Financial Profile / Retirement & Education Savings Plans

Which item is NOT included in a client's income statement? StatusA A. Interest received from corporate bond investments Correct B. Depreciation of the customer's primary residence StatusC C. Dividends from mutual funds that are reinvested in additional share purchases StatusD D. Year-end bonus received from employer B

A primary residence, at market value (which reflects asset appreciation or depreciation), 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 a dividend received from a mutual fund investment is still income, even if it has been reinvested.

A wealthy married couple with 3 adult children have a large estate. They intend to leave their estate to their children, but they both have a life expectancy of at least 15+ years. They are interested in establishing a trust that will minimize estate taxes upon death. The best recommendation would be a(n): StatusA A. revocable trust Correct B. irrevocable trust StatusC C. testamentary trust StatusD D. blind trust B

A revocable trust or living trust allows the grantor to change the terms of the trust at any time and can even revoke the trust. Because the grantor has control over the assets in the trust, these are considered to be assets of the grantor's estate upon death. In contrast, an irrevocable trust, once established, cannot be changed or terminated by the grantor. Because the grantor no longer has control over the assets in the trust, these are removed from the grantor's estate. Note, however, that trust, once created, is its own taxable entity - and it must pay tax on income in the trust each year. Both revocable and irrevocable trusts are created during the grantor's lifetime. In contrast, a testamentary trust is created upon death. These are called "will trusts" because the assets that go into the trust are set in the person's will and there can be multiple trusts established that will be administered by a trustee upon the grantor's death. A will trust would be used when the decedent wants to make sure that the assets are not completely distributed to beneficiaries upon death (for example, the decedent might have an adult child that is a "bum" and he or she wants to make sure that the money is "doled out" to this person over the years and not in a lump sum that he or she might blow immediately!) A blind trust is used to remove assets from a grantor's control to avoid potential conflicts of interest. These are often used by wealthy politicians who do not want to be accused of making decisions that will favor the investments that they own.

An Investment Adviser Representative (IAR) has a new single client who wishes to retire early. Outside of the client's current financial status, which of the following information should the IAR obtain from the client? I The number of years until retirement II Other sources of income the client will have after retirement III Whether the client has a pension benefit and what this amount will be IV What type of lifestyle the customer wishes to live in retirement StatusA A. I and II StatusB B. III and IV StatusC C. I, II, III Correct D. I, II, III, IV D

All of the information is relevant when determining the appropriate investments that would allow the client to retire early - the number of years until retirement; other sources of income after retirement; pension benefits, if applicable; and the type of lifestyle the customer wishes to live in retirement.

The primary advantage of a general partnership structure when starting a business is: Correct A. ease of formation StatusB B. pre-set dissolution date StatusC C. no limit on the number of owners StatusD D. limited liability for each owner A

Both general partnerships and sole proprietorships are ancient business forms that were used before corporations were invented (which occurred in the 1600s). With either a sole proprietorship or general partnership, the owners simply "go into business." The business entity is not created under State incorporation laws, so there is no limit on liability (the primary advantage of corporate ownership). To get limited liability (which is given to State-formed corporations, limited partnerships and limited liability companies), the entity must be legally-chartered in the State, which is costly and time-consuming. To form a sole proprietorship or general partnership, there is no State origination process, though some States ask that they be "notified." But these business owners have unlimited liability. General partnerships do not have a pre-set dissolution date. They are dissolved and reformed when there is a change in any of the partners. Finally, there is no limit on the number of general partners, but this is not a "primary advantage."

A customer's balance sheet shows the following: Cash: $130,000 Securities: 0 Automobile: $25,000 Home: $300,000 Unsecured Credit Line (Due This Year): $5,000 Credit Cards Payable: $5,000 Auto Loan Payable: $15,000 Mortgage Payable: $100,000 Assuming this customer's income exceeds expenses and that the customer will need a $20,000 emergency cash reserve, the amount that is available for investment in a portfolio is: StatusA A. $5,000 StatusB B. $50,000 Correct C. $100,000 StatusD D. $125,000 C

Both the automobile and home are long-term assets with loans against them - these are excluded from assets that can be invested. Even though there is equity in these long-term assets, it is not liquid and thus not part of the available funds for investment. There is $130,000 of cash available; and $10,000 of short-term liabilities (unsecured loan of $5,000 and credit card loan of $5,000); leaving a liquid net worth of $120,000 that could be invested, less a cash reserve. Assuming a $20,000 (say 20%) cash reserve, that leaves $100,000 available for investment.

Which statements are TRUE about asset classes and investment time horizons? I Equity investments are the better choice for short term time horizons II Interest bearing investments are the better choice for short term time horizons III Equity investments are the better choice for long term time horizons IV Interest bearing investments are the better choice for long term time horizons StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV C

Equity investments typically produce a higher rate of return with higher volatility - thus a long time horizon is needed to achieve consistent results with equity investments. Interest bearing investments produce a lower rate of return with lower volatility - thus they are suitable for portfolios with short time horizons.

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 Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV A

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.

Passive income includes income received from: I Real estate investments II Real estate limited partnership investments III Real estate investment trust investments IV Collateralized mortgage obligation investments StatusA A. II only Correct Answer B. I and II only Incorrect Answer C. I, II, III StatusD D. I, II, III, IV B

Passive income is defined as income from direct investments in real estate and limited partnerships. Income from real estate investment trusts (REITs) is defined as portfolio income, as is income from collateralized mortgage obligations.

A customer has $10,000 in passive losses from a limited partnership investment. If the customer has no other passive income for that tax year, the customer may deduct: Correct A. 0 StatusB B. $3,000 StatusC C. $5,000 StatusD D. $10,000 A

Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. If there is no passive income for that year, then any passive losses generated cannot be deducted.

