital gains taxes? A gain on a security held over: A 6 months is taxed at a lower rate than a gain on a security held over 3 months B 9 months is taxed at a lower rate than a gain on a security held over 6 months C 12 months is taxed at a lower rate than a gain on a security held over 9 months D 15 months is taxed at a lower rate than a gain on a security held over 12 months

answer: C) 12 months is taxed at a lower rate than a gain on a security held over 9 months The maximum tax rate on short term capital gains (a gain on an asset held 12 months or less) is 37% (the maximum individual tax rate). For assets held over 12 months, the maximum tax rate drops to 15% (this increases to 20% for individuals in the highest tax bracket).

Dividend payments made by which of the following are qualified? A Real Estate Investment Trusts B Master Limited Partnerships C Foreign companies that are listed in the United States D Short seller of stock who remits a payment in lieu of a dividend to the individual from whom the stock was borrowed

answer: C) Foreign companies that are listed in the United States Non-qualified dividends, which are taxed at rates up to 37% include dividends received from Real Estate Investment Trusts and Master Limited Partnerships. These are viewed as a pass-through of income, rather than being a true dividend. Finally, the borrower of shares must "pay" the dividend to the person from whom the shares are borrowed. This is called a "payment in lieu of a dividend" and does not get preferential tax treatment.

Who contributes assets into a trust? A Trustee B Custodian C Grantor D Beneficiary

answer: C) Grantor This one is pretty simple. The trustee administers a trust for the benefit of a beneficiary. The person who donates the assets into the trust is the grantor.

POD account registration stands for: A Pay on Date specified by customer B Pay on Disability of customer C Pay on Death of customer D Pay on Direction of customer

answer: C) Pay on Death of customer Pay On Death is a relatively new type of account registration that allows the registered owner to name the person into whose name the securities will be transferred upon the death of the customer. Thus, the securities are not required to be transferred into the name of the estate; and then retransferred to the beneficiary; after the estate clears probate.

All of the following accounts avoid probate upon death of an owner EXCEPT: A Totten trust B JTWROS C Tenants in Common D Payable on Death

answer: C) Tenants in Common

Two individuals own a joint account as tenants in common. One dies without a will. What happens? A The survivor now 100% owns the account B The provisions of common law are followed C The rules of intestate succession are followed D The state takes the deceased's share as unclaimed property

answer: C) The rules of intestate succession are followed When a joint account is owned as "tenants in common" there is a specified ownership percentage for each tenant. If a tenant dies, his or her share goes to the estate and is passed by will. If the tenant dies without a will ("intestate"), then the rules of intestate succession are followed. This is established by each State, and the estate's assets are distributed to the closest living relatives, with a surviving spouse being first in line to get the assets; then the children; then the siblings; etc.

5 brothers wish to form a company as a Subchapter S Corporation, along with other outside shareholders. Which statement is TRUE about this? A There can only be 1 family member owner per Subchapter S corporation, so this is not permitted B They are permitted to be owners of the Subchapter S Corporation and count as 5 separate shareholders against the limit of 100 shareholders in a Subchapter S Corporation C They are permitted to be owners of the Subchapter S Corporation and count as 1 shareholder against the limit of 100 shareholders in a Subchapter S Corporation D They are permitted to be owners of the Subchapter S Corporation but they have no voting rights because of the family relationship

answer: C) They are permitted to be owners of the Subchapter S Corporation and count as 1 shareholder against the limit of 100 shareholders in a Subchapter S Corporation Family members in a Subchapter S Corporation count as "1" owner. So the 5 brothers would count as "1" owner against the 100 owner limit.

The person that administers a trust is the: A grantor B beneficiary C trustee D conservator

answer: C) trustee This one is pretty simple. The trustee administers a trust for the benefit of a beneficiary. The person who donates the assets into the trust is the grantor.

