unit 18
If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate?
A limited liability company (LLC) If a businessowner's goal is ease in raising capital, the limited liability company (LLC) is preferable because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.
Which of the following would likely be stressed in a socially responsible fund?
Ethical and moral investing Socially responsible investing (SRI) is an impact investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage highly ethical corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity.
Which of the following are governed by the prudent investor rule? Trustee Executor Custodian Agent who has been granted discretionary authority
I, II, III, and IV The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. In these accounts, the fiduciary must act prudently. An agent who has been granted discretionary authority is acting in a fiduciary capacity.
Agatha has an account with her aunt, Sally, which is registered as TIC. If Sally predeceases Agatha, the assets in the account go to
Sally's estate When an account is opened as tenants in common (TIC), upon the death of one of the cotenants, that individual's share now becomes part of the deceased's estate. It might be that Agatha or Sally's spouse are beneficiaries named in Sally's will, but we don't know that.
When opening an account for a trust, which of the following sets of terms are synonymous?
Settlor—grantor The settlor, sometimes referred to as the grantor, is the person who establishes the trust. The trustee administers the trust and could be the grantor but does not have to be.
All the following information must be obtained from new individual customers EXCEPT
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.
In a trust account, the person who makes the account management decisions is
the 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).
Which of the following is NOT a characteristic of a corporation?
Existence terminates when an owner dies. A corporation is an entity that has an existence separate from its owners. Therefore, the existence of a corporation does not terminate when an owner dies. Also, because the owners and the corporation are distinct entities, the owners are not personally liable for the corporation's debts.
Which of the following accounts can only be opened by spouses?
Tenants in the entirety The unique characteristic of a tenants in entirety account is that it can only be opened by spouses. Each of the others can be opened jointly by any legal persons.
An investment adviser could enter into an advisory contract with any of the following EXCEPT
a person declared mentally incompetent
Your client recently sold his business for $5 million. He is 55 and feels that he is too young to retire. He plans to start a new business venture and will be funding the $250,000 start-up costs with his own funds. With substantial personal assets, he could limit his personal exposure by using any of the following business structures EXCEPT
a sole proprietorship The limited liability company (LLC) and both corporations offer the benefit of limited liability to the owner(s). If the business is structured as a sole proprietorship, personal assets are put at risk.
Two sisters might wish to open an account as tenants in common (TIC) rather than JTWROS in order to
ensure that their respective shares go to their heirs instead of the surviving sister. In a TIC account, when one of the cotenants dies, that individual's share of the account passes to her estate, not directly to the survivor (as is the case with JTWROS). For either kind of account, only the named cotenants have access to the account, not their spouses. In both types of accounts, there is an undivided interest in the account and any cotenant has full right to withdraw assets (but any certificates or checks must be in all names).
Which of the following accounts could be opened with a TOD designation? Individual Joint tenants in common Joint tenants with rights of survivorship UTMA
I and III The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.
A married couple wishes to open up an account at your firm. Which choice of registration would you recommend if they insist that no trading be done without the consent of both of them?
Tenants in the entirety Tenants in the entirety (TBE) is unique in that it is the only common form of account registration requiring the consent of both parties prior to any activity taking place in the account. With the other forms, any party to the account can initiate trading activity.
Gloria wishes to set up a trust where income must be annually distributed to her daughter. She wants her daughter to pay any income taxes because she is in a lower tax bracket than Gloria is. What should Gloria do?
Use a simple trust with her daughter as irrevocable beneficiary Simple trusts must annually distribute income to the beneficiaries. Complex trusts do not. If Gloria makes the beneficiary revocable, the trust is subject to grantor trust rules and the income will be taxed to Gloria.
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can
have a check drawn on the account payable to the trustee for trustee expenses The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.
The president of a business entity opens an account in the name of the business. When determining the suitability of recommendations to the account, knowing the president's personal financial condition is necessary for each of the following forms of business structure EXCEPT
C corporation Only in the case of the C corporation are the income and losses of the investment account taxed at the corporate level rather than passed through to the owners.
If a trust has been established under which the father is to receive income for life, and his son is to receive the trust principal on the father's death, which of the following statements is TRUE?
The trustee is not required to notify the son when an income distribution is made to the father. It is not required that the trust's remainder beneficiary be notified when income is distributed from the trust. The trustee must report distributions from the trust for federal income tax purposes. The trustee must follow the terms of the trust, making distributions as required by the trust instrument.
An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except
a minor. Because minors are not considered legal persons, advisory (or brokerage) accounts cannot be opened for them. Unit 24 discusses the UTMA accounts for minors.
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 3 children. She also wants the ability to change the allocation in the event that conditions change and 1 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
as an individual TOD account TOD, the term used for transfer on death, will allow this client to fulfill her wishes.
An estate account is opened with Family Asset Protectors (FAP) a registered investment adviser. Management decisions regarding the account must be made at the direction of the
estate's executor or administrator Only the estate executor (or administrator when the individual dies intestate) can make investment management and distribution decisions. This does not mean that the executor must make the investment decisions for the account, only that decisions as to who will do the management are within his purview. A guardian with authority over the children does not necessarily have power over the estate unless the guardian is also the administrator or the executor of the estate.