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 StatusA A. I and II only StatusB B. III and IV only Correct Answer C. I, II, III Incorrect Answer D. I, II, III, IV C

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).

The settlor of a trust is the: StatusA A. trustee StatusB B. beneficiary Correct C. grantor StatusD D. fiduciary C

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 trustee is a fiduciary.

A customer that has $40,000 to invest, but who wishes to use the funds 3 years from now to buy a new car, could be recommended all of the following EXCEPT: StatusA A. Money market mutual fund StatusB B. Bank CD StatusC C. 10 year Treasury note with 3 years left to maturity Correct D. Emerging market mutual fund D

The customer needs the money in 3 years to pay for a new car. There is not much risk of loss with either a money market fund investment, a bank CD, or a 3-year maturity Treasury. However, an Emerging Markets mutual fund is a very risky investment, and, 3 years from now, that money might have been lost! Then what do you tell the customer to do - take the bus?

Regarding limited partnerships, all of the following statements are true about general partners EXCEPT the general partner: StatusA A. is considered to be the key executive in the partnership Correct B. assumes limited liability StatusC C. decides which investments to make StatusD D. either manages or appoints a manager for the program B

The general partner is the key executive; makes management decisions such as deciding which investments to make; and either manages the program or oversees a manager. The GP collects a management fee for these duties and assumes unlimited liability.

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

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. In a "living trust," the grantor holds all 3 positions. 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. 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.

An elderly customer seeking extra income who has $100,000 to invest could be recommended which of the following? I The $100,000 purchase of a variable annuity II The $100,000 purchase of dividend paying blue chip stocks in a cash account against which calls are sold III The $200,000 purchase of dividend paying blue chip stocks at 50% margin in a margin account IV The $100,000 purchase of Treasury bonds StatusA A. I and III StatusB B. I and IV StatusC C. II and III Correct D. II and IV D

The purchase of a variable annuity is not suitable for an elderly customer. The whole concept behind a variable annuity is that the product has time to build value on a tax deferred basis in the separate account prior to annuitization. An elderly customer needs the income now. 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. This would be suitable. The margining of blue chip stock positions to "double up" on the amount of stock owned (since Regulation T margin is 50%) is not suitable because this does not come for free! The customer 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. The purchase of Treasury bonds is suitable, since they provide current income and they are safe as it gets.

Which of the following securities transactions would result in a short term capital gain? I Purchase 100 shares of ABC stock at $50 on January 2, 2017; Sell 100 shares of ABC stock at $60 on July 2, 2017 II Purchase 100 shares of ABC stock at $50 on January 2, 2017; Sell 100 shares of XYZ stock at $60 on July 2, 2017 III Purchase 100 shares of ABC stock at $50 on January 2, 2017; Sell 100 shares of ABC stock at $60 on January 3, 2018 IV Purchase 100 shares of ABC stock at $50 on January 2, 2017; Sell 100 shares of XYZ stock at $60 on January 2, 2018 Correct Answer A. I only StatusB B. III only Incorrect Answer C. I and II only StatusD D. III and IV only A

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 39.6% (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 over $400,000 per year). Note that to have a taxable gain or loss, the same security must have been purchased and subsequently sold (or vice versa).

An investor in a limited partnership generating passive losses can offset these against: Correct A. income generated from direct investments in real estate StatusB B. dividends received from blue chip corporations StatusC C. capital gains generated from the sale of partnership units StatusD D. income generated from investments in municipal bonds A

Under the Tax Code, passive losses can only be offset against passive income. They cannot be offset against portfolio income (interest, dividends, capital gains) or earned income. Passive income and loss is defined as that derived from real estate investments and limited partnership interests. Note that any capital gain on the sale of a partnership unit is "portfolio income;" not passive income.

A father is writing his will (the testator) and is naming as beneficiaries his 2 adult sons - Son A and Son B, and their children. Son A has 2 children - A1 and A2. Son B has 1 child - B1. Each one will get an equal share "per capita" of the father's estate upon the father's death. Son B predeceases the testator. This means that: Incorrect Answer A. Son A gets 100% of the assets of the estate upon the death of the testator Correct Answer B. The grandchild B1 gets 25% of the assets of the estate upon the death of the testator StatusC C. The grandchildren A1, A2, and B1, each get 33% of the assets of the estate upon the grandfather's death StatusD D. No assets will be distributed upon the death of the testator until the grandchildren become adults

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 capita" is Latin for "by the head." What this means is that each NAMED living family member gets an equal share of the estate. In this case, the father has named the 2 sons and their 3 children as the beneficiaries "per capita" - so there are 5 names and each gets 1/5th of the estate. If 1 of them predeceased the testator (as is the case here with Son B dying first), then the estate would be divided "per capita" 1/4th each among the remaining 4 living named beneficiaries.