A husband and wife wish to form a company as a Subchapter S Corporation, along with their 2 adult children. Which statement is TRUE about this? A There can only be 1 family member owner per Subchapter S corporation, so this is not permitted B They are permitted to be owners of the Subchapter S Corporation with the husband and wife counting as 1 shareholder; and the 2 adult children counting as 1 shareholder; against the limit of 100 shareholders in a Subchapter S Corporation C They are permitted to be owners of the Subchapter S Corporation, with all 4 family members counting as 1 shareholder against the limit of 100 shareholders in a Subchapter S Corporation D They are permitted to be owners of the Subchapter S Corporation, with each family member counting as 1 shareholder against the limit of 100 shareholders in a Subchapter S Corporation

answer: C) They are permitted to be owners of the Subchapter S Corporation, with all 4 family members counting as 1 shareholder against the limit of 100 shareholders in a Subchapter S Corporation Family members in a Subchapter S Corporation count as "1" owner. So the husband and wife, along with their 2 adult children, would count as "1" owner against the 100 owner limit.

A retired customer has an existing stock portfolio held in a cash account. He has heard that "leveraging" his portfolio can increase his return. The portfolio holds blue chip stocks that pay current dividends. He wants to transfer the positions to a margin account and use them as collateral to buy more stocks of the same blue chip companies. Which statement is TRUE? A This is an appropriate strategy that will increase the customer's income B This is not an appropriate strategy because the customer's tax liability will increase if the securities appreciate and are sold C This is not an appropriate strategy because the customer's income will decline D This is an appropriate strategy because the customer has the potential for larger capital gains

answer: C) This is not an appropriate strategy because the customer's income will decline This customer needs income. If he margins the blue chip stock positions to "double up" on the amount of stock owned (since Regulation T margin is 50%), this does not come for free! He is borrowing the extra money to buy the new shareholding, using his existing stock as collateral, and he must pay interest on the loan. The interest charge will eat up any dividends that the stocks pay - so there goes his income!

TOD account registration stands for: A Transfer on Date specified by customer B Transfer on Disability of customer C Transfer on Death of customer D Transfer on Direction of customer

answer: C) Transfer on Death of customer Transfer on death is a relatively new type of account registration that allows the registered owner to name the person into whose name the securities will be transferred upon the death of the customer. Thus, the securities are not required to be transferred into the name of the estate; and then retransferred to the beneficiary; after the estate clears probate.

A woman, age 45, has just inherited $5 million from a deceased relative. She already has substantial assets and income and does not need the money. She wants to give it all to charity so that she can get a tax deduction, but she wants to remain in complete control of the money, how it is invested and how it is spent. The best recommendation is that she establish and donate into a: A testamentary trust B foundation C charitable lead trust D charitable remainder trust

answer: C) charitable lead trust The grantor of a trust can be the trustee - and the trustee gets to make all of the decisions regarding the actions of the trust. This meets the customer's requirement that she retain control of the assets. When assets are donated to a foundation, the foundation has a Board of Trustees that makes the decisions. The customer could "influence" those decisions and could be on the Board of Trustees, but the majority vote of the Board (with at least 3 trustees) determines the actions taken by the foundation. So to retain control, it must be a trust. The next question is: "What type of trust?" A testamentary trust is one that is created when an individual dies (as in "last will and testament"). The customer must create a living trust (inter-vivos) to retain control and furthermore, it should be a charitable lead trust to get a tax deduction. In a charitable lead trust, the donor retains control of the contributed assets and gets a tax deduction for the contribution, with any income from those assets going to the specified charity for a set number of years. When the trust expires, the remaining assets go to a party of the donor's choosing - usually family members. In this case, the trust would make payouts annually to deplete the assets over the life of the trust. A charitable remainder trust is often viewed as the opposite of a charitable lead trust. In a charitable remainder trust, the annual income from the trust goes to a designated beneficiary(ies) such as children of the grantor, and then upon death of the grantor, the "remainder" is given to a charity. In such a trust, the tax deduction is lower, because it is based on the expected "present value" of the remainder that will go to charity at the termination of the trust.

A father is writing his will (the testator) and is naming as beneficiaries his 3 adult sons. Each one will get an equal share "per stirpes" of the father's estate upon the father's death. Each of the sons has children (the grandchildren of the testator) who are not yet adults. If one of the sons predeceases the testator, then the: A deceased son's share goes into the son's estate B deceased son's share passes to his brothers C deceased son's share passes to his children D deceased son's share reverts back to the father's estate

answer: C) deceased son's share passes to his children When a will is created, the estate can be distributed either "per capita" or "per stirpes." These 2 ways deal with the issue of a named beneficiary dying before the testator. "Per stirpes" is Latin for "by the branch." What this means is that each family branch gets an equal share of the estate. So if the father has 3 sons, Son A, Son B and Son C, each gets 1/3rd of the father's estate upon the father's death. If Son A dies before the father, the 1/3rd share now goes to the children of Son A.

