Invt Advisory

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

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

Joan is discussing with her attorney the creation of a testamentary trust to provide for the support of her adult child. Which of the following statements concerning this process is TRUE? Joan will control all her assets earmarked for the trust until she dies All assets placed in the trust will reduce Joan's eventual estate tax burden All assets in the trust will avoid the probate process All of the above

A A testamentary trust may be used when a donor wishes to control trust assets during her lifetime. Joan's will, when executed, will direct the executor to fund the trust with assets contained within the estate. This process does not avoid probate or reduce a potential tax liability levied on the donor's estate

Which of the following allocations would be the LEAST suitable for an investor with a 30-year time horizon, moderate risk tolerance, and the goal of long-term growth? 50% money-market funds, 50% long-term government bond funds 50% large-cap stock index funds, 25% small-cap funds, 25% emerging markets funds 75% large-cap stock funds, 25% international stock funds 50% equity income funds, 30% small-cap funds, 10% global funds, 10% balanced funds

A An investor with a long time horizon and a goal of growth should have some part of her portfolio in equity securities. Choice (a) is unlikely to meet this investor's goal.

Bill Hendricks would like to open a Coverdell ESA for his three-year-old son. Which of the following statements is TRUE? Bill may contribute up to $2,000 per year At least 50% of the investments in the account must be conservative The account becomes the property of the child upon reaching the age of majority Only parents or grandparents may contribute for the benefit of the minor child up to age 18

A Anyone may contribute to a Coverdell ESA for a child, but the total contributions to the account are limited to $2,000 per year. Choice (c) is true of a UGMA or UTMA account, not a Coverdell ESA. There is no percentage requirement for investments in the account.

When making recommendations to senior investors, which of the following features is the LEAST important consideration? The state in which the client has her primary residence The current employment status of the client The client's primary expenses The amount of monthly income the client need

A FINRA published a notice discussing the suitability issues of senior investors. Some of the important questions advisers should ask prior to recommending a securities product are: What is the client's current employment status and what are her primary expenses? Does the client still make mortgage payments? How much income does she need and what are her sources of income? How important is liquidity, health care, and insurance? What are the client's investment goals? While the state in which the client has her primary residence may be important for tax and estate considerations, it should not be a primary concern of the adviser

According to business decision exceptions to ERISA fiduciary rules, certain decisions affecting the plan would not be considered fiduciary decisions, such as the decision to create, amend, or terminate the plan. These types of decisions are known as: Settlor functions Party-in-interest decisions Participant intervention Sponsor functions

A Settlor functions are decisions normally made by the employer when acting as a plan sponsor or administrator, such as whether to match participant contributions, the type of plan to establish, its options, or amending the plan. These decisions are not considered to be fiduciary decisions and are not subject to ERISA's fiduciary rules. Selecting a service provider or managing assets, which affects the plan's assets and performance, are considered fiduciary functions.

Which TWO of the following items does the IRS consider earned income? Royalties Dividends Long-term disability benefits received prior to minimum retirement age Social Security I and III I and IV II and III II and IV

A The IRS defines earned income as compensation received for personal services actually rendered. Royalties and long-term disability benefits received prior to the minimum retirement age come under the IRS's definition. Dividends and Social Security are not considered earned income. They are still taxable, however

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

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

An income statement of an individual would contain: Expenses Liabilities Real property Savings accounts

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

Limited partners of a real estate limited partnership would be limited to a potential loss of: Their initial investment plus any unpaid amounts to which they had committed to pay Their initial investment plus any real estate shared by the partners Their initial investment plus the total amount of money borrowed by the partnership Their initial investment

A The liability for limited partners may not exceed their initial investment amount plus any agreed-upon future contributions. Generally, limited partners are not liable for the debts of the partnership. However, there are rare cases in which a limited partner will cosign on a loan for the partnership. In such a case, the limited partner's liability is increased.

The tax rate that applies to the last dollar that a person earns is called the: Marginal tax rate Federal tax rate Nominal tax rate Average tax rate

A The marginal rate is the rate at which the last dollar a person earns is taxed. In the U.S., a person's marginal tax rate (tax bracket) will rise as her total income increases.

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

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

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

A Under Section 404(c) of ERISA, all these statements are true except choice (a). In fact, the plan must offer a broad range of investment options to participants, not a limited number.

Under the provisions of the Alternative Minimum Tax (AMT), all of the following are tax preference items, EXCEPT: The greater of the purchase price or the current market price of an incentive stock option Any amount of accelerated depreciation expense deducted above the amount calculated by the straight line method Any depletion allowances over and above the investment's basis Any excess intangible drilling cost deducted that is greater than a stated percentage of the investment's income generated by an oil and gas program

A Under the provisions of the Alternative Minimum Tax (AMT), accelerated depreciation, excess depletion, and excess intangible drilling costs are all items that may be added back to an investor's taxable income. Incentive stock options are a type of company stock option given to employees as part of their compensation. Under the AMT, employees must include, as part of their income, the difference between the fair market value and the purchase price (exercise price) at the time of exercise. Choice (a) is the correct choice, since employees do not choose the greater of the two. Depletion is the using up of a natural resource. Depletion allowance, then, gives the owner the ability to account for the reduction (production) of reserves as a product is produced and sold. For accounting purposes, depreciation indicates the amount of an asset's value that has been used up. For tax purposes, businesses may deduct the costs of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules. Accelerated depreciation is a method used to claim greater deductions in the earlier years of an asset's life

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

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

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

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

An attorney, has been appointed as trustee for a trust created by Nancy Walker. The beneficiaries of the trust are Ms. Walker's three minor children. The attorney hired you to provide investment advice. You have interviewed the attorney and Ms. Walker extensively and are confident that you understand the trust's investment objectives and tolerance for risk. You are now ready to prepare a financial plan. Which of the following statements is TRUE? Your fiduciary responsibility has been fulfilled, so you may proceed You must seek an independent attorney's opinion of the trust before you go further You must interview the children's father before you go further You must interview the children before you go further

A You may interview the children or their father, but it is not required. As adviser to a trust, your fiduciary responsibility is principally to the beneficiaries of the trust. The adviser must look through the trust and remember that the investments must be suitable based on the beneficiaries' objectives. The adviser would receive a copy of the trust to see which investments would be suitable.

An individual has been appointed as guardian for an incompetent person by the courts. In opening a guardianship account with a broker-dealer, which of the following documents is required? A guardianship agreement A certificate of incumbency A durable power of attorney A power of attorney

B A certificate of incumbency is a certified copy of the appointment of guardianship. It is evidence the person listed is acting as a fiduciary for another person (the account holder). It may also be used to authorize a person to trade on behalf of any nonincorporated entity, i.e., businesses, clubs, associations, or any organization.

Mr. Lear is a widower who owns rental properties that he wants to leave to his three daughters when he dies. His goals are to minimize estate taxes while also retaining control of the properties during his lifetime. Furthermore, he thinks that his daughter Cordelia is a spendthrift and wants to protect the assets from claims by her creditors. Based on these facts, Mr. Lear should consider forming a: Sole proprietorship Family limited partnership General partnership Corporation

B A family limited partnership (FLP) is the best choice since it would satisfy all of Mr. Lear's goals. If Mr. Lear set up an FLP with himself as the general partner and gave limited partnership interests to his daughters, he could take advantage of certain IRS rules regarding the valuation of minority and illiquid interests to minimize estate and gift taxes. As the general partner, he also retains control of the assets. Furthermore, it would be difficult for his daughter's creditors to attach the partnership property. A general partnership, choice (c), would not allow him to retain full control of the property since all general partners have an equal say in managing the partnership's assets. A general partnership would also not provide the same kind of estate tax benefits.

The advantages of a living (inter vivos) trust include: Avoiding estate taxes Avoiding probate Receiving tax credits Avoiding gift taxes on all intrafamily asset transfers over $1,000,000

B A living (inter vivos) trust is a trust created while the grantor is still alive. One of the main advantages of a trust is that it allows the estate to avoid probate. Trusts do not allow people to avoid estate taxes, but they can be used to reduce them in certain circumstances. (Most living trusts are revocable which means the grantor may rescind them at any time. The assets of a revocable trust must be included in the estate when calculating the estate taxes due.)

Retirement plans that are set up to specifically benefit highly compensated individuals, are known as which TWO of the following plans? Qualified plans Nonqualified plans Top-heavy plans Special ERISA plans I and III II and III II and IV III and IV

B A top-heavy retirement plan is any nonqualified plan in which highly compensated employees may participate without limit of income, such as deferred compensation plans.

