Rec - Type of client (5)

S Corp eligibility and max #

100 + all must be residents

Another term for revocable trust is

Living trust

4 main CIP requirement

individual client's name, physical address, DOB, and SSN

Benefits of flow thorugh for start up

deduct losses

JTWROS - if one dies

verything goes to other party

Which trust allows charitable contributions

Complex

LLC benefit

low through of income/loss and limited liability

Does TIC avoid probate

yes

According to the USA PATRIOT Act, account identification and verification procedures should be applied to which of the following? New individual accounts New business accounts Existing individual accounts Existing business accounts A)I and II B)I and IV C)III and IV D)

A)I and II The procedures required by the USA PATRIOT Act for the verification and identification of customer accounts should be applied to all new customers—whether individuals or businesses.

An elderly investor with a net worth in excess of $1 million would like to avoid the publicity surrounding probate. That could be accomplished in each of the following cases EXCEPT A)using a TOD account B)using a tenants in the entirety account C)using a JTWROS account D)using a TIC account

D)using a TIC account Under a tenants in common (TIC) account, each person has ownership in equal (or unequal) shares. Upon death of one of the co-tenants, assets in that account belong to the heirs of the deceased and will go through probate.

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

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

There are many different legal ways to structure a new business entity. One of these is the general partnership. Among the benefits of using this structure would be: A)substantial capital can be raised with little effort and low cost. B)limited liability. C)taxation at a lower rate than a corporation. D)ease of formation.

D)ease of formation. Compared to a corporation, it is generally easier to form (and dissolve) a partnership. General partners have full liability and there is no tax - it is passed on to the partners, to be taxed at a rate that might exceed the corporate tax rate. Corporations are the entity for raising a lot of capital.

Does Tenant in Entirety avoid probate

no

Does a revocable trust avoid probate

no

TIC 3 people, one dies

2 survivors are co-tenants with dead person's estate

One respect in which an LLC differs from an S corporation is that A)there is no statutory limit on the number of investors in an LLC B)there is more favorable tax treatment afforded to members of an LLC C)an LLC can be formed with as little as a single investor D)not only income, but losses, if generated, pass through to investors in an LLC

A)there is no statutory limit on the number of investors in an LLC There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same and both can be formed with a single owner.

In order to pool their money for securities trading, two married sisters wish to open a single account with your firm. Which of the following would you recommend? A)Commingling is illegal. B)A tenants-in-common account. C)A partnership account. D)A joint tenants with right of survivorship (JTWROS) account.

B)A tenants-in-common account. Because the sisters are married, it is most likely that, upon death, each would like their share to pass to their respective estates. Tenants-in-common provides that the deceased tenant's share passes to the estate and the remaining tenant is a co-tenant with the estate. Joint tenants with right of survivorship (JTWROS) provides that the entire account passes to the other tenant upon the death of one of the tenants.

The type of trust created by a will that becomes operative at death is a: A)revocable trust. B)testamentary trust. C)living trust. D)Q-tip trust.

B)testamentary trust. As in "last will and testament".

Which trust allows discretion on income dist

Complex

Several investors open an account in joint tenancy. Financial information is required on which of the following investors? A)Only the one authorized to trade the account. B)The majority of the investors. C)The largest investor only. D)All of the investors.

D)All of the investors. When a joint account is opened, financial information should be obtained on all of the account owners.

Does JTWROS avoid probat

no

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

A)the corporate form of business structure would be the easiest for ultimate transfer of ownership In general, the corporate form of business leads to the easiest transfer of ownership. Since Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. In the case of a partnership, even though Suzie would be the only partner, transfer is not as easy as with the sale of stock.

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

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

S corp

Flow through

Does TOD avoid probate

no

Does an Irrevocable trust avoid probate

no

Does a testamentary trust avoid probate

yes

Sole Pro - benefits

Flow through

Which of the following statements relating to trusts is CORRECT? A)A simple trust is required to distribute all of its income in the year earned. B)A simple trust may distribute principal during the year. C)A complex trust is required to distribute all of its income in the year earned. D)A complex trust may only distribute principal during the year in which the trust terminates.