A major disadvantage of forming a C Corporation as compared to other business forms is: A unlimited liability B a limit on the number of shareholders C double taxation of dividends received by shareholders D an inability to issue senior securities

answer: C) double taxation of dividends received by shareholders C Corporations place a limit on liability of shareholders; can have an unlimited number of shareholders; and can issue preferred stock and bonds (senior securities). These are all advantages. The disadvantage is that a C Corporation is a taxable entity. The corporation pays tax on its net income and can distribute part of its after-tax income to shareholders as a dividend. The shareholder must pay tax on the dividend received, so it is said to be "double taxed." By the way, the preferential 15% tax rate on corporate dividends is intended to partially offset this negative factor.

A firm holds a joint cash account for a husband and wife. The wife calls the registered representative and says "Sell 500 shares of ABC out of the account immediately and send a check for the proceeds made out to my name." The representative should inform the wife that: A her instructions will be followed exactly B the transaction requires approval of the husband since it is a joint account C the trade can be performed but the check must be made out to both names on the account D a written power of attorney must be on file to perform the trade

answer: C) the trade can be performed but the check must be made out to both names on the account Any party in a joint account can enter orders. However, any checks drawn on the account must be made out to all names on the account.

A Registered Investment Adviser has been retained by a trustee to develop an investment plan for the trust. Such a plan would consider all of the following EXCEPT: A inflation forecast B investment objectives C will for the trustee D liquidity needs

answer: C) will for the trustee The investment plan for a trust must consider the trust's investment objectives, which must be in accordance with the grantor's or settlor's wishes; the liquidity needs (what needs to be paid out of the trust currently to meet the needs of the beneficiaries); and also must take into account any projected inflation (which will influence the investment to be made and the needed payouts in the future). The will of the trustee has nothing to do with this. Remember that the trustee is the fiduciary who oversees the management of trust so that it meets the needs of the beneficiaries. What the trustee does in his or her own will has no bearing on the management of the trust (also, if the trustee dies before the trust is terminated, the trust document will provide for a successor trustee).

A customer has $10,000 in passive losses from a limited partnership investment. If the customer has $10,000 of passive income for that tax year, the customer may deduct: A 0 B $3,000 C $5,000 D $10,000

answer: D) $10,000 Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. Since there is $10,000 of passive income for this tax year, the $10,000 of passive losses can be deducted in full.

An older customer, age 63, that is in the lowest tax bracket, seeks an investment that will give him an income stream. The BEST recommendation would be: A Variable annuity B Municipal bond C Certificate of deposit D AAA Corporate bond

answer: D) AAA Corporate bond Because the customer is in a low tax bracket, you would not recommend the municipal bond. Most variable annuity separate accounts are invested in equities for growth to supplement other forms of retirement income. Because they are equity funds, they do not give much of an income stream. The CD and the AAA Corporate bond both provide income, which is the stated objective. However, the AAA corporate bond is top-rated and will give a higher income stream than a CD. This is the best choice. Note that the question tells us nothing about risk tolerance, which would certainly be helpful, but this is typical of "test-like" questions!

Which of the following would NOT be included in a client's cash flow statement? A Salary B Rents C Taxes D Assets

answer: D) Assets Assets show on a balance sheet. Salary, rents and taxes paid would show on both an income statement and a cash flow statement.

When comparing a C corporation to an S corporation, which statement is FALSE? A Both C corporations and S corporations give the shareholders limited liability B Income in a C corporation is taxable to the corporation, while income in an S corporation is not taxable to the corporation C C corporation shares can be publicly traded, while S corporation shares cannot be publicly traded D C corporations are treated similar to partnerships for federal tax purposes, while S corporations are federally taxable entities

answer: D) C corporations are treated similar to partnerships for federal tax purposes, while S corporations are federally taxable entities C corporations are taxable entities - net income is computed at the corporate level and taxes are paid on this income. S corporations are "flow through" vehicles, similar to partnerships. Any net income or loss "flows through" directly onto the shareholders' tax returns and is not taxed at the corporate level. Taxation only occurs at the investor level. Both C and S corporations give limited liability; and only C corporation shares are publicly traded because S corporations are limited to a maximum of 100 shareholders - not enough for an exchange listing.