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

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

Sales of viatical investments can only be made to suitable investors. Which TWO of the following are considered suitable? An accredited investor under regulation D Anyone who has been specifically approved by the state Administrator Anyone who is in the highest marginal tax bracket and is in need of liquidity Anyone with a minimum net worth of $150,000 and gross income last year of at least $100,000, or a minimum net worth of $250,000 I and III I and IV II and III II and IV

B A viatical investment involves the purchase of an interest in an insurance policy covering the life of an individual. The purchase may be for a whole or fractional interest in the policy at a price above the cash value. The investors pay the premiums on the policy until the death of the insured at which time the death benefit is paid to the investors. Since it is unknown when the insured will die and the funds are not readily assessable on demand, NASAA has specific suitability requirements as found in choices (I) and (IV).

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

B According to the IRS, alimony is not included in the definition of earned income. The IRS defines earned income as compensation received for personal services actually rendered.

While examining a client's investment profile, an IAR determines that the client is able to tolerate a high degree of risk and does not anticipate the need to access invested funds for the next 25 years. What would be the best investment allocation for the client's portfolio? 40% debt, 50% equities, and 10% money-market instruments 95% equities and 5% money-market instruments 25% bonds, 25% equities, 25% money-market instruments, and 25% real estate 65% bonds and 35% equities

B An investor who has a long time horizon and is willing to tolerate high levels of risk may allocate a large percentage of her portfolio in stocks. Choice (b) is the only one that allocates more than 50% of the portfolio in equities

All of the following details regarding a Coverdell Education Savings Account are TRUE, EXCEPT: Contributions are limited to $2,000 annually Contributions are always tax-deductible Taxpayers whose income is above a stated level are not allowed to make contributions Withdrawals are generally tax-free if used for educational purposes

B Contributions to a Coverdell Education Savings Account (CESA) are limited to $2,000 annually and are never tax-deductible. Additionally, contributions are not allowed if the contributor's income exceeds a certain amount. Withdrawals from the account are tax-free if used for qualified educational expenses.

Sally is self-employed and has established a Keogh plan for her retirement. She has one full-time employee, Tom, who is 25 and has worked for her for 7 months. When is Tom eligible to participate in the Keogh plan? Immediately In 5 months In 17 months Never, since he is not self-employed

B Employees of self-employed persons with a Keogh plan must be covered by the plan if they have worked for the employer for one year and are at least 21

Which of the following statements is TRUE regarding tenancy in common? If an owner dies, the assets are directly transferred to the other owner(s) Due to the nature of the agreement, each individual's interest is generally more freely transferable This form of ownership is only permitted for equal ownership between two married individuals If an owner dies, the assets bypass the probate process

B In an account with a tenancy-in-common arrangement, the assets may or may not be equally divided. When an owner dies, his ownership interest in the account is included in his estate and is subject to probate. The benefit of a tenancy-in-common arrangement is that it makes it easier to transfer assets to other investors when one person dies. There is no requirement that the owners of a tenancy-in-common account be a married couple.

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

B Normally, the deceased has named an executor (executrix) in her will

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

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

Which of the following is a common feature of a private 457 plan? The plans do not follow ERISA guidelines, but are considered qualified Employers may discriminate or exclude certain employees from the plan Catch-up contributions must be allowed for everyone over 50 years of age Deferral elections must be made before April 15

B Private 457 plans for nongovernmental employers, such as unions, hospitals, and charitable organizations, may limit who is eligible to participate. Government 457 plans allow for the catch-up provision, while private 457 plans do not. Both private and government 457 plans are governed by ERISA guidelines.

Which TWO of the following statements are TRUE regarding Subchapter S Corporations? Their status is terminated if there are more than 100 shareholders. They have a federal charter. Shareholders have unlimited liability. Income and losses flow through to shareholders. I and III I and IV II and III II and IV

B Subchapter S status is revoked if there are more than 100 shareholders. As with limited partners, shareholders have limited liability, and income and losses flow through to shareholders. Subchapter S Corporations have state charters.

Monica comes to your office and asks for advice about funding her three-year-old son's college education. She is considering using a 529 plan, or a variable life insurance policy, or her employer-sponsored 401(k). Your best advice to Monica is: Use the 401(k) since all withdrawals will be taxed at long-term capital gains rates Use the 529 plan since all qualified withdrawals will be free from federal taxes Use the variable life insurance policy since that way her son will have sufficient funds for college if Monica dies prematurely Open an offshore account to avoid U.S. taxes entirely

B The best advice you can give Monica is to fund a 529 plan. 529 plans are specifically designed to help investors save for college expenses. All withdrawals used for qualified higher education expenses are free from federal taxation (and possibly state taxes as well). Withdrawals from 401(k) plans are taxed as ordinary income, not capital gains, which is why choice (a) is not correct. There is nothing in the stem of the question to indicate that Monica needs life insurance. Her stated objective is saving for her son's college education.

Which of the following statements is FALSE concerning federal income tax? For inherited securities, the cost basis is the market value at the time of death When gifting securities to a charity, the deduction the donor may claim is his original cost basis For gifted securities that have appreciated, the cost basis of the recipient represents the donor's original purchase price For gifted securities that have depreciated, the cost basis of the recipient represents the market value at the time of the gift

B The deduction a donor may claim on a gift of stock to a charity is the market value of the stock at the time of the gift. The donor would benefit if the stock price had risen, since he would avoid paying capital gains tax. In the event that the shares are gifted to an individual, the cost basis is the original purchase price or the current market price, whichever is less. If shares are inherited by an individual, the cost basis of the recipient is the market value of the shares on the date of the decedent's death.

George and Barbara are a wealthy couple in their seventies with five grandchildren. They want to set aside the maximum amount possible for each grandchild's college education while minimizing their estate tax exposure. Based on these investment objectives, which of the following recommendations would be the most appropriate for George and Barbara? They should open a Roth IRA for each grandchild They should establish a 529 plan for each grandchild They should open a Coverdell Education Savings Account for each grandchild They should buy a variable life insurance policy for each grandchild

B They could only contribute $2,000 per year to a Coverdell Education Savings Account for each grandchild. They may contribute much more to a 529 plan ($28,000 per year or $140,000 every 5 years) without tax consequences, and the money will also be removed from their estate.

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

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

Ted set up a 529 plan for his daughter Nicky in 2004. Performance in the account has been mediocre. Which TWO of the following options does Ted have with respect to making changes in the account? Roll over the funds into a Coverdell Education Savings Account Set up a new and separate 529 plan Roll over the funds into another 529 plan Maintain the same 529 plan as required I and II I and IV II and III II and IV

C A rollover of a 529 plan is permitted every 12 months. In rolling over funds from this type of plan an investor would be moving the funds to another state's plan. Generally, there are no residency requirements for a 529 plan. A 529 plan may not be rolled over to a Coverdell Education Savings Account.

A disadvantage of investing in a general partnership versus a limited partnership is: Flow-through tax treatment of gains and losses General partners have limited liability Limited partners have unlimited liability General partners have unlimited liability

D All general partners have unlimited personal liability for debts of the partnership. They also participate in management decisions and may bind the partnership, e.g., through contracts. Limited partners have no personal liability nor may they participate in management.

Perry is a 27-year-old paralegal who makes $35,000 annually. His law firm has a 401(k) plan and the firm matches employee contributions, but Perry does not participate in it, although he is eligible. He wants to save for retirement and is considering a variable annuity. Perry consults an investment adviser representative. The most appropriate advice that the IAR can give Perry is that he should: Invest as much as he can in a variable annuity every month Buy a variable life insurance policy Join his employer's 401(k) plan Wait until he is older to save for retirement

C By joining the 401(k), Perry can save for retirement on a pretax basis. In addition, his employer matches his contributions, which will help his savings grow faster. Payments to a variable annuity would have to be made on an after-tax basis. Generally, people investing for retirement should exhaust their ability to contribute to vehicles (such as 401(k)s or IRAs) that allow them to save money on a pretax or tax-deductible basis before investing in variable annuities.

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

C For a person interested in establishing a small company that will carry few liabilities, the simplest business form is a sole proprietorship. All of the other forms of business would require more extensive paperwork and administration.

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

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

A client creates a limited liability company (LLC). Which TWO of the following statements are TRUE? Like a corporation, LLCs provide investors with limited liability. The owners who manage the LLC are personally responsible for all debts that are incurred. The income earned by the company is taxed like a corporation. The income flows through to investors and is taxed like a partnership. I and II I and III I and IV II and IV

C Limited liability companies provide investors with limited risk. In other words, they may lose no more than their investment. Unlike corporations, LLCs are tax-efficient since they do not pay income taxes. Instead, the investors are required to pay taxes on the income earned by the company.