A)A simple trust is required to distribute all of its income in the year earned. A simple trust is one that is required to distribute all accounting income in the year earned, has no charitable beneficiaries, and does not distribute principal in the current year. A complex trust is one that is allowed to accumulate income, has a charitable beneficiary, or distributes principal. All trusts are complex in their final year because all principal must be distributed when the trust terminates.

Which of the following would NOT be considered an unethical practice for a registered investment adviser? A)Acting as a trustee for a client's trust. B)Acting as a principal in a recommended transaction without consent of the client prior to completion of the trade. C)Criticizing an estate plan prepared by the client's attorney. D)Failing to notify the Administrator that the adviser is maintaining custody of client funds and securities.

A)Acting as a trustee for a client's trust. Please notice the word not in the question. Although acting as a trustee for the client's trust is probably not a good business practice, it is not included in the list of unethical activities for an adviser.

Which of the following statements regarding an S corporation owner and an owner of an LLC are TRUE? Creditors have very limited recourse rights to the owners. They may not be nonresident aliens. They both are considered stockholders. Both receive the tax benefit of owning flow-through entities. A)I and IV. B)II and III. C)I and III. D)II and IV.

A)I and IV. Creditors don't have recourse to the owners of either entity unless the owners have specifically allowed it. Both are flow-through or conduit entities. Owners of S corporations are stockholders, whereas those in an LLC are members. Nonresident aliens may not own an S corporation.

Many investors use trusts to avoid probate. However, not all trusts are designed to do so. Those that would include irrevocable trusts revocable trusts living trusts testamentary trusts A)I, II, and III B)II and III C)I and II D)I and IV

A)I, II, and III Although there can be exceptions, especially when the trust document is poorly written, in most cases, assets in an irrevocable trust, a revocable trust, and a living trust (generally, the terms revocable trust and living trust mean the same thing) avoid probate. A testamentary trust, which goes into effect after death, does not avoid probate.

Sam Jones has been a successful businessman and is concerned that his youngest daughter will not be able to live within her means. To protect this from happening, Mr. Jones places a certain sum of money into a trust for the benefit of the daughter. Because Mr. Jones knows he won't live forever, he arranges for the Fidelity Bank and Trust Company to have control over the assets. In this case: Sam Jones is the grantor. Sam Jones is the trustee. Fidelity Bank and Trust Company is the trustee. Sam's daughter is the beneficiary. A)I, III and IV. B)I and III. C)II, III and IV. D)II and III.

A)I, III and IV. The person who funds the trust is the grantor or settlor. The bank has been appointed to be trustee, and the daughter is the beneficiary of the trust.

Which of the following pieces of customer information must an agent attempt to obtain when opening a new account? Emergency contact person Financial condition Investment objective Education A)II and III B)II and IV C)I and II D)I and IV

A)II and III When opening a new account, the agent normally would request information about the customer's financial condition, investment objectives, and other relevant personal information.

A form of business organization that offers flow-through of income and loss while providing the owner(s) with limited liability is: a sole proprietorship. an LLC. a C corporation. an S corporation. A)II and IV. B)I and IV. C)I and III. D)II and III.

A)II and IV. Only an LLC or an S corporation allows for direct participation in the income or losses of the business while offering limited liability. The sole proprietorship has flow-through, but unlimited liability. The C corporation limits liability, but has no flow-through.

Which of the following is among the items of information that must be entered on a new account form? A)Names of all persons who will have access to the account B)Names of other broker-dealer firms already holding accounts for the prospective customer C)What educational degree(s) the accountholder has earned D)Names and addresses of at least 2 of the prospective customer's neighbors as personal references

A)Names of all persons who will have access to the account The facts that are required on a new account form are aimed at facilitating the operation of the account, properly identifying the customer, and guarding against money laundering and other illegal activities. Of the choices offered, only the names of those with access to the account would help with these goals, so this item of information is the only one on the list that is required.