All of the following business forms give a "flow-through" tax benefit and limited liability to owners EXCEPT: A Limited Partnership B S Corporation C Limited Liability Companies D General Partnership

answer: D) General Partnership Limited liability is only provided by limited partnerships; corporations (whether S or C); and limited liability companies. Sole proprietorships and general partnerships have unlimited liability. Flow-through taxation is provided by S corporations, partnerships, sole proprietorships, and limited liability companies. The only business entities that provide both unlimited liability and flow-through taxation are general partnerships and sole proprietorships.

All of the following are defined as "portfolio income" under IRS guidelines EXCEPT: A Dividends received from common stock holdings B Interest income received from bond holdings C Proceeds from the sale of securities in excess of the tax basis of those securities D Royalties received from oil and gas limited partnership holdings

answer: D) Royalties received from oil and gas limited partnership holdings Income from partnership interests is defined as "passive income" under IRS rules. Royalties from oil and gas limited partnerships are thus "passive income". Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.

A business entity that has the legal protections of a corporation and the tax benefits of a partnership is a: A general partnership B limited partnership C C Corporation D S Corporation

answer: D) S Corporation A Subchapter S Corporation gives its shareholders limited liability (liability limited to the investment made), along with the flow-through tax benefits of a partnership because the corporation itself is not taxable. However, these are designed for smaller companies, since they can only have a maximum of 100 shareholders. A C Corporation is taxable and then distributes after-tax income to shareholders as a dividend, which is taxed again at the shareholder level. There is no flow-through tax benefit. General partners have unlimited liability - they do not get the benefit of limited liability given to shareholders. In a limited partnership, the limited partners have limited liability, however the general partner (each limited partnership must have at least 1 general partner) still takes on unlimited liability.

Which statement is TRUE about the grantor of a trust? A The grantor can be the grantor only B The grantor can be the trustee C The grantor can be the beneficiary D The grantor can be any of the above

answer: D) The grantor can be any of the above In a "living trust," the grantor holds all 3 positions (grantor, trustee and beneficiary). Living trusts are most often used to make sure that assets can be passed to heirs upon death without having to go through probate. The grantor is also the trustee, thus this individual maintains control over the trust assets. During the life of the grantor, the grantor is the trustee and also the beneficiary. When the grantor/trustee/beneficiary dies, then the assets are passed to the other named beneficiaries of the trust without going through probate court.

A Registered Investment Adviser is approached by the heirs of an estate to manage their newly received assets. The account would be substantial, but the adviser is concerned that the heirs might be overly litigious. The adviser wishes to limit his liability as a fiduciary to minimize this risk. Which statement is TRUE? A The investment adviser can get a signed letter from the beneficiaries, relieving the adviser of his fiduciary obligation B The investment adviser can subcontract out the management of the money to a subadviser, who will assume the fiduciary responsibility C The investment adviser can petition a court of law to void the adviser's fiduciary standard D The investment adviser cannot limit his fiduciary responsibility and liability

answer: D) The investment adviser cannot limit his fiduciary responsibility and liability Inherent in the role of an investment adviser is the fiduciary standard - the adviser must always act in the best interests of the person being advised and assumes liability for breach of this fiduciary obligation.

A QTIP trust would be used by: A a married couple B a divorced couple C older grandparents for their younger grandchildren D a couple with adult children entering into a second marriage

answer: D) a couple with adult children entering into a second marriage A QTIP trust is a Qualified Terminable Interest Property Trust. It allows the grantor to provide for the surviving spouse, and to also determine how the assets are distributed after the surviving spouse dies. Commonly used in second marriages, this is an irrevocable trust. The surviving spouse receives the income from the trust, and upon his or her death, the remaining assets are distributed to the named beneficiaries of the trust (which would be the children from both (now dead) parents).

All of the following can be the same person in a trust EXCEPT: A grantor B trustee C beneficiary D executor

answer: D) executor An executor is the person who oversees the distribution of assets of a person that is deceased, based on that person's will. The term has nothing to do with trusts.