CLIENT FINANCIAL PROFILE: type of client

1/ personal customers: o individual acct o individual acct held TOD / transfer on death / pay on death: acct assets transf to named beneficiary, bypassing estate and bypassing probate ***o Totten trust / TOD acct at a bank: not really a trust acct, since any adult c/open one w/out trust doc; usu sm bank accts where a benef is named to rec' acct bal at depositor's death, depositor c/revoke "Totten trust" at any time w/out penalty o joint acct: signed by ea named person on acct - joint tenancy w/ rights of survivorship (tenants by entirety): ea party owns "undivided interest" in acct, if one party dies, the oth person is the sole owner of acct o tenancy in common: ea party specifies %-age int in acct, if person dies, his %-age interest is incl in his estate - most common for bus partners o family limited partnership acct: allow for "flow-through" of gain and loss to partners - w/out bus itself being taxable, family mbrs are partners, typ parents are GPs who contribute assets to a trust over which they maintain control the heirs (the children) are ltd partners who have no mgmt role - passive investors :. over time, asset in trust b/comes property of children w/out estate tax bill 2/ institutional customers: o sole proprietorship acct "DBA" - doing business as: is sole prop wishes to use diff bus name (oth than individual's name), then ind m/file form in State notifying State of legal name being used o Form 1040 and Schedule C are filed: all earnings are subj to personal income tax, h/unltd liability for all bus debts o general partnership acct: when 2 or more persons form bus enterprise under terms of genl partnership agreement, ea partner's sh of income and loss is incl on that partner's personal tax return, ea genl partner bears unltd liability for all bus debts - copy of partnership agreement filed w/ State is needed corporations: invented w/ formation of Dutch East India Co, lmt liability of owners, corp created in State under that State's incorp laws o limited partnership acct / passive investors / DPP - direct participation program (lmts liability, ltd partnerships are State-created entities): formed when 2 or more persons form bus enterprise where at least 1 person is GP (mgr of venture, bears unltd liability) and 1 person is ltd partner (loss is ltd to their invest), there m/b 1 of ea, ea partner's sh of income and loss is incl on that partner's personal tax return - copy of cert of ltd partnership, State-creation doc is needed to open such acct o C corp acct: taxable entity, ltd liability - the most that they can lose if their investment; if corp pays cash div to sharehldrs out of "aft-tax" income, sharehldrs m/incl div amt on their pers tax returns and pay personal inc tax on distr - copy of corp charter is needed to open such acct o S corp acct: <100 sharehldrs, are NOT taxable entities, all items of inc and loss flow-through onto sharehldrs' personal tax returns - copy of corp charter is needed to open such acct o limited liability co acct (LLCs): neither corp nor partnership, formed as bus entities that give "flow through benefit" associatd w/ S corps w/out sharehldr limitation imposed on S corps (max of 100 sharehldrs); - LLC mbrs (neither sharehldrs nor partners) c/take mgmt role w/out being considered t/b genl partners in venture - flow-through taxation and ltd liability - copy of cert of organization is needed to open acct 3/ fiduciary customers: o trust acct: apptd to manage assets for beneficiary under terms set forth in Trust Agree - settlor (Grantor, Trustor): ind who est's trust, donates assets to trust, sets objectives of trust, names benef of trust and names trustee - trustee: fiduciary that manages assets of trust in best interests of benef - beneficiary: ind named in trust doc for whom assets are being mgd, trust doc may/not bequeth assets to benef on death of settlor o legal list: legal entity formed in State w/ trustee being fiduciary over acct, ltd by ea State in types of invest tha c/b made - State law req's that fiduciaries either follow "prudent man" rule or restrict invest to a "legal list" prov by State - invest consist of debt rated in top 4 ratings categories, BBB or btr o prudent man rule: only invest that w/b made by a prudent in are permitted o inter-vivos trust o testamentary trust o revocable trust taxation o non-revocable trust taxation o estate acct o testator o per capita o per stirpes

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

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.

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

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.

At the initial discussion phase with a customer about portfolio planning, which of the following is NOT necessary? Correct A. Testamentary letter StatusB B. Listing of customer brokerage accounts StatusC C. Life insurance coverage held by the customer StatusD D. Listing of assets owned by the customer A

A "testamentary letter" is a will (as in "last will and testament"). This is not needed to start an asset allocation plan for a customer. A listing of the customer's existing brokerage accounts would certainly be useful; as would a listing of assets owned by the customer, and the life insurance coverage maintained by the customer.

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: Correct Answer A. LLC Incorrect Answer B. Partnership StatusC C. Sole proprietorship StatusD D. C corporation A

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.

All of the following accounts avoid probate upon death of an owner EXCEPT: StatusA A. Totten trust StatusB B. JTWROS Correct C. Individual StatusD D. Payable on Death C

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, also called Payable 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 an Individual account without the TOD feature, then on death, the account goes to the deceased's estate, is passed by will and must go through probate (where someone could contest the transfer).

All of the following would be found on a client's personal balance sheet EXCEPT: StatusA A. real estate owned Correct B. living expenses StatusC C. savings accounts StatusD D. mortgage on real estate B

A mortgage is a secured liability of an individual; savings account balances are an asset; and real estate owned is an asset. All would appear on an individual's balance sheet. On the other hand, living expenses would show on one's income statement; not on the balance sheet.

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: Incorrect Answer A. trustee Correct Answer B. beneficiary StatusC C. grantor StatusD D. donor B

A trustee has a fiduciary responsibility to the beneficiary of the trust.

An investment adviser would recommend to a client that he or she should buy which of the following in order to properly fund an investment plan if the client dies prematurely? Correct A. Life insurance StatusB B. Life annuity StatusC C. Bonds StatusD D. Mutual funds A

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. Also note that a life annuity is not a good choice, since it stops making payments when the annuity contract holder dies.

What is the difference between Joint Tenancy and Tenants in Common when referring to a brokerage account? Correct A. Joint Tenancy gives each owner an undivided interest in the account while Tenants in Common gives each owner a divided interest in the account StatusB B. Joint Tenancy does not give each owner rights of survivorship while Tenants in Common gives each owner rights of survivorship StatusC C. If a tenant dies, assets held Joint Tenancy are included in the deceased's estate while assets held as Tenants in Common are excluded from the deceased's estate StatusD D. Joint Tenancy has a limit on the number of individuals who may be owners while there is no limit on the number of owners in an account held as Tenants in Common A

In a Joint Tenancy, each person owns 100% of the account. If one dies, the other 100% owns the account. This is the typical ownership option for a husband and wife. Each one has "rights of survivorship" to all account assets. In contrast, an account held as Tenants in Common specified an ownership percentage for each Tenant. If that person dies, the percentage goes to that person's estate and is passed by will. While Joint Tenancy is most common for married couples, there is no limit on the number of participants in either type of joint account.