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

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

Nancy is a nurse at Needam Hospital, a private for-profit hospital located in Utah. Nancy earned $62,000 in salary and $26,000 in overtime last year. She is in the 25% tax bracket and has a Roth IRA, to which she contributes the maximum each year. Nancy would like to contribute more for her retirement on a tax-deferred basis. As her adviser, you may recommend all of the following, EXCEPT: A 401(k) Variable annuities A 403(b) plan Fixed annuities

C Since the hospital is a for-profit organization, the employees may not contribute to a 403(b) plan. Nancy could contribute to a 401(k) plan, if offered by the hospital, or a variable or fixed annuity.

Which of the following choices describes a benefit that a Subchapter S Corporation would provide to investors that is not found when investing in a limited partnership? The number of potential investors is limited Earnings are subject to double taxation Subchapter S Corporations are easy to establish and capitalize Management is centralized

C Subchapter S Corporations provide investors with the following benefits. They are relatively easy to create. They issue common stock, and they allow for the flow-through tax treatment of losses and income. Unlike C Corporations, they do not pay taxes on their earnings, which might then be taxed again when paid to investors in the form of a dividend (double taxation). All business ventures tend to have centralized management and, although Subchapter S Corporations do have a limited number of investors, this is not seen as a benefit.

Kim Jones comes to your office and asks for advice concerning the funding of her retirement. She is considering using either her work-sponsored 401(k), a variable annuity offered by your firm, or a 529 plan. Your best advice to Kim is: Use the 529 plan, since all withdrawals are taken tax-free Use the variable annuity, since all withdrawals are taxed at long-term capital gains rates while the 401(k) distributions will be treated as ordinary income Use the 401(k) Open an offshore account in the Cayman Islands to avoid all U.S. taxation

C The best advice to give Kim is to fund her 401(k). The client will receive immediate tax relief from the reduction in her reportable income and tax-deferred growth. Variable annuities' earnings are taxed as ordinary income when withdrawn. 529 plans are designed to help investors save for higher education expenses, not for retirement. Any withdrawals that are not used for college or graduate school are subject to a 10% tax penalty. Choice (d) is, of course, both unethical and illegal.

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

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

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

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

When meeting with a potential customer for the very first time, which of the following would be a reasonable course of action? Prior to the meeting, informing the client to bring additional financial information. If necessary, an IAR may inform the client that he may not know the answer to one of her questions, but will find out and respond within a reasonable period. Inform the client that she needs to increase her risk tolerance to obtain her goals. Discuss the customer's current financial situation and her goals for retirement. I and II only I, II, and III only I, II, and IV only I, II, III, and IV

C When meeting with a potential customer, it would not be reasonable to tell her that she needs to change her risk tolerance. A client may increase the future value of a portfolio by saving more money or by allowing her money to compound over a longer period. It is often considered inappropriate to encourage a client to assume risk beyond her comfort level

Pursuant to Regulation T of the Federal Reserve Board, when opening a margin account, which TWO of the following MUST be signed? A loan consent form A hypothecation agreement A margin account form Trading authorization I and III I and IV II and III II and IV

C When opening a margin account, a customer must sign both a hypothecation agreement and a margin account form. The loan consent form is used when a customer authorizes the member to lend his securities, and is not required. Trading authorization is also not required

In a Money Purchase Plan, the annual maximum contribution is: $5,500, plus $1,000 if the person is 50 or older $17,500 20% of pretax income The lesser of 25% of compensation or $52,000

D A Money Purchase Plan is a defined contribution plan, since the employer is required to contribute on behalf of all eligible employees. It is unlike a profit-sharing plan, which does not require employer contributions if the company is not profitable.

Which of the following would NOT be an important consideration when conducting a capital needs assessment for a client? The rate of inflation The client's future anticipated earnings The client's life expectancy and retirement needs The amount of anticipated volatility in the marketplace

D A capital needs assessment analyzes a client's future goals and needs. Retirement planning, college funding, and the risk of death before meeting a savings goal are all considered. A client's life expectancy, the rate of inflation, and her earnings will all affect the capital needs assessment. Market volatility may influence the securities on which recommendations are based, but not the capital needs assessment.

Who supplies the property to create a trust? The settlor The grantor The maker All of the above

D All these terms are synonymous. The person who supplies the assets to place in a trust may also be referred to as the donor or trustor. When taking your examination, you may see these terms used interchangeably

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

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

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

D A partnership is easy to establish and operate, while corporations require more reporting and administration. Partnerships generally do not allow for the free transfer of shares and, if a partner manages the business enterprise, he may be liable for the debts of the partnership.

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

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

Gary and Mary were recently divorced. Mary has been ordered by the court to pay alimony to Gary. How are these monthly payments treated for tax purposes? Alimony payments are deductible to Mary. Alimony payments are taxable to Gary. Alimony payments are taxed as earned income. Alimony payments are not taxed as earned income. I only I and II only I, II, and III only I, II, and IV only

D Alimony is deductible for tax purposes by the payer and taxable to the recipient. It is not taxed as earned income, but is taxed as unearned ordinary income.

Under ERISA, which of the following transactions are prohibited between a fiduciary and a party in interest? The fiduciary is involved in the sale of property of the plan to a party in interest. The fiduciary extends credit between the plan and a party in interest. The fiduciary furnishes goods or services between the plan and a party in interest. The fiduciary transfers plan assets to a party in interest. I only I and II only II, III, and IV only I, II, III, and IV

D All are prohibited transactions under ERISA.

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

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

A registered representative has a client who owns a small business. The business produces strong cash flow during the holiday season, but negative cash flow the rest of the year. This may indicate a need for which of the following choices in the client's portfolio? Capital preservation Current income Tax relief Liquidity

D Because the client may need access to capital when the cash flow from the business is negative, the portfolio should have some investments that are liquid. Money-market instruments might be suitable for this portion of the portfolio.

George, a bachelor with no dependents, would like to insure that the securities in his account will go to his sister upon his death, but wishes to avoid probate. As his adviser, what type of account would be most appropriate for George? Joint Tenants With Right of Survivorship (JTWROS) Tenants in Common (TIC) A durable account Payable On Death (POD)

D By setting up the account as POD, the assets pass to George's sister without going through probate. If he were to choose JTWROS, his sister would be considered an equal owner of the assets, whereas she is only the beneficiary in a POD account. Tenants in common is used most often by unrelated parties, such as business partners. There is no such thing as a durable account.

Gary and Mary were recently divorced. Mary has been ordered to pay child support to Gary, who has custody of their two children. Which of the following statements is TRUE regarding child support payments? Child support is not tax-deductible for the payer. Child support is tax-deductible for the payer. Child support is taxable for the receiver. Child support is not taxable to the receiver. I and II only II and III only II and IV only I and IV only

D Child support payments are not tax-deductible for the payer and not taxable for the recipient.

Eileen has set up 529 plans for each of her grandchildren. What is the most that Eileen may contribute to each child's plan without incurring gift taxes? $2,000 annually $5,500 annually $2,000 annually or $10,000 at one time $14,000 annually or $70,000 at one time

D Eileen may take advantage of the annual gift tax exclusion to contribute $14,000 per year to each of her grandchildren's 529 plans. She may also aggregate five years' worth of contributions into one large $70,000 contribution (5 x $14,000). If Eileen opts to contribute $70,000 at one time, she may not make any further contributions for five years without incurring gift taxes.

Which of the following statements regarding SEP-IRAs is FALSE? Contributions are deposited into an employee's eligible IRA Employees are allowed to make contributions to their IRAs Part-time employees who meet the eligibility requirements must be included in the plan The employer is required to contribute a specific amount annually

D Employers are not required to make contributions to a Simplified Employee Pension plan (SEP-IRA). Instead, they make elective (discretionary) contributions. All of the other statements regarding SEP-IRAs are true.

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

D Limited liability companies may now be established in any state by filing the appropriate documents with the secretary of state or another state authority. All the other statements are true.

Which TWO of the following investments impose income limits on contributors? A Traditional IRA A Coverdell ESA A 529 plan A Roth IRA I and III I and IV II and III II and IV

D Not everyone is eligible to make contributions to a Coverdell ESA and a Roth IRA. With a Roth IRA, single filers may not contribute if adjusted gross income is greater than $129,000 (an increase from $127,000 in 2013). There is a phaseout between $114,000 and $129,000 (an increase from $112,000 and $127,000 in 2013). For joint filers, no contribution is allowed if adjusted gross income is greater than $191,000 (an increase from $188,000 in 2013). There is a phaseout between $181,000 and $191,000 (an increase from $178,000 and $188,000 in 2013). With a Coverdell ESA, a single filer may not contribute if adjusted gross income is greater than $110,000. For a joint filer, the adjusted gross income limit is $220,000.