A socially responsible investor does not want to own oil or coal company stocks because of their contribution to global warming. This investment philosophy is an example of: A strategic asset allocation B tactical asset allocation C dynamic asset allocation D extra-financial investment considerations

answer: D) extra-financial investment considerations When an investment decision is being made where earning money is not the primary consideration, this is an "extra-financial" investment consideration. An investor might wish to not invest in gun manufacturers or in companies that pollute. He or she might want to invest in companies that support sustainability, etc. These are all "extra-financial" investment considerations.

When an agent of an investment adviser prepares a client balance sheet, all of the following are considered to be personal possessions EXCEPT: A artwork B furniture C jewelry D investments

answer: D) investments A "personal possession" of a customer is an item that is typically kept in the customer's home. These include furniture, artwork, jewelry, clothing, etc. This is basically an "insurance" definition for items that would be covered under a personal possessions insurance policy. A client's home itself is insured separately and is not a "personal possession." Finally, checking accounts, savings accounts and investment accounts are categorized separately as customer assets and are not included in the list of personal possessions.

All of the following are advantages of starting a business using a general partnership structure EXCEPT: A ease of formation B no limit on the number of owners C flow-through taxation D no limit on liability of owners

answer: D) no limit on liability of owners General partnerships (and sole proprietorships) are the oldest business forms. These are not State-created entities like corporations, which give owners limited liability. Rather, one simply goes into business, but each owner has unlimited liability - making Choice D incorrect. General partnerships are easy to form (just go into business - no State paperwork required). The partnership itself is not a taxable entity - all income and loss flows-through onto each partner's tax returns and is only taxed at the partnership level. Finally, there is no limit on the number of partners.

All of the following are features of a Donor Advised Fund EXCEPT: A immediate tax deduction B tax free growth of investments made C flexibility of choice and timing of charitable contributions D operating expense waiver on investments made

answer: D) operating expense waiver on investments made

A Registered Investment Adviser (RIA) has managed $5,000,000 of a customer's funds successfully for many years. The customer asks the RIA to prepare a revocable trust for his children and tells the RIA to transfer $2,000,000 of his funds into the trust and trade the new account in the same manner as the existing account. The RIA should: A open the account and begin trading B tell the customer to contact a tax specialist C explain to the customer that revocable trusts cannot be traded D refer the client to an attorney that can set up the trust

answer: D) refer the client to an attorney that can set up the trust Trusts must be established as legal entities in a State, similar to establishing a corporation or partnership in a State. The best choice is to have the customer contact an attorney who is qualified to establish such a trust.

To open an account for an individual customer, an investment adviser representative should do all of the following EXCEPT: A determine that the customer has an adequate liquid emergency fund B determine that the customer has adequate insurance coverage to meet expected needs C investigate and discuss the customer's investment goals and needs over the investment time horizon D require the customer to pay off all credit card balances prior to making investment recommendations

answer: D) require the customer to pay off all credit card balances prior to making investment recommendations The first 3 choices are reasonable. To open an account for an individual customer, an adviser representative should determine that the customer has adequate emergency funds; has adequate insurance coverage; and should investigate and discuss the customer's investment goals and needs. Requiring the customer to pay off credit card balances, while probably a good thing, has no relevance.

Which of the following items are included as deductible passive losses on the income tax returns of limited partnership investors? I Interest payments on secured debt II Principal payments on secured debt III Intangible drilling costs IV Depletion allowances

answer: I, III, IV Interest payments on loans, intangible drilling costs (the cost of drilling for oil and gas), and depletion allowances (the recovery of monies paid to buy the oil or gas reserve) are all tax deductible items under the Internal Revenue Code since they are "ordinary and necessary business expenses." Repayment of principal on a loan is not tax deductible.

A middle-aged couple that is renting an apartment wants to determine the amount of money needed today to buy a retirement home in 10 years. To calculate the amount of money that would be required to be invested today, all of the following are needed EXCEPT: A expected rate of inflation B assumed rate of return on investment C current cost of the home D risk free rate of return on investment

answer: D) risk free rate of return on investment In this example, we need to determine the capital needed 10 years from now to buy the house. To do so, we would take the current cost of the house and inflate it over the next 10 years by the expected rate of inflation. Then we need to take this future dollar amount and discount it back by our assumed investment return, to get the dollar amount that must to be invested today to fund this capital need The risk free rate of return is not part of the formula (unless the couple wanted to make their required investment in ultra-safe short term Treasury securities, which will give an extremely low rate of return - not the best idea).