Which statement is TRUE about property held in a Joint Tenancy account? Correct Answer A. A contribution of more than 50% by one of the parties is essentially a gift to the other Incorrect Answer B. Each tenant has a specified ownership interest in the property in the account StatusC C. If an owner in a joint tenancy account dies, his or her ownership percentage will be transferred to his or her beneficiary StatusD D. Upon death of one of the tenants, the assets in account must be sold and the proceeds distributed to the survivor(s) A

In a Joint Tenants account, each person owns 100% of the assets. This is typical for a husband and wife. If one dies, the other automatically 100% owns the assets in the account. The asset transfer does not go through the deceased individual's estate and bypasses probate. Thus, the assets of the deceased person do not go to a beneficiary - they go the other account owner. There is no requirement that the assets be sold upon the death of one of the tenants - the other tenant simply owns the entire account. Because these accounts are used by married couples and each of the 2 tenants is an equal owner, it could be stated that a contribution by one of the tenants of more than 50% of the assets is essentially a gift to the other tenant (Choice A).

A husband and wife have a joint account with a member firm. The wife calls the registered representative with instructions to liquidate their 500 share position of ABC stock. The registered representative should: Correct A. accept and execute the order as given StatusB B. execute the order only after the branch manager approves StatusC C. execute the order only after the husband approves orally StatusD D. execute the order only after the husband approves in writing A

In a joint account, any one of the owners can enter trades in the account. In addition, any one of the owners can authorize that checks be drawn on the account, however all checks must be drawn to full account name.

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 Custodian account StatusA A. I and IV Correct B. II and III StatusC C. I, II, III StatusD D. I, II, III, IV B

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. Custodian 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 married couple that is in the maximum tax bracket has 1 child, age 13. The couple is looking to start a 529 plan to fund the child's college education beginning 5 years from now. To calculate the amount of money needed to pay for college, all of the following are needed EXCEPT: Correct A. parent's income StatusB B. current cost of tuition StatusC C. assumed rate of return StatusD D. expected inflation rate A

In this example, we need to determine the capital needed, 5 years from now to pay college tuition. To do so, we would take the current cost of tuition and inflate it over the next 5 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. Also note that the parent's income is not part of the calculation. Of course, the burning question is whether the parents have the amount of funds now that must be invested to meet this future capital need - but that is not part of this question.

A business form that gives a "flow-through" tax benefit and limited liability to owners is a(n): StatusA A. C Corporation Correct Answer B. S Corporation StatusC C. Sole Proprietorship Incorrect Answer D. General Partnership B

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. Thus, the only business entities that provide both limited liability and flow-through taxation are limited partnerships, limited liability companies, and S corporations.

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 StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV C

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.

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 of the father's estate "per capita" 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 young children - Grandchild A1 and Grandchild A2 and Son B has 2 children, Grandchild B1 and Grandchild B2. If Son A predeceases the testator, then: StatusA A. Son A's 1/2 share goes into his estate Correct B. Son A's share goes to Son B StatusC C. Grandchild A1 gets 25% and Grandchild A2 gets 25% of the estate's assets upon the death of the testator StatusD D. the deceased son's share reverts back to the father's estate B

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 capita" is Latin for "by the head." What this means is that each NAMED living family member 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 A dies before the father, the 1/2 share now goes to living Son B - so Son B inherits 100% of the estate. The grandchildren are not named as beneficiaries, so they get nothing. If the testator had NAMED both the 2 adult sons and their 4 children "per capita," then there would have been 6 names, with each getting 1/6th of the estate. If 1 of them predeceased the testator, then the estate would be divided "per capita" 1/5th each among the remaining 5 living descendants.

IRAs

o any employed person qualifies for IRA contribution o married couple contributes double o IRA catch-up for individuals age 50 or older o contribution based upon earned income o if not covered by qualified plan - deductible o if covered by ano qualified plan and income is too high - not deductible o can contribute until age 70-1/2 o Roth IRAs - same dollar contributions as traditional IRA; but distributions are not taxable o Roth IRA has "backloaded" tax benefit o canNOT contribute maximum to both a Roth IRA and a traditional IRA o conversion of traditional IRA to Roth IRA o IRA contributions must be made by tax filing date - no etension o permitted investments o prohibited investments o no withdrawal until age 59-1/2 w/out penalty of 10% o distribution prior to age 59-1/2 w/out penalty o distributions are taxable o payout must begin on April 1 of the year after reaching age 70-1/2 o Roth IRAs not subject to age 70-1/2 withdrawal requirement and are not taxable o IRA rollover - 60 days o once per year o 20%withholding tax on premature distributions o IRA transfer o direct btw trustees o to harvest tax losses in an IRA , must close all IRA accts and sell the assets for less than the aggregate basis

ERISA Rule 404(c): 3 investment alternatives

o 404(c) relieves fiduciary of liability for poor choices among options offered o tax-deferred annuities 403(b) plans o 457 plans salary deferral plans for highly compensated govt employees o no 10% penalty tax for withdrawals prior to age 59-1/2 o life cycle funds o age weighted investing

tax treatment of stocks

o cost basis o sale proceeds o short term o long term o specific ID of shares sold o stock option grants o 70% of dividends rec'd by corp are excluded fr tax

Which of the following statements are TRUE when comparing a C corporation to an S corporation? I C corporations give the shareholders limited liability II S corporations give the shareholders limited liability III Income in a C corporation is taxable to the corporation IV Income in an S corporation is taxable to the corporation StatusA A. I and III StatusB B. II and IV Correct C. I, II, III StatusD D. I, II, III, IV C

Both C and S corporations give limited liability. 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.