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account is A)Totten trust B)Revocable trust C)Demand deposit account (DDA) D)Passbook savings account

A)Totten trust The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.

If the Smiths want to open a joint account at AAA Securities Corporation and have their securities transferred to their three daughters upon the death of the last surviving account holder, their agent should recommend that the Smiths open: A)a joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form. B)individual accounts in the name of each daughter. C)a joint tenancy account with right of survivorship. D)a tenants in common account.

A)a joint tenancy account with right of survivorship and execute a transfer on death (TOD) registration form. The agent should recommend that the Smiths open a joint account with right of survivorship and complete a transfer of death registration form. The joint tenancy account gives the Smiths joint ownership in the securities in the account. The surviving joint tenant immediately becomes the owner of the whole property upon the death of the other joint tenant (right of survivorship). The transfer upon death registration identifies the beneficiaries to receive the securities upon the death of the last joint tenant. Only individual and JTWROS accounts may be opened with a TOD provision.

An individual opens an account with your firm. She tells you that upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others, but she does not want to incur any significant legal expense. You would suggest that the account be opened A)as an individual TOD account B)as a joint account with right of survivorship C)under a discretionary power D)as a joint account with tenants in common

A)as an individual TOD account TOD, the term used for transfer on death, will allow this client to fulfill her wishes.

All of the following information must be obtained from new individual customers EXCEPT A)educational background B)Social Security number C)date of birth D)physical address

A)educational background A customer's educational background is not required to open a new account. In the case of an account opened in the name of a business, the business address and tax identification number are required.

An estate account must be managed at the direction of the: A)estate's executor or administrator. B)attorney with guardianship over the surviving children. C)general estate creditors. D)investment adviser.

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

One of your clients has named you as the trustee for a trust he has established. The beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should: A)follow the terms of the trust. B)contact the grantor. C)do nothing. D)follow the wishes of the beneficiary.

A)follow the terms of the trust. Trust law requires that the trustee act in accordance with the terms of the trust document at all times.

One of your long-time advisory clients has been critically injured in an automobile accident. The client is in the ICU at the local hospital, unable to communicate. You would be able to accept orders for the account A)from a person who has a written durable power of attorney over the account B)from the client's spouse C)from the client by getting a squeeze of the hand for a "yes" D)from the client's lawyer

A)from a person who has a written durable power of attorney over the account When a client is incapacitated, agents may transact business in the account only when they receive instructions from someone with proper authorization, in this case, a durable power of attorney.

In a trust, the person who establishes the trust and decides on its terms is the: A)grantor. B)beneficiary. C)fiduciary. D)trustee.

A)grantor. The grantor, sometimes referred to as the settlor, is the person who establishes the trust and specifies its terms. The person who administers the trust is the trustee, and the person who receives distributions from the trust is the beneficiary. Interestingly, trust law would permit the grantor to also be the beneficiary and/or the trustee.

A feature of which of the following business entities is limited liability for owners as well as flow-through of income: A)limited partnership. B)general partnership. C)sole proprietorship. D)C corporation.

A)limited partnership. Limited partnership interests offer both flow-through of income (or loss) along with limited liability. The general partnership has full liability as does the sole proprietorship. C corporations have limited liability, but no flow-through.