Dividend payments made by which of the following are qualified? I Equity mutual funds II Real Estate Investment Trusts III Foreign companies that are listed in the United States IV Master Limited Partnerships

answer: I and III Dividends paid by U.S. corporations generally qualify for the lower 15% tax rate, and this includes equity mutual fund dividends. Dividends paid by foreign corporations to U.S. security holders qualify for the lower rate if: - The corporation is incorporated in a country that has a comprehensive tax treaty with the United States; - The corporation is incorporated in a U.S. possession; or - The corporation has its shares listed on an established trading market in the United States. Non-qualified dividends, which are taxed at rates up to 37% include dividends received from Real Estate Investment Trusts and Master Limited Partnerships. These are viewed as a pass-through of income, rather than being a true dividend.

Which of the following statements are TRUE regarding a joint account with tenancy in common? I A specific percentage ownership is assigned to each party II Each party owns an undivided interest in the account III If one party dies, that person's interest goes to his beneficiary or estate IV If one party dies, the other party wholly owns the account

answer: I and III In a joint account with tenancy in common, each owner has a divided interest in the account. A specific percentage ownership is assigned to each participant. If one party should die, that person's percentage interest goes to his beneficiary or estate.

Which of the following statements are TRUE regarding revocable trusts? I Income is taxed at the rate scheduled for the grantor II Income is taxed at the rate scheduled for the trusts III The grantor has control over the assets IV The trustee has control over the assets

answer: I and III Income in a revocable trust is taxed at the grantor's tax bracket (since the grantor still has control of the assets that generate the income). Contributions can be taken out of the trust by the grantor (as the gifts were revocable). In contrast, income in a non-revocable trust is taxed at the rates scheduled for trusts - these are the same rates as for individuals but the brackets "ratchet up" faster to a maximum rate of 40% (in 2023).

Which of the following statements are TRUE regarding trusts? I Trusts are federally taxable entities II Trusts are federally tax-exempt entities III Trusts eliminate estate taxes IV Trusts do not eliminate estate taxes

answer: I and IV Trusts are federally taxable entities, so there is no tax deferred build-up of earnings in the trust. Trusts do not eliminate estate taxes (otherwise everybody would use them!).

Which of the following accounts avoid probate upon death of an owner? I Totten trust II JTWROS III Transfer On Death IV Tenants in Common

answer: I, II, III A Totten trust is a bank account, not a securities account. It allows the depositor to name a beneficiary, to whom the funds go upon death, bypassing the estate and probate. If an account is opened as Joint Tenants with Rights of Survivorship, each tenant 100% owns the account - when one dies, the other 100% owns the account, bypassing the estate and probate. Opening an Individual account-TOD (Transfer on Death) permits the transfer of assets directly to the named beneficiary upon death of the account owner, bypassing the estate and probate. If an account is opened as a Joint Account with Tenants in Common, there is a specified ownership percentage for each tenant. Upon death of 1 tenant, that person's percentage goes to his or her estate, is passed by will and must go through probate (where someone could contest the transfer).

The settlor of a trust does which of the following? I Donates the assets to the trust II Appoints the trustee III Establishes the purpose of the trust IV Manages the assets of the trust

answer: I, II, III The "settlor" of a trust is the person who grants property to the trust for the benefit or one or more beneficiaries. The settlor is also called the grantor, donor or trustor. The trustee is appointed by the settlor to manage the assets of the trust in the best interest(s) of the beneficiaries. The settlor establishes the purpose of the trust and names the beneficiaries. The settlor does not manage the trust assets - this is done by the trustee (who is usually a third party, but in rare cases, the settlor can also act as trustee).

Which of the following statement(s) is (are) TRUE regarding family limited partnerships? I The venture must have a legitimate business purpose other than tax avoidance II The partnership must have at least 1 general partner and 1 limited partner III Only general partners can assume a management role IV Any asset can be held in the partnership

answer: I, II, III, IV Family limited partnerships, like all partnerships, must have a least 1 general partner and 1 limited partner - but there is no stipulation on who must be the general and who must be the limited partner(s). The partnership cannot be formed just to avoid taxes - it must have a legitimate business purpose. Only a general partner can assume a management role - the limited partner(s) remain as passive investors. Finally, any assets can be held in the partnership - real estate is common - not just financial assets.