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

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.

Which of the following is the easiest business to form? StatusA A. C Corporation Incorrect Answer B. S Corporation StatusC C. Limited Partnership Correct Answer D. General Partnership D

C Corporations, S Corporations and Limited Partnerships all must be formed by chartering the business in a State. There are required "formation documents" that must be filed and fees paid to establish these businesses. General partnerships and sole proprietorships usually do not require State formation filings.

Which of the following would be defined as "portfolio income" under IRS regulations? Correct A. Long term capital gains StatusB B. Alimony payments StatusC C. Royalty payments StatusD D. Bonus payments A

Capital gains (long or short term) are defined as portfolio income. Earned income is basically defined as income from one's regular employment, but also includes alimony payments, royalties received (such as royalties earned for writing a book), and bonuses.

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

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 39.6%. The 15% rate applies to individuals earning under $400,000 per year ($450,000 for couples). Above these levels, the tax rate is increased 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.

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 Correct Answer A. I and III Incorrect Answer B. I and IV StatusC C. II and III StatusD D. II and IV A

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: o The corporation is incorporated in a country that has a comprehensive tax treaty with the United States; o The corporation is incorporated in a U.S. possession; or o 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 39.6% include dividends received from Real Estate Investment Trusts and Master Limited Partnerships. These are viewed as a pass-though of income, rather than being a true dividend.

A dividend paid by a foreign corporation will be "qualified" in all of the following cases EXCEPT: StatusA A. The corporation is incorporated in a country that has a comprehensive tax treaty with the United States StatusB B. The corporation is incorporated in a U.S. possession StatusC C. The corporation has its shares listed on an established trading market in the United States Correct D. The corporation has qualified for duty free shipments to the United States D

Dividends paid by U.S. corporations generally qualify for the lower 15% tax rate. Dividends paid by foreign corporations to U.S. security holders only qualify for the lower rate if: o The corporation is incorporated in a country that has a comprehensive tax treaty with the United States; o The corporation is incorporated in a U.S. possession; or o The corporation has its shares listed on an established trading market in the United States.

Which of the following would be defined as "earned income" under IRS regulations? I Social Security payments II Alimony payments III Royalty payments IV Bonus payments StatusA A. I and II Correct B. III and IV StatusC C. II, III, IV StatusD D. I, II, III, and IV B

Earned income includes wages, salaries, tips, bonuses, royalties for books and self-employment income. Social security payments and alimony payments are "transfer payments" that are taxed at the same rate as earned income, but they are not defined as such.

Which of the following are attributes of a living trust? I Taxable build-up of earnings in the trust II Tax-deferred build-up of earnings in the trust III Upon death, the decedent's estate avoids probate IV Upon death, the decedent's estate is subject to probate Correct Answer A. I and III StatusB B. I and IV Incorrect Answer C. II and III StatusD D. II and IV A

Establishing a trust is primarily done to remove assets from the grantor's estate - that means these assets do not go through probate. Thus, the trustee is certain that the beneficiary will get those assets placed in the trust - there is no will that can be contested. 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!); and the trustee is subject to the prudent investor rule when selecting investments.

The principal benefit of establishing a living trust is: StatusA A. tax deferred build-up of earnings in the trust StatusB B. elimination of estate taxes upon the death of the grantor of the trust Correct C. removal of assets held in the trust from the decedent's estate, avoiding probate StatusD D. increasing investment returns because asset selection in the trust is exempt from the "Prudent Man" rule C

Establishing a trust is primarily done to remove assets from the grantor's estate - that means these assets do not go through probate. Thus, the trustee is certain that the beneficiary will get those assets placed in the trust - there is no will that can be contested. 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!); and the trustee is subject to the prudent investor rule when selecting investments.

For a family limited partnership account, who gets the termination benefits? StatusA A. Grantor StatusB B. Trustee StatusC C. Income beneficiary Correct D. Remainder beneficiary D

Family limited partnerships are set up primarily to protect family assets (e.g., a family business or family farm) from creditors and to protect the assets from being sold to someone outside the family. There is a general partner (typically a parent) and limited partners (typically children). The main benefit is that these family assets can be transferred over time to the children at a lower tax basis, since, in theory, they have "lost" value (because they are no longer marketable). This structure can allow parents to gift assets to children yearly with minimal or no gift tax. The beneficiary of such a family limited partnership will be each limited partner (meaning each child). Beneficiaries can be designated to get only income from the partnership; or can be designated to get remaining assets when the partnership is terminated; or can be designated to receive both. The "termination benefit" refers to the distribution of remaining partnership assets when the partnership is dissolved. This can be set up as the date of death of the parent(s); a specified future date; or by majority vote of the partners.

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

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.

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 Correct Answer A. I and III Incorrect Answer B. I and IV StatusC C. II and III StatusD D. II and IV A

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 39.6%.

Income in a revocable trust is taxed at the: StatusA A. corporate tax rate StatusB B. trust tax rate Correct C. grantor's tax rate StatusD D. gift tax rate C

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). 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 39.6%.