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

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

Which of the following items is not included in an income statement? Sales Interest Taxes Dividends

D The income statement for a business will disclose its sales (revenues) less its operating expenses, less interest paid on its debt, which equals earnings before taxes. Then taxes are deducted, to determine net income, from which dividends may be declared. Once declared, the balance sheet will reflect the reduction in retained earnings, and an increase in current liabilities, and a decline in working capital. A word of caution: when constructing an income statement for a client, dividends received from owning investments are included on the client's income statement.

A married couple, have returned from a vacation in Las Vegas with winnings of $4,000,000. They have already paid federal tax on the winnings and would like to make monetary gifts to their relatives, but want to avoid paying federal gift taxes. If the couple has 5 children and 11 grandchildren, what is the maximum amount that they may provide as a gift, without incurring a gift tax? $14,000 per person, per year $140,000 $224,000 $448,000

D The maximum gift per person without incurring gift taxes is $14,000. Each member of a married couple may make a gift in that amount to an unlimited number of individuals. In this case, the married couple may each give $14,000 to each of their 5 children and 11 grandchildren a total of 16 individuals. (16 x $14,000 = $224,000; 2 x $224,000 = $448,000)

The risk tolerance of the customer is NOT a consideration when providing advice to which of the following types of clients? High net worth investors Corporations Trusts Estates I only II, III, and IV only I, II, III, and IV None of the above

D The risk tolerance of the customer must be taken into account in all cases, even when the customer is an institution.

Which of the following statements is TRUE according to ERISA section 404(b)? The fiduciary may maintain plan assets in any foreign jurisdiction Any plan participant may be considered a fiduciary The fiduciary may not maintain the indicia of ownership of assets of the plan outside the jurisdiction of the district courts of the U.S. The fiduciary may maintain the indicia of ownership of assets of the plan outside the jurisdiction of the district courts of the U.S. if authorized by the Secretary of the Department of Labor

D The rules according to ERISA section 404(b) prohibits fiduciaries from maintaining the indicia or evidence, of ownership of plan assets outside the jurisdiction of U.S. courts, unless allowed by the Secretary of the Department of Labor.

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

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

The Investment Policy Statement of a qualified plan under ERISA: Defines the roles of parties involved in management of the plan Identifies specific asset classes to be offered in the plan Lists the criteria for the selection and performance requirements for each investment option Requires the fiduciary of the plan to be registered with the state Administrator as an IA I only I and II only I, II, and III only I, II, III, and IV

C All are true statements, except that the Investment Policy Statement does not address the registration requirements or status of the fiduciary. However, under the Uniform Securities Act, the fiduciary is defined as an IA, but is exempt from registration if the plan assets are at least $1,000,000 and the IA has no place of business in the state.

When developing an investment recommendation for a client, which of the following would be the LEAST important? The client's total current assets The client's adjusted gross income The client's current mortgage interest rate The number of children in the client's household

C When evaluating a client's investment needs, an investment adviser will consider the client's income, expenses, assets, liabilities, and household size. Evaluating the client's mortgage interest rate may be included as a part of the process, but doing so is not required to develop a suitable investment strategy.

A customer's investment policy statement may contain which of the following? Expectations related to the markets Analysis of risks and rewards Asset allocation models I only I and II only II and III only I, II, and III

D A customer's investment policy, which details how the customer's money is to be managed, may include all of these items.

According to the Employee Retirement Income Security Act, all of the following persons or entities would meet the definition of a fiduciary, EXCEPT: The attorney who sets up the plan The investment adviser to the plan An individual who has discretion regarding the administration of the plan The trustee of the plan

A According to the Employee Retirement Income Security Act (ERISA), attorneys, accountants, and actuaries are not considered fiduciaries when acting solely in their professional capacities. Numerous activities involving the retirement plan require a person to act as a fiduciary, that is, to act in the best interests of others. A person who has discretion over the administration of the plan, or who manages the assets of the plan, is responsible for fulfilling the obligations of a fiduciary. Additionally, some activities are business decisions rather than fiduciary actions. Whether a plan will be established for employees and the benefits provided are business decisions.

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

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

Which of the following is dissolved when an owner dies? A corporation A general partnership An S Corporation A trust

B General partnerships generally dissolve when an owner becomes mentally incapacitated or dies. All of the other entities listed have continuity of life.

The last dollar of income earned each year is taxed at the: Effective tax rate Marginal tax rate Average tax rate Highest tax rate

B Income is taxed at progressively higher rates. The first dollar earned is taxed at the lowest bracket, or rate, while the last dollar earned is taxed at the appropriate rate, or marginal tax rate. The effective tax rate is the average of the taxes paid at different rates.

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

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

Mary has a traditional IRA. She just celebrated her seventy-third birthday. She must withdraw the required minimum distribution (RMD) not later than: April 1 of the following year December 31 of the current year The end of five years The end of 10 years

B Since Mary was required to withdraw the Required Minimum Distribution by April 1, after she turns 70 1/2, subsequent RMDs must be withdrawn by December 31 each year.

An advantage of a Coverdell Education Savings Account versus a 529 plan is: More money may be invested A custodian has greater control over the investments There are lower tax rates There is a longer holding period

B With a Coverdell Education Savings Account, the custodian has greater control of the selection of investments (i.e., individual stocks, bonds, or mutual funds). There is a maximum contribution of $2,000 per year in a Coverdell. In a 529 plan, an investment is made in the state plan without the benefactor's input. Depending on the state, a 529 plan may allow a substantially larger contribution (exceeding $200,000 in some states). Both plans offer tax-free growth if the funds are used for qualified educational expenses. Funds in a Coverdell Education Savings Account (ESA) must be used within 30 days of reaching the age of 30. There is no specific age requirement for funds to be withdrawn from a 529 plan.

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

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

What information is important for determining whether a limited partnership is appropriate for a particular client? The client's financial status and ability to assume risk The client's investment objectives The client's occupation The client's educational background I only I and II only I, II, and III only I, II, III, and IV

C A client's educational background is not an important factor for determining whether a limited partnership is appropriate for the individual.

Biff and Muffy want to contribute the maximum amount to each of their grandchildren's 529 college savings plans. What is the most that they can give each grandchild without incurring federal gift tax liability? $2,000 annually or $10,000 every 5 years $2,000 annually or $20,000 every 5 years $28,000 annually or $140,000 every 5 years As much as they want each year up to $300,000

C As a married couple, Biff and Muffy may contribute $28,000 annually to each of their grandchildren's 529 savings plans without incurring gift taxes. They may also compact five years of contributions into one and contribute $140,000 to each grandchild's 529 plan without incurring gift taxes. If they choose to aggregate their contributions into one large lump sum, they may not contribute more for the following five years without incurring gift taxes.

Dividends are: Taxed as short-term gains Taxed as long-term gains Taxed as ordinary income Tax-free if reinvested

C Dividends are taxed as ordinary income at the investor's tax rate (even if reinvested to acquire more shares), usually at no more than a tax rate of 20%

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

C Typically, in an irrevocable trust, the donor gives up all claim to assets placed in the trust. Assets in this type of trust are typically not included in the donor's estate. This reduction of assets would reduce any potential estate taxes payable by the donor's estate. Choice (b) is wrong because losing control of the assets is not a benefit to the donor

Which of the following would NOT be included in the adjusted gross income (AGI) of a customer? Salary Alimony payments received from an ex-spouse Income received from investments Interest received from a municipal bond investment

D A client's federal adjusted gross income (AGI) consists of her taxable income. If taxable, a client's salary, alimony received, and income derived from her investments would be included in AGI. Since interest from a municipal bond is tax-free, it would not be part of the AGI.

A trustee would most likely NOT consider which of the following factors when managing a trust's assets? The value of the assets The general condition of the economy and the stock market The current rate of inflation The beneficiaries' normal trading practices in their own brokerage accounts

D A trustee has a fiduciary responsibility to manage assets in a way that is reasonable. Before investing, a reasonable person would consider the general conditions of the economy, the strength of financial markets, and the current effect of inflation on the markets. How one beneficiary invests in her personal brokerage account has little to do with the needs of the other beneficiaries of the trust

In reviewing and analyzing a customer's financial status, which of the following choices are important considerations? Discretionary income available for investment Insurance needs or policies in place Participation in retirement plans Anticipated expenditures I and II only II and III only II, III, and IV only I, II, III, and IV

D All of the information presented should be considered before suggesting or implementing an investment plan

Which TWO of the following are features of 401(k) plans? Mandatory employee contributions Mandatory employer contributions Voluntary employee contributions Voluntary employer contributions I and II I and III II and III III and IV

D In a 401(k) plan, both employee and employer contributions are voluntary.