A deceased individual with 2 surviving children and a spouse, had established a trust for his family. The trust document appointed both children as co-trustees. The surviving spouse is to receive current income, and his 2 children will receive equal shares of the remaining principal upon the spouse's death. As the adviser to the account, you
follow the instructions of the trustees The responsibility of following the trust's instructions is that of the trustee(s). Should they attempt to deviate from that, the adviser should inform them that they face potential liability under trust law. However, in all cases, the adviser must follow the direction of the trustees. As a practical matter (not tested), if the trustees appear to violate the trust's instructions, many advisers would terminate their relationship to avoid any potential liability.
The federal legislation that requires broker-dealers to verify the identity of any person opening an account is
the USA PATRIOT Act of 2001 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).
One of the portions of the USA PATRIOT Act of 2001that affects the opening of an account for a new customer is
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, the person who establishes the trust and decides on its terms is
the grantor The grantor, sometimes called 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.
When a will calls for property to be distributed per stirpes, it means that
the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants When a will calls for a per stirpes distribution of assets, it provides that if any named beneficiary predeceases the testator (the maker of the will), surviving children of that individual share in the share that the individual would have received. For example, if the testator had 3 children and 1 of them died first, any children of the deceased would share in their parent's portion (they would split one-third of the estate between them).
One of the ways in which a simple trust differs from a complex trust is that simple trusts
must distribute their distributable net income each year. Unlike complex trusts, simple trusts must distribute their DNI on an annual basis. Unlike complex trusts, simple trusts may not make distributions from the corpus (body) of the trust nor may they retain income. The terms "simple" and "complex" do not refer to the simplicity of the trust preparation.
A trust document's investment policy emphasizes that the fiduciary must follow SRI. When you are asked by the trustee to explain what that means, you would reply,
socially responsible investing. Socially responsible investing (SRI) is an impact investment strategy which seeks to consider both financial return and social good. In general, socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. You might also see SRI referred to as sustainable responsible (not reasonable) investing.
An investment adviser registered with the SEC could have all of the following as advisory clients EXCEPT
the ABC Unit Investment Trust Be careful—UITs do not have investment advisers. Any of the others could have advisory accounts.
Which of the following actions should be taken by an agent when a client decides to open an options account?
Review with the client the risks involved when trading options before the first options trade It is imperative that suitability and risk be addressed with the client before allowing option trading to take place. The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading takes place in the account.
One of your clients dies. You could legally take instructions regarding the individual's estate from
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.
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
II, III, and IV A feature common to both C and S corporations is the limited liablity of the investor. That is, the investor is not liable for the debts of the business and cannot lose more than the original investment. Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid.
Which of the following statements about S corporations is NOT correct?
S corporation status offers greater opportunity for raising additional capital than do other forms of business structure. S corporations are flow-through vehicles, so any earnings are taxable to shareholders, whether or not they are paid out as dividends. An S corporation may have no more than 100 shareholders and may issue only 1 class of stock so its ability to raise large amounts of capital is rather limited.
When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as
impact investing Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact.
All of the following statements relating to an account registered as tenants in common are true EXCEPT
upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) Unlike an account registered JTWROS, when a cotenant in a TIC account dies, that individual's share of the account passes to the individual's estate, not the other cotenant(s). That would be the case with JTWROS (which is why that form is far more popular with married couples instead of TIC). In a TIC account, each cotenant has an undivided interest (specific securities in the portfolio are not designated to each cotenant—they share ownership in the entire portfolio). This is not to be confused with the fact that the ownership interests can be unequal. For example, one investor can own 40% of the account and the other 60%.
Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that
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. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.
Small corporations that satisfy certain criteria can elect not to pay income tax at the corporate level but instead pass their earnings through to their shareholders. These corporations are known as
S corporations The type of small corporation that can elect not to be taxed at the corporate level but to pass its earnings through to its shareholders is an S corporation. The term "S corporation" comes from the subchapter of the Internal Revenue Code that governs these corporations (Subchapter S). The other type of corporation—the C corporation—is one that has not elected to be treated under Subchapter S. Its earnings are taxed at the corporate level and again at the individual level when they are paid out as dividends.
If a client wishes the assets in her account to pass directly to specific beneficiaries after her death, her account should be titled
TOD TOD (transfer on death) provides that, upon the death of the account holder, the assets pass to the named beneficiary or beneficiaries without going through probate.
Keisha has 3 married children, each with children of their own. She wishes to leave equal shares of her estate to each of her children. What happens if 1 of those children dies before Keisha?
The share belonging to the deceased child is distributed per stirpes Unless specified otherwise, assets in an estate are distributed per stirpes (sometimes called in stirpes). Stirpes is a Latin word meaning branches and, in this context, it is used to determine how the next generation receives a share in an estate when the parent predeceases the grandparent. As an example, if Keisha had child A, B, and C, and C died having 2 living children, the estate would be divided as follows: Child A gets ⅓, child B gets ⅓, and the 2 children of child C receive ¹⁄₆ each (sharing half of child C's portion). If you selected, "The estate is divided equally between the 2 surviving children and the children of the deceased child," that would mean that everyone would receive ¼ and that is not the way it is done.
A client with a sizable estate would probably find it most efficient to pay estate taxes with
proceeds from a life insurance policy In general, people with estates where there is a potentially large estate tax liability find that the most efficient way to pay those taxes is through a life insurance policy.
One of your clients dies. You could legally take instructions regarding the individual's estate from
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