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? StatusA A. The investment adviser can get a signed letter from the beneficiaries, relieving the adviser of his fiduciary obligation StatusB B. The investment adviser can subcontract out the management of the money to a subadviser, who will assume the fiduciary responsibility StatusC C. The investment adviser can petition a court of law to void the adviser's fiduciary standard Correct D. The investment adviser cannot limit his fiduciary responsibility and liability D

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.

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 StatusA A. I and II only Incorrect Answer B. III and IV only Correct Answer C. I, III, IV StatusD D. I, II, III, IV C

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.

Cash payments made to investors from which of the following investments are subject to the lower 15% maximum tax rate? I Common stocks II Preferred stocks III Convertible bonds IV Non-convertible bonds Incorrect Answer A. I only Correct Answer B. I and II StatusC C. III and IV StatusD D. I, II, III, IV B

Interest payments received from bond investments (whether the bonds are convertible or not) do not qualify for the lower tax rate. The 15% rate applies to individuals earning under $400,000 per year ($450,000 for couples). Above these levels, the tax rate is increased to 20%.

When comparing the characteristics of a C Corporation to a Limited Liability Company (LLC), which statements are TRUE? StatusA A. C Corp LLC Flow through taxation Yes Yes Limited Liability No Yes StatusB B. Flow through taxation No No Limited Liability Yes No StatusC C. Flow through taxation Yes No Limited Liability No Yes Correct D. Flow through taxation No Yes Limited Liability Yes Yes D

Limited Liability Companies (LLCs) have both the characteristics of a partnership and a corporation. LLC owners have limited liability, which is also true for shareholders in C Corporations. 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.

Limited liability companies: I are limited as to the number of investors II give limited liability to investors III allow for flow through of gain and loss StatusA A. I only StatusB B. I and II Correct C. II and III StatusD D. I, II, III C

Limited liability companies have no limit on the number of investors. They do give limited liability to the owners; and they can be structured to give a flow-through tax benefit.

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

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 custodian account if the parent is the custodian and the child is under age 18. 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.).

All of the following are considered when evaluating a customer's tax status EXCEPT: StatusA A. Income Sources Correct Answer B. Citizenship Incorrect Answer C. Marginal tax bracket StatusD D. State of residence B

Part of a suitability determination is making inquiry about the customer's "tax status." The sources of a customer's income should be evaluated. For example, dividend income is taxed at a lower rate than interest income. Thus, Choice A is considered. 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) 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. 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.).

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: StatusA A. portfolio income Correct B. passive income StatusC C. earned income StatusD D. alternative income B

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.

All of the following are objectives that a capital needs analysis would attempt to address EXCEPT: StatusA A. paying for a child's college 15 years from now StatusB B. the maturing of a medical resident's balloon loan 10 years from now StatusC C. having funds 20 years from now to enjoy a comfortable retirement Correct D. borrowing 5 years from now using a home equity line to make a major home improvement D

Put simply, a "capital need" means that a specific sum of money is needed at a future date to meet an upcoming need or obligation. Thus, a capital need might be the need to pay for a kid's college; the need to accumulate enough money to make a down payment on a home purchase; the need to have the funds to pay off a maturing loan; the need to have enough funds for retirement, etc. Borrowing money is not a capital need, but it can be a way of meeting a capital need.

S Corporations: I are limited as to the number of investors II give limited liability to investors III allow for flow through of gains and losses StatusA A. I only StatusB B. II only StatusC C. I and II Correct D. I, II, III D

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 to the shareholders' personal tax returns.

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

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.

Three individuals are starting a new business. The advantage of forming the business as an S Corporation as compared to a general partnership is the fact that an S Corporation: StatusA A. is easier to form StatusB B. is subject to favorable tax treatment Correct C. has limited liability for owners StatusD D. has no limit on the number of owners C

S Corporations give the shareholders limited liability. General partners have unlimited liability. To form a general partnership, the individuals just have to sign a partnership agreement and "go into business." There is no required state filing (usually). In contrast, any corporation must be formed by incorporation in the State, so a corporation is more difficult to form. Both S Corporations and partnerships are subject to flow-through taxation. There is no limit on the number of partners in a partnership; an S Corporation can only have a maximum of 100 shareholders.

Which business structure has limited liability? Correct Answer A. C corporation StatusB B. Sole proprietorship Incorrect Answer C. General partnership StatusD D. Association A

S corporation and C corporation shareholders have limited liability. Limited partners and members of limited liability companies also have limited liability. In contrast, general partners and sole proprietors have unlimited liability. An "association" is a generic business term for any business entity.

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: Correct A. Emerging markets fund StatusB B. Single stock StatusC C. Municipal bond StatusD D. Index fund A

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).

A socially responsible customer would NOT invest in a(n): Correct A. defense company StatusB B. food company StatusC C. drug company StatusD D. computer company A

Socially responsible investors typically will avoid investments in gambling, tobacco, alcohol, and weapons/military. This type of investing, also called, ethical investing, is a non-financial consideration when making recommendations.

Which of the following business structures has unlimited liability? StatusA A. S corporation Correct B. Sole proprietorship StatusC C. C corporation StatusD D. Limited liability company B

Sole proprietors and general partners have unlimited liability. Shareholders in C and S corporations, and members of limited liability companies, have limited liability.

Which of the following is (are) included in the cash flow analysis performed when determining the current financial status of a customer? I Interest income II Earned income III Dividends StatusA A. I only StatusB B. II only StatusC C. I and III Correct D. I, II, III D

Sources of cash inflows are earned income, interest income, royalty payments received, as well as the proceeds from asset sales. Dividends received from security holding are also part of a customer's cash flow - which is simply cash coming in each year versus cash going out. Assets, liabilities, and equity in assets are not part of annual cash flow - these are balance sheet items of the customer.