An account is opened "joint tenants with rights of survivorship." Which of the following statements are TRUE? I If one party to the account dies, the other party wholly owns the account II Orders may be given by either party III Checks can be drawn in the name of either party IV Mail can be sent to either party

answer: I, II, IV Any checks drawn on an account are made out to the full account name. If it is a joint account, the names of the parties on the account will be on the check - not just one of the parties. In a joint account, orders can be entered by either party; mail can be sent to either party, and in an account with rights of survivorship - if one party dies, the other party wholly owns the account.

Which of the following are types of joint accounts? I Partnership account II Tenancy in common account III Joint tenants with rights of survivorship account IV Custodial account

answer: II and III In a joint account, each owner can trade the account and can draw checks in the account's name. The joint account ownership options are Tenants in Common - each person has a divided interest; and Joint Tenancy - each person has an undivided interest. Custodial accounts are not joint accounts - the minor is not authorized to trade the account nor can he or she draw checks from the account. Only the custodian can perform these actions. Similarly, in a partnership account, only the designated partner(s) authorized in the partnership agreement can trade the account and draw checks - each individual partner is not permitted to do so.

A State's "Legal List" will typically consist of which of the following securities? I Low grade securities II High grade securities III Low risk securities IV High risk securities

answer: II and III Many States establish a "Legal List" of permitted investments for fiduciaries. The legal list typically consists of ultra-safe securities - generally U.S. Government bonds, government agency bonds, and AAA rated corporate and municipal securities. These securities would be high grade; and low risk.

In a joint tenants with rights of survivorship account: I a specific percentage ownership is assigned to each party II each party owns an undivided interest in the account III if one party dies, that person's interest goes to his beneficiary or estate IV if one party dies, the other party wholly owns the account

answer: II and IV In a joint tenants with rights of survivorship account, each party owns an undivided interest in this account, that is, legally each tenant 100% owns the account. If one person dies, the other party wholly owns that account, avoiding probate. This is the typical ownership for an account for a married couple.

Which of the following BEST describes S corporations? I S corporations have a limited life II S corporations have an unlimited life III S corporations are taxable entities IV S corporations are not taxable entities

answer: II and IV S corporations are limited to 100 shareholders or less; and give limited liability to investors. S corporations are not taxable entities - all items of income and loss flow-through onto the shareholders' personal tax returns. As with any corporation, these have an unlimited life.

Which of the following are appropriate investment strategies for a client with a 20-year time horizon? I The client should hold more cash II The client should hold less cash III The client should hold less stocks IV The client should hold more stocks

answer: II and IV This client has a long (20-year) time horizon for holding the investments. In such a case, equity securities are the best investment, earning the highest returns historically over long time periods. Cash would be least suitable. The best portfolio would be one predominantly holding stocks.

Which statements are TRUE regarding the taxation of capital gains? I A capital gain is first considered to be long term if a position is liquidated at a profit after being held for 1 year or less II A capital gain is first considered to be long term if a position is liquidated at a profit after being held for over 1 year III For investors in the maximum tax bracket, any long term capital gains will be taxed at the same tax rate as that bracket IV For investors in the maximum tax bracket, any long term capital gains will be taxed at a lower rate than that bracket

answer: II and IV Under Internal Revenue rules, a capital gain (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. Short term capital gains are taxed at ordinary income rates with a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15% (this increases to 20% for individuals earning in the highest tax bracket).

Limited partnerships

commonly known as a direct participation program ("DPP") or tax shelter, this is a partnership that permits the gains and losses of the business to flow through from the program to the investors (known as limited partners) untaxed. The partners include the items of income and loss on their individual tax returns, and hence directly participate in the results of the enterprise.

C corporation

taxable business entities that can have an unlimited number of shareholders. C corporations that have excess funds to invest can take advantage of a tax benefit called the "corporate dividend exclusion." If a C corporation invests in dividend paying stocks (which are paid out after being taxed at the corporate level), 70% of the cash dividends received from investments made in other corporate common and preferred stock are excluded from tax. Note that this tax benefit is not given to business forms that get the "flow-through" tax benefit, such as S corporations or partnerships.