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

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

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

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

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

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

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

C A durable power of attorney gives someone else the power to manage the grantor's financial affairs if that individual becomes incapacitated. A regular power of attorney terminates if the grantor becomes incapacitated.

An investor purchases a mutual fund in a joint brokerage account and receives a dividend, which the investor decides to reinvest in the fund. Which TWO of the following statements are TRUE regarding the tax consequences of this transaction? Reinvested dividends are not subject to taxation. Reinvested dividends are subject to taxation. Any dividend received, whether reinvested or not, is subject to taxation. Qualified dividends are not subject to taxation. I and III I and IV II and III II and IV

C All dividends, interest, and capital gains distributed from a mutual fund are subject to taxation unless the investment is purchased within a tax-sheltered account such as a 401(k) or individual retirement account. Qualified dividends are subject to taxation.

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

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

Two of your clients, Bruce and Gary, are forming their own company. They are planning to incorporate and want to know which corporate entity would be best from a tax perspective. Which of the following entities would have the MOST tax disadvantages? A C Corporation An S Corporation A limited liability company (LLC) A limited liability partnership (LLP)

A A C Corporation would be the worst option from a tax perspective. The corporation would first need to pay corporate taxes on any profits it generated. Its shareholders (owners) would then be required to pay personal income taxes on anything that is distributed to them in the form of dividends. All the other choices are flow-through entities for tax purposes.

Which of the following features are characteristics of a Roth IRA? Contributions are made with after-tax dollars. Anyone with earned income is eligible to fund a Roth IRA. Any distributions of monies that were never taxed will be subject to tax, but at preferential rates. Distributions from the plan are tax-free as long as the owner of the account is at least 59 1/2 years old. I only I and II only I and IV only I, II, III, and IV

A A Roth IRA is funded with after-tax dollars, so there is no immediate tax benefit. Qualified distributions held more than five years may be withdrawn tax-free when the investor reaches 59 1/2. Choice (II) is incorrect because there are income limitations on who may fund a Roth IRA

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

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

Paul wants to set up a pension plan for his small business but does not want to obligate the company to making set annual contributions, nor does he want a plan that will be complex or expensive to administer. Which plan would be the best choice for Paul's company? A SEP plan A Money Purchase plan A 403(b) plan A Coverdell IRA

A A simplified employee pension plan would be the best choice given this criteria. As the name implies, a SEP plan is simpler to administer and set up than some other types of pension plans. The employer is not required to make fixed annual contributions to the employee's account. A Money Purchase plan, choice (b), does require an employer to make fixed annual contributions regardless of its cash flow. A 403(b) plan, choice (c), may be established only by certain tax-exempt organizations such as a public school system.

Randy has inherited his father's IRA. According to IRS rules, Randy must withdraw the entire account by: The fifth year following the owner's death The year following the owner's death The tenth year following the owner's death There is no statutory period for withdrawal

A According to the IRS, a beneficiary who is an individual may be required to withdraw the entire account by the end of the fifth year following the year of the owner's death. No distribution is required for any year before the fifth year.

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

A Contributions to both a Roth IRA and Coverdell Education Savings Account (ESA) are only permitted for persons whose income is below a certain level. Both allow for tax-free growth if certain conditions are met, but the contributions are made in after-tax dollars. A Roth IRA allows a catch-up contribution if the person is age 50 or over. A Roth IRA allows for a maximum annual contribution of $5,500 and the annual amount for a Coverdell ESA is $2,000.

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

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

A client of an investment adviser representative has just died. If the client did not have a will, from whom may the investment adviser representative accept instructions? The intestate Administrator The deceased client's adult child Any person with a legally executed power of attorney The deceased client's spouse

A If an individual dies without a will and the assets of estate exceed the estate's liabilities, the estate is considered intestate. A probate court will appoint a person to act as the administrator of the estate and distribute the estate's assets to the beneficiaries. A power of attorney is void after a client dies.

According to modern views about investing, fiduciaries should be most concerned about which of the following objectives when making investment decisions? Developing an investment policy that accords with the client's goals and risk tolerance Developing a properly diversified portfolio consisting of securities that will minimize the risk exposure to clients Ensuring that the client's capital is preserved for heirs Making certain that the client avoids the purchase of non-investment-grade debt instruments and equities that are nonlisted, non-Nasdaq issues

A Modern views of fiduciary responsibility in investing place less emphasis on preservation of capital and more emphasis on risk management (not complete avoidance), appropriate diversification, and development of an investment policy that is consistent with client goals. Fiduciaries are no longer limited to investing in certain classes of assets as they were under the legal list approach

What is considered easy for a limited partnership to perform? Originally forming of the business Selling interests in the business for the purpose of raising capital Selling interests from one investor to a new investor Continuing business operations indefinitely into the future

A Partnerships are one of the easiest business entities to form, especially when compared to corporations. However, the transfer of partnership interests from one investor to another is difficult since a general partner's approval may be required. Another difficulty for partnerships is the raising of capital due to the fact that the general partner is often limited to selling to institutional and accredited investors. In some cases, a partnership will disband due to the death of a partner, thereby limiting the life of the partnership.

What is the biggest advantage of investing in a general partnership? Income is only taxed once Each partner has limited liability Each partner shares equally in the partnership's profits It is easy to dissolve or liquidate the partnership

A Partnerships are tax-advantaged investments since the income they generate is taxed only once. A partnership's income passes through to its partners and is, therefore, taxed at each partner's level. In general partnerships, since there are no limited partners, limited liability is not an available feature. Also, profits are not automatically split equally among the partners.

Two months ago, Jason, one of your agents, put five of his clients in an in-state-sponsored mutual fund under a Section 529 plan for their children's college education. They each have a $100-per-month payroll deduction set up at their place of employment. Last week, Jason called each of them and convinced them to roll over their holdings into a prepaid tuition plan while continuing their payroll deductions. Yesterday, he called them again to sell them on a rollover to a new Coverdell Education Savings Account that your firm is offering. What is wrong with this course of action on the part of the registered rep? It suggests excessive activity and may be considered churning the accounts A 529 plan cannot be rolled over into a Coverdell ESA There is no violation since all the plans are different There is no problem since the investments are made through payroll deduction I and II only I and III only II and III only III and IV only

A Since three different investments were suggested within a two-month period, this could be considered excessive activity (churning the accounts), especially if the investments were in mutual funds. Additionally, the provisions of Section 529 plans provide for a rollover without a change of beneficiary only once within a 12-month period, but not into a Coverdell ESA.

Who is permitted to participate in a tax-sheltered annuity established under Internal Revenue Code Section 403(b)? An employee of a school district Only self-employed individuals Any employee of a corporation who meets the eligibility standards Any employee who participates in a nonqualified retirement plan

A Tax-sheltered annuities are funded with pretax dollars and represent an immediate deduction to the investor. They are made available to employees of public school systems under IRS Code 403(b) and to employees of certain nonprofit organizations under IRS Code 501(c)(3)

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

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

Bert and Berti are both 60 years old and earned $150,000 jointly last year. They contribute to their 401(k) plans but would like to save more for their retirement. The most suitable type of plan for an IAR to recommend is a: Roth IRA, in which each may contribute $6,500 per year Traditional IRA, in which each may contribute $5,500 per year Roth IRA, in which both may contribute $5,500 per year Traditional IRA, in which both may contribute $6,500 per year

A The maximum annual contribution to either a traditional or Roth IRA is $5,500, per individual. However, for people age 50 or older, the maximum annual contribution is $6,500. Bert and Berti's gross income does not exceed Roth income eligibility requirements, so the Roth is typically a better choice compared to a traditional IRA, since withdrawals from a Roth are tax-free. With the traditional IRA, any earnings are taxed as ordinary income upon distribution, plus the contributions may be taxed if contributions were made on a pretax basis. Given the clients' ages, income, and the tax-free withdrawals, the Roth is the better investment choice.

When looking at the tax consequences of trading securities within a trust, the trustee should look at: Other taxable income generated by the trust The taxable assets of the trustee The taxable assets of the grantor The taxable income of the beneficiary of the trust

A The trust is a taxable entity. While the beneficiary may receive the income of the trust and the trust is managed for the beneficiary's benefit, income received by the trust is taxable. The income or other assets held by the beneficiary are not relevant for tax purposes.