If three individuals have a tenants in common account with your firm and one individual dies, then A)the two survivors continue as co-tenants with the decedent's estate B)the account must be liquidated and the proceeds split evenly between the two survivors and the decedent's estate C)trading is discontinued until the executor names a replacement for the deceased D)the account is converted to joint tenants with rights of survivorship

A)the two survivors continue as co-tenants with the decedent's estate Explanation Under a TIC account, the decedent's estate becomes a tenant in common with the survivors. The executor of the estate functions in place of the deceased unlike JTWROS where the survivors acquire the deceased's interest. Reference: 14.2.1 in the License Exam Manual

Which of the following is among the most important reasons to form an S corporation? A)Enjoying the same legal status of a general partner in a partnership B)Avoiding the double taxation of dividends C)Ability to enjoy corporate tax rates D)Ability to retain and reinvest earnings in a growing business

B)Avoiding the double taxation of dividends One of the most beneficial features of the S corporation is that the earnings pass through to the shareholders in proportion to their share of ownership and are taxed at the individual level (as opposed to the corporate level). Dividend distributions are not taxed twice as with the regular form of corporate ownership (C corp).

If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form a(n): A)S corporation. B)C corporation. C)general partnership. D)proprietorship.

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

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses? A)Limited partnership. B)Corporation. C)LLC. D)Sole proprietorship.

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

Advantages of using the partnership form of business organization include which of the following? A)Permanent life. B)Ease of dissolution. C)Ease of raising large amounts of capital. D)Limited liability.

B)Ease of dissolution. Partnerships are relatively easy to form and to dissolve. They are not practical for raising large sums of capital as are corporations. General partners have full personal liability, and partnership agreements specify events that will lead to the termination of the entity.

Which of the following is NOT a characteristic of a C corporation? A)Double taxation of dividends B)Generally not liable for federal income tax on profits C)Retains and reinvests earnings D)Limited liability

B)Generally not liable for federal income tax on profits Regular corporations are subject to federal income taxation because the earnings are not passed to the shareholders, as is the case in an S corporation or a partnership. Dividends are taxed twice: first at the corporate level and then at the individual level. Limited liability is a basic characteristic of all corporations. A regular corporation retains and reinvests earnings that are not distributed to shareholders as dividends.

Which of the following statements about C corporations are TRUE? A C corporation pays income tax on its earnings at the corporate level. The income of C corporations is subject to double taxation. Dividends paid by a C corporation are not subject to income tax at the shareholder level. A)I and III. B)I and II. C)II and III. D)I, II and III.

B)I and II. A C corporation pays tax on its earnings at the corporate level. Its earnings are also taxed at the shareholder level when they are paid out as dividends. As a result, the income of C corporations is subject to double taxation.

One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a partnership or a C corporation. Among the advantages of operating as a partnership are: ease of dissolution. ease of raising additional capital. flow-through of income or loss. limited liability. A)III and IV. B)I and III. C)II and IV. D)I and II.

B)I and III. Unlike a C corporation, operating income or losses of a partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes name verbal assurance that the customer is of legal age a street address, unless the primary mailing address is a PO Box located in the state of residence a taxpayer identification number A)I and II B)I and IV C)III and IV D)II and III

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

Which of the following statements regarding grantor trusts are CORRECT? If the grantor has the power to revoke the trust, he is treated as the owner of the trust. If the grantor or a non-adverse party can control the beneficial enjoyment of the trust, he is treated as the owner of the trust. The grantor may be taxed on trust income only if the grantor actually received the income. If the grantor can receive income from the trust, he is treated as the owner of the trust. A)II and III. B)I, II and IV. C)I and IV. D)II, III and IV.

B)I, II and IV. As long as the grantor has the power directly or indirectly to control the trust, he is treated as the owner. The grantor may be taxed on trust income if the grantor either actually or constructively receives the income.

Three sisters are interested in forming a business together. They have three initial concerns: How to maximize their benefits from the fact that the business is not expected to earn money for at least the first two years. Make sure that the business will be able to continue in the event one or two of the sisters dies. Minimize their personal liability for the obligations of the business. Based on the sister's concerns, which form of business is appropriate for the situation? A)Limited partnership. B)LLC. C)C corporation. D)General partnership.

B)LLC. The LLC will allow losses to flow through to the sisters, continue in the event one or two sisters should die, and have the same type of protection as offered by a C corporation.