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

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.

When managing the assets of a trust, an investment adviser would NOT be concerned with the: Incorrect Answer A. financial needs of the trust beneficiary(ies) StatusB B. investment limitations specified in the trust document Correct Answer C. tax considerations of the trust settlor StatusD D. anticipated market movements that could affect trust investments C

The trust settlor or grantor establishes the trust, sets its objectives and contributes assets. The trustee manages the trust for the benefit of the trust beneficiary(ies). In doing so, the trustee must make prudent investments and must follow any limitations set by the trust. As a fiduciary, the trustee must manage the trust assets to meet the needs of the beneficiary(ies) and part of this would be making sure that the investments are not too susceptible to market downturns. The tax considerations of the settlor (grantor) have no bearing on the trustee's responsibilities.

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: Correct A. tiers Treasury notes over a 5-year time frame StatusB B. emphasizes municipal bonds of the state where the customer resides StatusC C. emphasizes investment grade preferred stocks paying a high dividend rate StatusD D. allocates funds among aggressive growth stocks and large capitalization stocks A

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 customer has $20,000 to invest, but needs immediate access to the funds to pay a variety of bills that will arrive over the next 3 months. The BEST recommendation is for the customer to deposit the funds to a: Correct Answer A. Money market checking account Incorrect Answer B. Money market mutual fund StatusC C. Money market instrument StatusD D. Treasury Direct account A

This customer needs immediate access to the funds to pay bills as they come due - so a checking account paying money market interest rates is the best recommendation. Money market mutual fund shares must be redeemed to get access to the funds, and this takes time. Money market instruments must be sold to get access to the funds and this takes time as well. A Treasury Direct account allows an investor to buy Treasury securities directly from the U.S. Government without a broker. However, these do not have a checking account feature and are not an appropriate recommendation.

A 60-year old man seeks an investment that gives liquidity and income. The best recommendation would be: Correct A. Short-term Treasury Note StatusB B. Blue Chip Stock StatusC C. Bank CD StatusD D. Zero-Coupon Bond A

This customer seeks liquidity and income. Liquidity means that the customer can easily cash-out the investment. A zero-coupon bond gives no income, so we can rule that one out. A bank CD gives income but is not liquid, in the sense that it cannot be sold in the market. Of course, it can be redeemed with the bank issuer, but there typically is an interest penalty to do so. A blue chip stock is liquid, but the dividend income is not as great as that provided by a fixed income security. A Treasury note gives a fixed rate of income and also is highly liquid. It is the best choice, (though a good argument could also be made for a bank CD!).

A new client with no other investment assets has just come into an inheritance of $500,000 of ABCD stock, a blue chip company listed on the NYSE. As the adviser to this customer, your IMMEDIATE concern should be: StatusA A. whether the company is a candidate for delisting StatusB B. the possibility that the value of ABCD stock may decline sharply Correct C. the lack of diversification of the customer's investment StatusD D. whether the customer paid any estate tax liability due C

This is the client's sole investment. Because this is a blue chip company, it is not likely to be delisted. It is also not likely to suffer a sharp price decline, though this could occur. The immediate concern should be the customer's lack of diversification. If the customer were to sell a portion of the ABCD stock and reallocate it to other investments, the client will reduce overall risk.

The person that administers a trust is the: Incorrect Answer A. grantor StatusB B. beneficiary Correct Answer C. trustee StatusD D. conservator C

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.

The person who donates the assets into the trust is the: StatusA A. Custodian StatusB B. Fiduciary Correct C. Grantor StatusD D. Trustee C

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 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? StatusA A. The trustee is prohibited from making the investment because of the potential for a total loss Correct B. The trustee is prohibited from making the investment because he will derive a personal benefit StatusC C. The trustee is prohibited from making the investment because limited partnerships are not publicly traded StatusD D. The trustee is permitted to make the investment if this is in the best interests of the beneficiary B

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 NOT true regarding the role of the trustee? StatusA A. The trustee owes a duty to the beneficiaries to comply with the prudent investor rule StatusB B. The trustee must invest and manage trust assets solely in the interest of the beneficiaries Incorrect Answer C. If the trustee has 2 or more beneficiaries, the trustee must act impartially, taking into account any differing interests of the beneficiaries Correct Answer D. The trustee is prohibited from delegating investment and management functions to an agent unless the beneficiary approves D

Trustees must act in the best interests of the beneficiaries of the trust and must conform to the "Prudent Man" rule. The trustee is permitted to delegate investment and management functions as he or she sees fit - there is no requirement for beneficiary approval.

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: StatusA A. open the account and begin trading StatusB B. tell the customer to contact a tax specialist StatusC C. explain to the customer that revocable trusts cannot be traded Correct D. refer the client to an attorney that can set up the trust D

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.

Under IRS regulations, a gain or loss upon current disposition of an asset is first considered to be long term if the asset has been held for: StatusA A. 6 months or less StatusB B. over 6 months StatusC C. 1 year or less Correct D. over 1 year D

Under IRS rules, a security's holding period is short term if the security has been held for up to 1 year. Short term capital gains are taxed at a maximum rate of 39.6% (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 over $400,000 per year).

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

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 39.6% (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 over $400,000 per year). 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 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 of the father's estate "per stirpes" 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 young children - Grandchild A1 and Grandchild A2. If Son A predeceases the testator, then: StatusA A. Son A's 1/2 share goes into his estate Incorrect Answer B. Son A's share goes to Son B Correct Answer C. Grandchild A1 gets 25% and Grandchild A2 gets 25% of the estate's assets upon the death of the testator StatusD D. the deceased son's share reverts back to the father's estate C

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 A dies before the father, the 1/2 share now goes to the children of Son A. Since there are 2 children, A1 and A2, each will get 25% of the estate of the testator.