Pete and Danielle are a married couple in their 20s. They both have jobs that pay well and they have begun to think about investing for retirement. Which of the following portfolio allocations would be most appropriate for them? 10% bonds, 90% stock 100% common stocks 80% bonds, 10% common stocks, 10% money market 50% bonds, 50% common stocks

A To amass the assets they will need at retirement, Pete and Danielle should include common stocks in their portfolio. A portfolio that is predominately bonds, choice (c), will not likely produce the required long-term returns. However, a portfolio that mixes stocks and bonds, choice (d), is probably a better choice for the couple than one that is exclusively common stock, choice (b). However, given their long time horizon (they are still in their 20s), Pete and Danielle can probably tolerate additional investment risk, so they can put the majority of their savings in stocks to increase their potential return. Choice (a) would be most appropriate given their goals and risk tolerance.

Which of the following is the LEAST important factor when planning for college? The parents' income The current cost of tuition The assumed rate of return The inflation rate

A When planning for college, a person needs to anticipate what tuition costs will be in the future. An effective method of estimating the future cost is to use the current cost of tuition and inflate it over time. Since the investment made today will compound over time, a person must select an assumed rate of return.

In 2005, Joan gives her daughter an antique necklace for her birthday. The necklace was originally purchased for $5,000, but her daughter has the necklace appraised for $10,000. If her daughter sells it for $12,000, for tax purposes, the proceeds of the sale are treated as a: $7,000 capital gain $2,000 capital gain $12,000 capital gain Tax-free event, since it is under the gift tax limit

A When receiving collectibles as a gift, the recipient's basis is generally the original purchase price. Since the necklace originally cost $5,000, Joan's daughter would have a gain of $7,000 ($12,000 proceeds - $5,000 basis).

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

B A disadvantage of investing in a C Corporation is the double taxation of income that is paid to shareholders in the form of a cash dividend. That income was first taxed as part of the corporation's income, since a C Corporation is a taxable entity. The shareholders must also pay income tax on the portion they receive as a cash dividend. The maximum tax rate on this double-taxed income is usually 20%. Choice (d), limited liability, is true of C Corporations, but it is an advantage rather than a disadvantage

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

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

Who is responsible for filing estate income tax returns and making sure that the payments are made on the estate's behalf? The heirs The administrator or executor The probate court The decedent or testator

B An executor or administrator is responsible for managing the estate's assets and distributing the property to the heirs. These responsibilities include paying any estate taxes that are due as well as income taxes that might be due on income earned by the estate before the assets are distributed to the heirs.

Mary is a 32-year-old investor with an aggressive risk tolerance. She has trading authorization for her 87-year-old aunt who is in ill health. The account was opened with the aunt's money and for her benefit. Mary is the sole heir of her aunt's estate. Whose objectives and needs should an investment adviser representative consider when recommending investments for the account? Mary's only The Aunt's only Both Mary's and the aunt's Primarily Mary's since she will probably inherit the money soon

B Any investments that the adviser recommends for the account must be suitable for the aunt, since the account was opened with her funds and for her benefit. The fact that Mary expects to inherit the money is not relevant, even if this is likely to occur fairly soon given her aunt's age and condition.

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

B Dividends from all sources, including life insurance policies, would be included in the income section of a personal income statement, not in the expenditures section.

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

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

Which of the following statements is FALSE regarding limited partnerships? The general partner manages the business entity The partnership does not provide any tax advantages The limited partners have limited liability The limited partners may transfer their ownership

B In a limited partnership, the general partner manages the business enterprise while the limited (silent) partners contribute capital to the business and have limited risk. Although it is not without its challenges, a limited partner may transfer her ownership. The difficulty is that many partnerships require a general partner's approval to be allowed to sell. Partnerships are tax-advantaged and, unlike corporations, are not subject to taxes

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

B In a partnership, the general partners are liable for the partnership's debts. (Limited partners are not liable but there is no indication in the question stem that one of them is going to be a limited partner.) In an S Corporation, the owners are not liable for any of the company's debts. They have only limited liability. As for choice (a), both entities receive favorable federal tax treatment. Both are pass-through entities for tax purposes. All losses and profits are passed through to the owners.

John and Audrey are a married couple. They are both thirty-five and have a 4-year-old daughter. They both work and together they earn more than $200,000 per year. John received a substantial bonus last year, which they want to save in order to purchase a home in 3 to 5 years. Which of the following investments would be the BEST recommendation for them? A short-term, investment-grade bond fund A short-term municipal bond fund A bond index fund An equity-indexed annuity

B John and Audrey have a short-term investment goal--they want to buy a house in the next couple of years. Thus, capital preservation and liquidity should be two of their main goals. Choice (b) is the best answer, but choice (a) is also a viable answer. Both funds would meet these objectives. However, the stem of the question indicates that they have a high income and are probably in a high marginal tax bracket. Thus, a municipal bond fund would provide them with income that is free from federal taxes and is possibly state and local tax-exempt as well.

If an advisory client is most concerned with minimizing taxes, common stocks may provide a lower tax liability than corporate bonds because: Stocks tend to provide a lower yield than bonds Qualified cash dividends are taxed at a maximum rate that is less than the tax rate on interest from bonds The unrealized appreciation on some bonds is taxed each year as ordinary income Stock gains are taxed at a lower rate than gains on bonds to encourage investments in stocks

B Qualified cash dividends are taxed at a maximum rate of 20%. The interest on corporate bonds is taxed as ordinary income.

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

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

Under IRS rules, which of the following items are exempt from the definition of earned income? Unemployment benefits Alimony Child support Income received from investments in property Net earnings from self-employment I, II, and III only I, II, III, and IV only II, III, IV, and V only I, II, IV, and V only

B The IRS defines earned income as compensation received for personal services actually rendered. According to the IRS, all of these items are considered earned income. Wages, salaries, and tips Union strike benefits Long-term disability benefits received prior to minimum retirement age Net earnings from self-employment Unemployment, alimony, and child support are not considered earned income. Income received from investments in property are defined as passive income, which is different from earned income, and treated separately by the IRS.

An 81-year-old gentleman is establishing a bypass trust for his two adult children. His investment adviser is evaluating the risks and benefits of numerous investment vehicles. Which of the following choices is MOST applicable for investments in a bypass trust? Government securities are advisable to preserve the value of assets passing to the beneficiaries Growth stocks are advisable, since long-term capital gains tax rates will apply to the beneficiaries, but would not apply to the estate Municipal securities would provide tax-free income to the beneficiaries Short-term maturities are most suitable, given the grantor's age

B The tax rates for estates can be significantly higher than the maximum long-term capital gains tax rate of 20%. In a Credit Shelter Trust (also known as a bypass trust, family trust, or B trust), when an individual dies, his assets flow into the trust in the amount of the estate-tax exemption. Although this amount is subject to tax, an individual can apply his unified credit to the amount and the trust is free from estate taxes in the future. The growth of the trust is not part of the estate. The beneficiaries pay taxes as capital gains, but this is often a far lower rate than estate tax rates. Growth stocks are often appropriate because of the significant difference between the two tax rates

Your client has decided that he is ready to make some speculative moves with a small portion of his portfolio. His suitability profile supports this move. Which of the following recommendations could you make to meet his new goal? Purchase an asset allocation fund with a growth objective Buy a biotechnology fund Buy calls and puts Invest in utility stocks I and II only II and III only II, III, and IV only I, II, III, and IV

B This question is a bit tricky, due to its wording. We know that the investor wishes to make some speculative moves, and most of the choices in this question could be viewed as aggressive. When evaluating choices (I) and (IV), the key point to focus on is the word speculative. Speculation involves a high degree of risk and volatility. Options clearly have both. A biotechnology fund would also fit in this category. Typically, any sort of sector play would be considered speculative. An asset allocation fund with a growth objective is not speculative. Growth and speculation are two different investment objectives. Utility stocks are purchased for their dividends and, therefore, are not considered speculative.

An investor in the 35% tax bracket is considering investing in a corporate bond, which has a 6% coupon. In order to earn an amount equal to her after-tax return from the corporate bond, she would need to invest in a tax-free bond that is yielding: 2.1% 3.9% 2.5% 6%

B To determine the after-tax return, multiply the yield on the corporate bond by (1 - Tax Bracket). .06 x (1 - .35) = .039 3.9% is also known as the net yield, or the after-tax return. If the investor bought a tax-free bond (e.g., a municipal bond) yielding 3.9%, divide by (1 - .35) to obtain the taxable-equivalent yield, or 6% in this example.