An individual walks into the office of a broker-dealer wishing to open a new account. Which of the following information would NOT be required on the new account form? A)Physical address B)Marital status C)Name of employer D)Citizenship

B)Marital status Although most new account forms do ask for marital status, it is not a required item as are the other choices given here.

One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A)Beneficiary. B)Trustee and beneficiary. C)Trustee. D)As the grantor, there are no other roles that may be taken.

B)Trustee and beneficiary. Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee. Reference: 14.4.1.1 in the License Exam Manual

Your advisory client is an 86-year old woman who is presently in the hospital, unable to communicate due to a severe stroke. For the past 6 years, she has followed the practice of making annual gifts of stock to her children and grandchildren on her birthday. Since her 87th is coming up later this month, her oldest son approaches you and asks you to continue the policy. A)You should go to the hospital and see if she can blink her eyes to indicate yes or no. B)Without a proper durable power of attorney being produced, you cannot do anything. C)With 6 years of prior history, you know this is what she would want you to do so you go ahead as in previous years. D)You may only follow the provisions of her will.

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

Obtaining all of the following complies with the regulations regarding customer identification programs (CIPs) EXCEPT A)date of birth B)a PO Box, instead of a physical address, if it is the primary mailing address C)taxpayer identification number D)name

B)a PO Box, instead of a physical address, if it is the primary mailing address A PO Box is never acceptable without a physical address.

In administering a joint account, a member firm's responsibilities concerning suitability determination and information disclosure apply to: A)the person whose Social Security number is on the account. B)all persons who jointly own the account. C)the person with trading authority for the account. D)the person with the greatest capital contribution.

B)all persons who jointly own the account. Suitability rules apply to all owners in a joint account.

To maintain the proper portfolio balance for a client, it would be most appropriate to review the portfolio at least: A)client and portfolio review is not necessary. B)annually. C)every 2 years. D)every 10 years.

B)annually. Most advisers would suggest that a client's life situation and portfolio should be reviewed at least annually. More frequently would not be inappropriate.

An advantage of structuring a business operation as an S corporation rather than a C corporation would be A)avoiding double taxation B)simplicity when raising capital through a public offering C)the C corporation is limited to a maximum of 100 shareholders while no such limit exists for the S corporation D)limited liability

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

The type of business organization in which one person owns the entire business and there is no legal distinction between that individual and the business is a: A)limited partnership. B)sole proprietorship. C)corporation. D)general partnership.

B)sole proprietorship. A sole proprietorship is the simplest form of business organization, because one person owns the entire business and there is no legal distinction between the owner and the business. This means that the owner is personally responsible for the business's debts. A partnership always requires two or more owners. Although one person can own an entire corporation, a corporation is a legal entity separate and distinct from its owner(s).

There are provisions in the IRS Code which allow certain forms of business to avoid being subject to income tax on the business level. The list would include all of the following EXCEPT: A)limited partnership. B)sole proprietorship. C)LLC. D)S corp.

B)sole proprietorship. In the case of a sole proprietorship, the owner reports any income on his personal Form 1040, Schedule C. The other entities do not pay tax themselves - any income flows through to the members (LLC), stockholders (S corp) and partners (ltd. Partnership).

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

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

The federal legislation that requires broker-dealers to verify the identity of any person opening an account is A)the Securities Exchange Act of 1934 B)the USA PATRIOT Act C)the Insider Trading Act D)the Uniform Securities Act of 1956

B)the USA PATRIOT Act The USA PATRIOT Act (the full title is Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Assets Control (OFAC). This is accomplished through the customer identification program (CIP).

A business organized as a sole proprietorship wishes to open an advisory account. When preparing an investment policy statement, the IA would have to consider the objectives of A)the stockholders B)the sole proprietor C)the members D)the partners

B)the sole proprietor A sole proprietorship only has one owner. Therefore, the account would focus on the needs of that individual.

A wealthy individual has set up a GRAT. During the term of the trust, how is the income taxed? A)Deferred until the termination of the trust. B)Only to the extent that the actual earnings exceed the amount of the annuity payout. C)To the beneficiaries. D)To the grantor.