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: StatusA A. deceased son's share goes into the son's estate StatusB B. deceased son's share passes to his brothers Correct C. deceased son's share passes to his children StatusD D. deceased son's share reverts back to the father's estate C

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 father is writing his will (the testator) and is naming as beneficiaries his 3 adult sons. Each one will get an equal share "per capita" of the father's estate upon the father's death. Each of the sons has 2 children (the grandchildren of the testator) who are not yet adults. If one of the sons predeceases the testator, then the: Incorrect Answer A. deceased son's share goes into the son's estate Correct Answer B. deceased son's share passes to his brothers StatusC C. deceased son's shares passes to his children StatusD D. deceased son's share reverts back to the father's estate B

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. When it is "per capita," (Latin for "by the head") each NAMED beneficiary gets an equal share of the estate. In this will, there are 3 named beneficiaries - the 3 living sons. Assume they are Son A, Son B and Son C - each gets an equal 1/3rd of the father's estate upon the father's death. If Son A dies before the father, the estate is now divided among the 2 remaining living beneficiaries, Son B and Son C, who will now get 1/2 of the estate each upon the father's death. Because the grandchildren are not named, they get nothing. If the testator had NAMED both the 3 adult sons and their children "per capita," things work out differently. Assume that the 3 adult sons had 2 children each. Then there would have been 9 names (the 3 sons and their 6 children), with each getting 1/9th of the estate. If 1 of them predeceased the testator, then the estate would be divided "per capita" 1/8th each among the remaining 8 living descendants.

A 72-year old widow receives the income from a trust. Her adult children will receive the trust's principal when she dies. The children are the trustees for the trust. In order for an Investment Adviser to open an account for the trust, the IA should: I Review the trust documents for guidance II Invest the assets with an objective of a balance of income and growth III Review the potential conflict of interest with the beneficiaries and obtain a statement of consent IV Permit the adult children to direct the investment decisions made for the account StatusA A. I and II StatusB B. III and IV StatusC C. I, III, IV Correct D. I, II, III, IV D

When opening a trust account, the trust document should be reviewed to makes sure that the wishes of the grantor are being followed. The trust assets benefit both the elderly widow and her adult children. Therefore, an investment objective of a balance of income (for the widow) and growth (the residual assets for the children upon the mother's death) is appropriate. Usually, the trustee and the beneficiary are different people, but this does not need to be the case. The adult children can act both as trustees and can be beneficiaries of the trust. However, this is a conflict of interest and getting the adult children to sign a statement of consent that they understand the conflict of interest between their 2 roles as trustees and beneficiaries is prudent. Because the adult children are the trustees, they can make decisions for the trust, including investment decisions.

personal customers: individuals, joint accts, family limited partnerships

o current financial status o family composition o tax situation o tax filing status o if unmarried, then head of household or qualifying widow(er) status will lower tax bill o married filing jointly gives lower tax bill if 1 works o married filing separately gives lower tax bill if both are high earners and there are lg itemized deductions o marriage penalty o employment information o financial goals o to fund college education for children o to fund retirement or early retirement o to fund for the care of aging dependents o to pay off the mortgage on a primary residence early o to fund for a major lifestyle purchase such as the purchase of a vacation home o capital needs o investment strategy o risk tolerance o current cash flow o current invests and strats o time horizon o invest knowledge o cust demographics o cust values o ins approach o life ins owned by an irrevocable trust or by ano person is excluded fr decedent's gross estate o capital needs analysis

tax considerations

o earned income o transfer pymts and pension pymts are not earned income o social security pymts claimed by ex-spouse o invest income o maximum tax rate for cash dividends rec'd by individuals is 15% or 20% for high earners o dividends are taxable even if reinvested o capital gain o maximum net capital loss deduction is $3,000 per year o short term o long term o net short term capital gains taxed at regular rate o net long term capital gains taxed at 15% max rate or 20% for high earners o first $250,000 of capital gain from sale of personal residence is excluded fr tax o passive income o 3.8% Medicare tax on unearned income

RETIREMENT PLANS: ERISA

o profit sharing plans o defined contribution plans o defined benefit plans o tax-deferred annuity plans 403(b) o payroll deduction savings plans covers "private" plans only

ERISA

o settlor o fiduciary responsibility o non-discrimination o vesting o party-in-interest o class exemption for b/ds o prohibited trans o IPS o defined contribution (DC) o defined benefit (DB) o unfunded pension liability in defined benefit o pension benefit guaranty corp terminated defined benefit plans w/ unfunded liability o tax qualified plan o non-tax qualified plan

estate and gift taxes: "net estate" of more than $5.49 mill in 2017 is taxable

o tax paid by donor o progressive tax o gift tax exemption - $10,000 per person indexed for inflation annually - $14,000 in 2017 o recipient of gift assumes cost basis of donor and donor's holding period o estate tax exclusion o unlimited marital exclusion o unified credit o charitable contributions reduce taxable estate o permitted deductions to calculate taxable estate - funeral expenses - administrative expenses - legal fees - claims against estate such as unpaid bills - mortgages aginst estate-owned property - assets donated to charities fr the estate - any estate tax liability owed to the State o cost basis of inherited asset is value at date of death o inherited assets - when sold gain or loss is always long term o securities valued at date of death o appreciated assets that have potential downside should be sold by estate to capture gain w/ capital gains tax o alternative valuation date for securities o personal bankruptcy Chapter 7 bankruptcy o exempted property kept by debtor o non-exempt property sold and proceeds used to pay creditors' claims