Unit 22 - Nonqualified Accounts

Under whose Social Security number is the custodial account established?

Assets in a custodial account are the minor's property, so the minor's Social Security number is used.

The income level of a donor

Contributions into a Coverdell Education Savings Account (ESA) are phased out at high income levels for a donor, whereas the income level of a donor has no impact on contributions made into a Section 529 plan.

If a customer wishes to open a cash account in his name only and allow a third party to make trading decisions, but not withdraw cash and securities, he must instruct his broker-dealer to open

For a person other than the account owner to withdraw assets and make trading decisions, full power of attorney is required. A limited power of attorney allows someone other than the account owner to enter trades, but not to withdraw assets.

Revocable trust

In a revocable living trust the grantor has complete control over the trust while alive and because of this, the grantor is also subject to any tax implications of the trust.

All of the following accounts would allow all parties with access to the account to authorize withdrawals except

Individual accounts with limited POA allow a designated person to place trades but not make withdrawals.

Which of the following accounts would allow the assets of a single father's account to go directly to his daughter while avoiding probate but not a let her have access while he is alive?

Individual with TOD exactly meets his requirements. JTWROS and TIC and individual with POA would all allow the daughter access to the account while he is still alive.

John and Tara Bourne have two children, Henry and Avery, who they want to set up custodial accounts for. Which of the registrations of the accounts are allowed?

Only one adult and one minor are allowed on each account.

Under the Uniform Transfers to Minors Act (UTMA) a custodian has control over the account and can do each of the following except

Selling short and writing uncovered options may only be effected in a margin account. The UTMA forbid the establishment of a margin account. Furthermore, these investment strategies, though legal and appropriate in other settings, provides unlimited risk and is inappropriate in an account held for a minor and therefore not permited

What happens to the contents of a custodial account in the event of the death of the beneficial owner (the minor child)?

The custodian's fiduciary responsibility is for the benefit of the minor and ceases upon the minor's death. The account passes to the minor's estate for distribution to the minor's heirs.

Which of the following are true of an irrevocable trust?

The grantor may be able to avoid some of the tax consequences because he gives up ownership of items in the trust and cannot change the terms of the trust once established.

An investor has opened an individual brokerage account for use in a small business and has given a business partner a power of attorney (POA) over the account. Which of the following persons may have access to the account for trading purposes?

The owner of an individual account and anyone who has power of attorney (POA) over the account are the only persons who may have access. This would exclude the business's attorney, secretary, or anyone else not having the POA.

The benefits of designating a brokerage account as transfer on death (TOD) are that

The transfer on death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account's assets upon death. Those named persons may be changed whenever the account holder wishes. Although this designation allows the account to bypasses probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.

A registered representative is appointed the fiduciary for a trust account. Which of the following is true?

When acting as a fiduciary, all investment decisions must be made in accordance with the prudent investor rule, which mandates that only wise and safe investment decisions be made. Speculative positions, such as selling short or writing uncovered call options, are almost always prohibited. Margin trading can only occur if it has been specifically designated as being allowed in the trust documents. Fiduciaries may charge a reasonable fee for their services but may not be compensated based on, or share in, profits.

The primary use for a revocable living trust is to

While the grantor is alive he has full control of the trust. It is mainly used in place of a will.

Tenants in Common (TIC)

securities owned by the decedent pass to the decedent's estate—in this case, 50% of the assets. The other 50% is retained by any remaining living parties to the account.

If the beneficiary of a custodian account dies, the securities in the account pass to

the securities in the account must pass to the minor's estate, not to the parents' or custodian's estate.