D)To the grantor. Even though the Grantor Retained Annuity Trust (GRAT) is technically an irrevocable trust, because of the retained interest by the grantor, tax liability on the trust's income remains with him.

Which of the following is required to be maintained by financial institutions such as banks and broker-dealers (BDs) by the USA PATRIOT Act to prevent the financing of terrorist operations and money laundering? A)Privacy notices B)Do-not-call lists C)Customer identification programs (CIPs) D)Specially Designated Nationals List

C)Customer identification programs (CIPs) The USA PATRIOT Act requires financial institutions to maintain customer identification programs (CIPs) to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Assets Control (OFAC) publishes and maintains the Specially Designated Nationals List, which financial institutions use to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money laundering activities.

Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business? General partnership. Sole proprietorship. S corporation. C corporation. A)I only. B)II and III. C)I and II. D)III and IV.

C)I and II. Corporations, whether organized as C or S corporations, afford their owners limited liability which is the protection of their personal assets from losses incurred by the businesses. General partnerships and sole proprietorships subject their owners to personal liability for losses of the business.

For which of the following types of business clients does the concept of limited liability apply? General partnership. LLC. S corporation. Sole proprietorship. A)I and IV. B)III and IV. C)II and III. D)I and II.

C)II and III. LLCs (limited liability companies) and S corporations offer their owners limited liability protection from the creditors of the business. That is not the case with a general partnership or a sole proprietorship.

Among the differences between C corporations and S corporations is -the liability assumed by the shareholders -the number of allowable shareholders -the tax treatment of the corporation's earnings -residency requirements of shareholders A)I and IV B)II and III C)II, III and IV D)I, II, III and IV

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

Two brothers are interested in forming a business together. They have three initial concerns: 1) how to maximize their benefits despite the fact that the business is expected to lose money for at least the first year or so; 2) making sure that the business will be able to continue in the event one of the brothers dies; and 3) minimizing their personal liability for the obligations of the business. On the basis of the brother's concerns, which form of business is appropriate for the situation? A)General partnership. B)Limited partnership. C)LLC. D)C corporation.

C)LLC. The LLC will allow losses to flow through to the brothers, continue in the event one brother should die, and have the same type of protection as that offered by a C corporation.

A man is planning to start his own glass sculpturing business. He wants to be able to deduct his anticipated losses for the first two years. He anticipates that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to-day business decisions. What business form do you recommend? A)C corporation. B)General partnership. C)Limited partnership. D)S corporation.

C)Limited partnership. A limited partnership with him as general partner would allow for additional investment capital without giving up management control. C corporations do not allow deductibility of losses; S corporations do not allow guaranteed debt to be included in the taxpayer's basis. General partnerships could allow the other partners to more easily control the day-to-day operations than a limited partnership, in which the other investors (presumably limited partners) would not be permitted to take a role in the running of the business.

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

C)Owner of a sole proprietorship. The owner of a sole proprietorship has unlimited personal liability for the debts of the business, and this is one of the main disadvantages of sole proprietorships. Limited partners, members of limited liability companies, and shareholders of corporations are not personally liable for the debts of the business.

Which of the following individuals may not open a joint account? A)Three sisters. B)Two spouses. C)Parent and a minor. D)Business colleagues.

C)Parent and a minor. Any two or more persons can have a joint account, but a minor is specifically excluded from the definition of a person.

A customer and his spouse own shares in the ABC Fund as joint tenants with rights of survivorship. If the customer dies, what happens to the shares in the account? A)The account would be frozen until the estate was settled. B)One-half of the shares would belong to the spouse, and the remaining half would be distributed to the customer's estate. C)The spouse would own all the shares. D)Ownership of the shares must be determined by probate court.

C)The spouse would own all the shares. In a JTWROS account, securities pass to the surviving owner. The account does not have to be frozen but can continue to enter orders.