Which of the following persons could contribute to a 457 plan? A computer programmer who works for IBM A Certified Public Accountant A local government employee All of the above, since these plans are entirely self-funded with no employer contribution

C A Section 457 is a type of retirement plan used by many public sector workers. These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Series 66 students may encounter all three types on the examination. All have similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of employees of the state government or local government agencies or subdivisions.

Which TWO of the following statements are TRUE concerning Section 457 plans? They are state-sponsored and used to fund higher education expenses. They are used to fund retirement. They grow tax-deferred. They grow tax-free. I and III I and IV II and III II and IV

C A Section 457 plan is a type of retirement plan used by many public sector workers. These 457 plans grow on a tax-deferred basis and are generally subject to the same contribution limits as 401(k) and 403(b) plans. All have similar tax features and contribution allowances. The difference between the plans is the type of employee who may use them. A 401(k) plan is used by for-profit employees, a 403(b) plan by nonprofit employees, and a 457 by some local government workers. State-sponsored, higher education savings vehicles are referred to as Section 529 plans, not 457 plans.

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

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

Pat, an advisory client of Terri, is in his late 20s. He has a higher-than-average income, his own home, and several other valuable assets, with little debt other than a mortgage. He has indicated that his main goal is retiring at age 55. He also tells Terri that the stock market makes him very nervous, and that he has never been comfortable putting his money in anything but CDs and money-market funds. Which of the following statements is TRUE regarding this situation? Pat's low-risk tolerance is inappropriate for someone in his situation and Terri should ignore it Since Pat is financially capable of bearing some risk, Terri may not recommend conservative strategies Regardless of whether Pat can financially bear some risk, Terri must take his low-risk tolerance into account when making recommendations Once Pat has revealed his low-risk tolerance, Terri may not attempt to convince him that assuming a moderate level of risk might be suitable for him

C An investment adviser must take into account a client's psychological ability to tolerate risk, regardless of the level of the client's financial resources. However, this does not prevent the adviser from trying to convince the client that a higher level of risk might be appropriate

The plan documents of a qualified retirement plan require that the investment manager purchase securities issued by the plan's sponsor. These are securities that a prudent investor clearly would not purchase. What is the only course of action that the investment adviser may take in order to avoid violating the fiduciary responsibility provisions of ERISA? Purchase the securities Purchase only a small amount of the securities Refuse to purchase the securities Appeal to the Department of Labor for an individual exemption from the prohibited transaction rules

C ERISA states that a fiduciary must follow the terms of the plan documents unless these documents are inconsistent with ERISA. In this case, purchasing these securities would violate the prudent expert standard of ERISA. Thus, the plan documents are in conflict with ERISA and the investment adviser should not follow them. An adviser that did purchase the securities could be held liable for violating a fiduciary duty.

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

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

Which of the following actions by an agent of a broker-dealer is NOT permitted? Providing securities-related advice to a customer and receiving a commission based on the purchase of the security by the customer Describing the features of a trust to a customer Providing advice to a customer regarding the type of joint account to be opened Providing advice to a customer regarding the investments within a custodial account

C Giving advice to customers regarding the type of joint account to be opened is legal advice and, therefore, may only be provided by attorneys.

A very conservative client has just retired and wants to set aside some money to buy a new car within the next two years. Which of the following investments would be suitable based on this client's situation? Treasury bonds maturing in 20 years Treasury notes maturing in two years Money-market funds Bank-insured certificates of deposit I and II only I, II, and IV only II, III, and IV only I, II, III, and IV

C In this example, the investor is interested in capital preservation and liquidity. With the exception of the 20-year Treasury bond, all of the investments listed are short-term, liquid, and safe. The 20-year bond's maturity would expose the client to excessive interest-rate risk, making the investment less liquid and, therefore, unsuitable

As a child approaches college age, the custodian of a 529 plan might want to: Switch to a variable annuity to enjoy tax deferral Move the assets into a UTMA Adjust the asset allocation within the plan Convert to a prepaid tuition plan

C Many 529 plans provide the opportunity to alter the asset allocation to reduce market risk as the beneficiary approaches higher education enrollment. A 529 plan offers tax-free growth. There is no tax benefit if the 529 plan assets are moved into a variable annuity

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

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

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

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

All of the following statements are TRUE of a 529 plan, EXCEPT: Withdrawals used for educational purposes are not subject to federal taxation There are no income limits placed on contributors Contributions are unlimited A married couple may give a lump sum of $140,000 without incurring federal gift taxes

C The contribution limits for a 529 plan are quite high (much higher than those for a Coverdell Education Savings Account, which is capped at $2,000 a year) but they are not open-ended. Each state establishes the maximum amount that may be contributed to all 529 plans maintained for one beneficiary (usually $200,000 to $300,000). All the other statements are correct. Note, however, that an investor who contributes the maximum amount allowable to a 529 plan may incur federal gift taxes. A single investor may contribute up to $14,000 per year ($28,000 for a couple) for each beneficiary without incurring gift taxes. An investor may also aggregate 5 years' worth of annual contributions into one and give a $70,000 lump sum ($140,000 for a married couple) without incurring federal gift taxes.

Geraldo and Gwen are married and in their late 30s. They want to plan for their retirement. Which of the following asset allocations is most applicable? 20% equities and 80% fixed-income instruments 50% equities and 50% fixed-income instruments 70% equities and 30% fixed-income instruments 90% equities and 10% fixed-income instruments

C The couple, in planning for their retirement, should be focused on growth at this point. Equities have a greater historic growth potential than fixed-income instruments; therefore, a greater percentage of the assets should be invested in equities. Diversification is also important. If the portfolio of investments is too heavily weighted in equities, choice (d), market risk (systematic risk) is high. The best choice would be to allocate investments more heavily in equities, but to have a significant percentage also invested in fixed-income instruments.

Important considerations that an investor should take into account before investing in a limited partnership would include all the following matters, EXCEPT: Checking into the general partner's qualifications for running the entity as well as his financial position A complete assessment of the funding available to the partnership An analysis to determine whether the business will lose enough money to make the investment a viable tax shelter A determination as to whether the length of the investment program is compatible with the investor's financial position

C The ideal situation for a limited partnership is for the business to generate a positive cash flow, but to report a loss due to the deductions that are applied to revenue. In the investment, there is an expectation of profit, which is made attractive to the investor by the timing of the profit and the way it is taxed. It is wrong to consider the merits of a limited partnership based on how poorly the business will perform.

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

C The investment adviser needs more information about this couple's investment objectives before she can recommend a suitable strategy. Choices (a), (b), and (d) could all be appropriate recommendations for this couple depending on their goals.

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

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

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

C The maximum annual contribution to a Coverdell ESA is $2,000. Contributions to a 529 plan are substantially higher. Although there is no annual limit on a 529 plan, contributions exceeding the annual gift limits of $14,000 per year may be subject to the payment of gift taxes. Lump-sum contributions of up to $70,000 over a five-year period are permitted by single individuals and up to $140,000 if the contribution is made from joint property. Qualified distributions from the account are tax-free in both cases. Funds in the Coverdell ESA may be used for elementary school as well as for higher education, whereas distributions from a 529 plan may only be used for higher education. Income limits apply to Coverdell ESA contributors, but do not apply to 529 plans.

A client currently has $75,000 in cash he does not envision needing for the next 18 months. He is interested in seeing if he can receive a greater return on this cash than the savings account it is currently in. Which of the following choices would be MOST suitable? A municipal bond A GNMA fund Short-term debt instruments An equity income fund

C This question is a good example of a situation you may see on the Series 66 Examination. It is one in which you really do not have enough information to answer it properly, at least in real life. What is the best way to answer a question like this? Start by taking apart the question to understand the customer's intent. We will start with the facts. The customer has $75,000 in cash, i.e., the savings account. He wants something with a better yield. His time horizon is 18 months, which is relatively short. In this case, we can remove immediately the equity income fund as a choice. Stocks are never a good choice for someone with less than a 4- to 5-year time horizon. We can also remove the municipal bond. Why? Because there is no mention of a tax concern, or a job that implies a large income each year. Now we are left with the GNMA fund and short-term debt instruments. Both have principal risk. However, a GNMA fund is usually a better choice for someone with 2+ years' time horizon. This is mainly due to the interest-rate risk the fund is subject to. This person has 18 months as his time horizon, which is relatively short-term. The correct choice is short-term debt instruments because this client would be purchasing securities such as Treasury bills and similar items.