A limited liability company is A)an insurance company B)traded on major exchanges C)a company with tax consequences similar to a partnership D)a limited partnership

C)a company with tax consequences similar to a partnership A limited liability company (LLC) is a form of business entity in which the shareholders (called members) are taxed individually at their respective tax rates as is the case in a partnership.

If 3 individuals open a joint account with your firm and one of the parties has written authorization from the other parties granting him authority to make all trading decisions, the new account form must contain information on: A)the individual granted trading authority. B)the individual with the highest net worth. C)all three individuals. D)any two of the three individuals.

C)all three individuals. Information is needed on all three individuals because they all have ownership in the account.

Benefits of structuring a business as a General Partnership would include: A)the ability to raise large sums of money. B)general partners are only liable to the extent of their investment. C)avoidance of taxation at the entity level so the partners are not taxed twice. D)longevity.

C)avoidance of taxation at the entity level so the partners are not taxed twice. General partnerships file a Form 1065 and pay no tax. Instead, each partner's share of the income is reported on Form K-1 making for a single rather than double layer of tax.

An S corporation is characterized by: A)limited lifetime. B)unlimited personal liability. C)flow-through tax treatment. D)more than 100 shareholders.

C)flow-through tax treatment. Shareholders of an S corporation have limited liability, are limited to no more than 100 shareholders, and receive flow-through tax treatment.

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

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

When a trustee is managing the trust assets, which of the following is the most important consideration? A)Preservation of capital. B)Minimizing expenses. C)Reasonable income. D)The purposes, terms, distribution requirements, and other circumstances of the trust.

D)The purposes, terms, distribution requirements, and other circumstances of the trust. Although there certainly is a case for preservation of capital, reasonable income, and minimizing expenses, the most important consideration is to follow the design and objectives of the trust.

Alvin's spouse is a trustee of a trust established by Henrietta Flood, which directs income from the trust be paid to Alvin, for as long as he lives. Alvin's son, Floyd, will receive the principal upon Alvin's death. Floyd would like to receive some of the principal before Alvin's death and Alvin does not object. How should his spouse, the trustee, act in this situation? A)Distribute part of the income to Floyd. B)Distribute part of the principal to Floyd. C)Distribute all of the principal to Floyd. D)Follow the trust terms, continuing to distribute the income to Alvin and the principal to Floyd upon Alvin's death.

D)Follow the trust terms, continuing to distribute the income to Alvin and the principal to Floyd upon Alvin's death. A trustee must follow the terms of the trust. Nothing in the question implies that the trustee has any discretionary powers.

An investment policy statement would likely include: expected returns of the recommended strategy and the expected range of these returns. recommended allocations among differing asset classes. strategies used for selecting specific stocks in the equity portion of the portfolio. disclosure of the fees that the adviser will earn for implementing the recommended strategy. A)I and II. B)II, III and IV. C)I only. D)I, II and III.

D)I, II and III. An investment policy statement prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately.

Limited liability is a characteristic of being an owner of a general partnership a limited partnership an S corporation a sole proprietorship A)I, II, and III B)III only C)I and IV D)II and III

D)II and III Limited partnerships and any corporate form of ownership offer limited liability. Such is not the case with a general partnership and certainly not the case with a sole proprietorship.

An agent may open a joint account for which of the following? Lee and his 13-year-old son, Tom. Mary and Kelley, two adult college roommates. Jerry and Mark, friends and partners in business for more than 20 years. Melinda and her minor nephew, John, for whom she is guardian. A)I and IV. B)II and IV. C)I and III. D)II and III.

D)II and III. Joint account owners share ownership of the account and must be adults. A minor may not legally exercise control over an account and may not be an owner of record of an account. Remember that a joint account is owned by two or more persons and, under both state and federal law, a minor is not a person.

Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer. An account opened by a sole proprietor in the name of the company. An account opened in the name of ABC Corporation, an S corporation by one of its shareholders. An account opened in the name of the GHI fund, a Regulated investment company, by the fund's portfolio manager. A)III and IV. B)I and IV. C)I and II. D)II and III.

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

A wealthy individual has established a trust and wishes to establish an account that permits the trust to engage in margin transactions. Which of the following statements regarding margin trading in trust accounts is TRUE? A)It is permitted with the written approval of the beneficiary of the trust. B)It is not permitted. C)It is permitted if the trustee observes the prudent investor rule. D)It is permitted if provided for in the underlying documentation.

D)It is permitted if provided for in the underlying documentation. Although not a common practice, margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.

A wealthy individual has set up a GRAT. Should he die during the time the trust is active, how are the remaining assets in the trust taxed? A)The original value plus any appreciation passes to the beneficiaries and is taxed as ordinary income. B)No tax is due if the grantor should die during the term of the trust. C)The original value plus any appreciation passes to the beneficiaries, but is subject to gift tax. D)The original value plus any appreciation is taxed as part of the grantor's estate.

D)The original value plus any appreciation is taxed as part of the grantor's estate. One of the risks in setting up a GRAT is that if the grantor dies during the term of the trust (usually 2-10 years), the assets put in the GRAT, plus any appreciation, are included in his or her estate.

Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is A)shareholders' losses are limited to the amount of their investment B)unlike the C corporation which is limited to 100 investors, there is no such limit for an S corporation C)the ease in raising substantial amounts of capital. D)any losses flow-through to the investors

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

The customer identification program (CIP) requires that certain information relating to new customers be obtained. Included in that requirement for individual clients who are citizens of the United States are all of the following EXCEPT A)a physical address B)Social Security number C)date of birth D)current employment status

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

An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider the: A)number of limited partners. B)liability of the general partner. C)mean requirement of the wealthiest and the poorest partner. D)objectives of all of the partners on a collective basis.

D)objectives of all of the partners on a collective basis. Because all income and gains pass through to the partners, and because there is unlimited personal liability for all general partners, we must examine the objectives of each of them to determine proper suitability

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from the: A)person named as executor of the estate. B)spouse. C)person with a durable power of attorney. D)person appointed as administrator of the estate.

D)person appointed as administrator of the estate. Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor and a durable power of attorney is cancelled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.

A form of business structure that exposes all personal assets of the owner to creditors is the A)limited partnerships B)LLC C)C corporation D)sole proprietorship

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

The type of trust created in the grantor's will is a A)beneficiary trust B)limited trust C)living trust D)testamentary trust

D)testamentary trust A testamentary trust is one that is created in the grantor's will ("last will and testament") and that does not become effective until the grantor dies. A trust expressly created during the grantor's life is a living trust.

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A)the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box B)the CIP requires a statement of the customer's goals while the regulators only require current financial information C)the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts D)the CIP requires date of birth while the regulators only require proof of legal age

D)the CIP requires date of birth while the regulators only require proof of legal age The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

One of the portions of the USA Patriot Act that affects the opening of an account for a new customer is A)the Transportation Security Administration (TSA) B)the requirement to obtain suitability information C)the "know your customer rule" D)the customer identification program

D)the customer identification program The customer identification program (CIP) is mandated by the Patriot Act and requires that broker-dealers (and other financial institutions) obtain certain specified information about new customers. The "know your customer" rule was written many decades before the Patriot Act. The Patriot Act, through the CIP, is concerned with validating identity, not suitability.

In a trust account, the person who makes the account management decisions is the: A)beneficiary. B)nontrustee custodian. C)investment adviser representative. D)trustee.

D)trustee. A trust is a legal entity that designates a person (the trustee) to manage the trust's assets for the benefit of another person (the beneficiary or beneficial owner).

PArtnership benefits

Ease of dissolution, flow through of income and loss

GRAT

Grantor Retained Annuity Trust

C corp benefit

easy to raise lots of money

GRAT taxation

to the grantor bc he retains interest