Virginia is thirty-five years old. She recently changed jobs and does not want to pay taxes on the distribution she is due to receive from her former employer's 401(k) plan. Virginia can accomplish this goal by rolling the money over into: A Roth IRA A traditional IRA Another 401(k) plan I only I and II only II and III only I, II, and III

C Virginia may roll the distribution over into a traditional IRA or another employer's 401(k) plan and continue to defer taxes. A distribution from a 401(k) (or another qualified retirement plan, such as a 403(b) or 457 plan) may also be rolled over into a Roth IRA. However, Virginia would be required to pay taxes that year on the distribution if she chooses this option. The same rules that apply to conversions from traditional IRAs to Roth IRAs also apply when investors take money from qualified employer-sponsored retirement plans and put it into Roth IRAs. Thus, choice (d) is not correct.

Jonah has recently retired at age 65. He is receiving a large lump-sum retirement payout from his former employer. Although he has only a small investment portfolio, he has accumulated savings that would cover six months of expenses. Which of the following combinations would be an appropriate allocation of Jonah's lump sum in an investment portfolio if his primary interest is income and his secondary interest is growth for inflation protection? 100% cash 50% cash, 45% bonds, 5% equities 85% bonds, 15% equities 25% cash, 75% equities

C While a portfolio that consists of 75% equities, choice (d), might be too volatile for a 65-year-old retiree, increased life expectancies have made some exposure to equities justifiable for such investors. Since equities provide much more inflation protection than bonds or cash (money-market investments), a small portion in stocks would generally be suitable. Since this investor already has a six-month liquidity cushion in the form of savings, a large additional allocation to cash, as in choices (a) and (b), might not provide enough income or inflation protection in the long run

Why would an investment adviser perform a capital needs analysis for a client? To determine how much income the client will need at retirement To determine how to best reduce the client's tax liability To determine how much disposable income the client has available to purchase insurance To determine how much insurance the client needs in order to fund future financial goals

D A capital needs analysis is used to determine the amount of insurance a client needs to purchase today in order to fund her future financial goals. For example, if the client dies prematurely and the value of her investments are not sufficient to pay for her child's college education, life insurance is needed to fund the difference.

A client has a portfolio invested in mutual funds. Since the client does not currently need the income, he has chosen to reinvest all of his dividends and capital gains distributions. Which of the following statements are TRUE? Income taxes on these distributions will be deferred until the year in which the investor begins making withdrawals from the funds. The distributions must be included in the client's taxable income for that year. These distributions will be reinvested in the fund at NAV. The client's portfolio will appreciate faster. I and III only II and III only I, III, and IV only II, III, and IV only

D A client who reinvests dividends and capital gains distributions from a mutual fund must include them in his taxable income for that year, just as if he had received these payments in cash. Reinvesting dividends and capital gains distributions into a fund does not provide any tax advantages for investors. However, the dividends and capital gains distributions will be reinvested at net asset value (NAV) without sales charges (III) and the portfolio will appreciate faster if these distributions are reinvested (IV).

Jill has created a revocable trust to provide for the support of her adult child. The trust has generated $20,000 in income during the year and is invested in a wide variety of stocks and bonds. Which of the following statements concerning this trust is TRUE? Jill controls the assets in the trust The trust must be structured as a living trust The trust will become irrevocable upon Jill's death All of the above

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

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

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

Which of the following factors would be important when determining a person's tax status? The person's age The person's place or state of residence The person's tax status at the end of the prior year The person's country of citizenship I and II only I, II, and III only I, II, and IV only I, II, III, and IV

D All of the items listed may have an effect on a person's tax status. For example, a person's age may affect her property taxes since many states offer homestead exemptions, while a person's country or state of residency may affect the rate at which her income is taxed.

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

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

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

D An estate is only supposed to exist for a limited amount of time--a year or two at the most. By this time, the executor should have distributed all the assets to the heirs and finished winding up the estate's affairs. Treasury bonds, choice (d), are long-term investments with maturities of ten years or more. All the other choices represent short-term investments, which would be suitable for an estate. Treasury bills, choice (b), mature in a year or less, and commercial paper, choice (c), matures in 270 days or less.

Brian lives in New Jersey. He is opening a 529 college savings plan sponsored by the state of Montana for his daughter Julie. His initial contribution is $70,000. Which of the following statements is TRUE? Brian will be able to deduct the $70,000 from his state income taxes Brian will be required to pay federal gift taxes on the $70,000, since the amount exceeds the annual gift exclusion Anything that the account earns will be taxed at Julie's tax rate Neither Brian nor Julie will be liable for gift taxes on the $70,000 contribution

D Brian may contribute up to $70,000 at one time to Julia's 529 plan without worrying about federal gift taxes. The tax code allows donors to aggregate five years' worth of gifts under the annual gift exclusion ($14,000) into one lump sum (5 x $14,000). Some states do allow donors to deduct a portion of contributions to 529 plans from their state income taxes, but only if the donor contributes to a plan sponsored by his home state.

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

D Contributions to a 403(b) plan are made on a pretax basis, resulting in a zero cost basis. Therefore, all distributions are taxed as ordinary income.

Which feature of a deferred compensation plan is generally considered to be a disadvantage? The plan must be made available to all employees regardless of tenure The plan has a short vesting period Unless the plan is funded by the end of the year, the employer will be subject to harsh penalties for breaching its fiduciary duty The plan is not tax-deductible

D Deferred compensation plans are nonqualified and funded with after-tax dollars. These plans are not available to all employees and do not require immediate funding.

The Big Brain Inc. Defined Benefit Retirement Plan maintains a written statement for the plan's fiduciaries that provides them with information concerning various categories of investments and guidance concerning investment decisions. The common name for this document is the: Plan administration protocol Fiduciary guidelines statement Statement of investment guidelines Investment policy statement

D Every retirement plan must maintain a written statement of investment policy. This document provides the fiduciaries with guidelines concerning various categories of investment management decisions. Two of the main issues addressed in the statement are proxies and the activities of the investment manager

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

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

Required minimum distributions (RMDs) from a traditional IRA account must: Begin within one year of when the individual retires Be completed within a ten-year period Begin by April 1 of the year following the one in which the individual turns 59 1/2 Begin by April 1 of the year following the one in which the individual turns 70 1/2

D Required minimum distributions (RMDs) from a traditional IRA must begin by the year following the calendar year in which the individual turns 70 1/2

Which of the following forms of business would be the BEST for an owner who wants his business to provide him with tax advantages and protection from losing his money? A general partnership A sole proprietorship A C Corporation An S Corporation

D The Subchapter S Corporation is the best choice for this client since it is more tax- efficient than a C Corporation. S Corporations are a pass-through form of business. In other words, since the S Corporation is not a taxable entity, its income is distributed to the owners for tax purposes. General partnerships and sole proprietorships expose the owner-operator to more risk than S Corporations because creditors have the right to place liens against the owner's personal assets.

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

D The grantor of a trust may be the trustee and/or the beneficiary of a trust.

Ed and Stephan want to start a Web site design business. They are trying to decide what the best way is to organize the business. They want to protect their personal assets from any debts that the business incurs, but they also want to avoid being double-taxed on their profits. Based on these objectives, the BEST organizational structure for them to adopt would be a: Limited partnership General partnership C Corporation Limited liability company

D The two main advantages of a limited liability company are that the owners cannot be held personally liable for the company's debts, and the IRS treats limited liability companies the same way as partnerships for tax purposes. Ed and Stephan can limit their liability but they can also avoid paying both corporate and personal income taxes on their profits, as they would otherwise need to do if they formed a C Corporation. A general partnership would not protect them from liability since all general partners are responsible for the partnership's debts. A limited partnership must have both a general partner and a limited partner, so only the limited partner would be protected from liability.

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

D This is an actual court case. The plan's trustees sued the investment manager who was held liable even though the plan's assets increased.

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

D Under the Uniform Prudent Investor Act (UPIA), a trustee managing an account that has multiple beneficiaries must act impartially when investing and managing the trust's assets. When making investments, a trustee must take into account the different interests of all beneficiaries.

Which of the following is NOT a leveraged investment strategy? Buying stock in a margin account Investing in a portfolio of securities that were financed with borrowed money Borrowing money in an effort to magnify both gains and losses Investing in a company with a large amount of debt outstanding

D When a person leverages a portfolio, he acquires a loan in order to buy more securities. This activity is done in a margin account, which allows him to magnify his investment results by increasing the number of shares or bonds that he is able to purchase. Investing in a company that has issued a great deal of debt, such as a utility company, is not a leveraged portfolio strategy.