Unit 6 - Clients, Portfolio Management Styles, and Taxation (16 questions on the exam)

C. $87,000 - Distributable Net Income (DNI) is dividends and interest plus cap gains tht have not been reinvested back into the trust - in this case: $24,000 + $35,000 + $28,000 = $87,000

10. During the previous fiscal year, the Kaplan family Trust received $24,000 in dividends and $35,000 in interest from corp. bonds. Securities transactions during the year resulted in long-term cap gains of $48,000, $20,000 of which were reinvested in the corpus. The DNI for the Trust is: A. $11,000 B. $79,000 C. $87,000 D. $107,000

B. liabilities E. assets

A family balance sheet ONLY contains which of the following? A. amounts paid for expenses B. liabilities C. salary income D. divs and int E. assets

D. more than 20 years - because their retirement income needs to provide for them in the years AFTER retirement as well

A husband and wife are 55 and 57 years old. The husband plans to retire at 62 and the wife at 65, and both are healthy. What is the most appropriate estimate of the time horizon for their retirement portfolio? A. 5 years B. 7 years C. 8 years D. more than 20 years

A. This trust has DNI for the year of $16,000 = $10,000 + $7,000 + $1,500 - $2,000 B. the $1,500 of realized gains that was reinvested

A. How much of this is part of distributable net income (DNI)? B. What part of this trusts would NOT be part of the DNI? he Gordon Clark trust had dividend income of $10,000, and interest income of $7,000. In addition, the trust realized cap gains of $3,000, half of which were reinvested in the corpus (body) of the trust. Transaction costs for the year were $2,000.

She can only deduct the $35k - because that's her CASH BASIS

Jenny invests $25k into an S corp. along with 9 other investors. Within a year the corp. needed additonal funds for equipment, so Jenny lent $10k to the corp. Her basis would now be $35k. If the corp. experiences a $400k loss, her portion of the loss would be $40k. How much can Jenny deduct for tax purposes?

B. S corp D. LLC E. LP

The business entities that have limited liability and flow-through of income or loss are which of these? (3 answers) A. C corp B. S corp C. Sole proprietorship D. LLC E. LP

False - Dividiend income is considered portfolio, or investment, income. Passive income comes from LPs and real estate.

True or false? Dividend income from stock ownership is considered passive income by the IRS.

False - the cost basis of inherited securities is the market value of the securities on the date of the owner's (the donor of the securities) death.

True or false? The cost basis of inherited securities is the origina purchase price of the securities.

C. Sole propreitorship E. GP

Which have flow-through of income, but UNLIMITED liability? A. LLC B. S corp C. Sole proprietorship D. C corp E. GP

A. C corp

Which of the following has limited liability but NO flow-through of income? A. C corp B. S corp C. Sole proprietorship D. LLC E. GP

A. 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 (i.e. when it is active, the term usually being 3- 10 years), the assets put in the GRAT, plus any appreciation are included in her estate

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

C. have a check drawn on the account, and 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 withdraw funds; provided the withdrawal is done in a manner consistent with the trust doc - trust funds must be placed in custodial accounts

3. Since a trust account is managed for the beneficial interest of the beneficiary, the IAR can; A. have funds withdrawn from the account at the direction of the beneficiary B. arrange to have the trust's funds pledged to support a loan for the trustee C. have a check drawn on the account, and payable to the trustee for trustee expenses D. place the securities in the trust fund in a non-custodial brokerage account

A. draft tax and estate docs to ensure compliance with current law in order to provide substantial after-tax returns - an IAR must NOT draft estate docs, estate docs should only be by an attorney because it constitutes practicing law - an IAR should discuss tax implications of investments as a way of imroving a client's after-tax returns

6. With respect to taxation, the IAR should NOT: A. draft tax and estate docs to ensure compliance with current law in order to provide substantial after-tax returns B. discuss the tax implications of investments C. explain the taxable status of particular investments D. consider the tax implications as a way of improving a client's after-tax returns

A. earned income includes salary, bonus, and income as an owner of an LP - earned income includes salary and bonus but not income as an owner of a LP -passive income is derived from rental property, LPs, and enterprises in which an individual is not actively involved

8. Which of the following regarding tax is NOT true? A. earned income includes salary, bonus, and income as an owner of an LP B. passive income is derived from rental property, LPs, and enterprises in which an individual is not actively involved C. portfolio income includes dividends, interest, and net cap gains derived from the sale of securities

A. 1, 2, and 4 - the balance sheet contains assets and liabilities at a specified point in time personal property currently owned, such as jewelry, is an asset - a loan still outstanding, such as a car loan and the debt to the dentist, both are liabilties - the amount ALREADY paid for the Botox injections is no longer on the balance sheet

9. As part of its suitability determination, an IA firm requires that all potential nonbusiness clients complete a family balance sheet. Items that would be included are: 1. gold jewelry 2. loan secured by the family car 3. the amount paid thus far this year for botox injections 4. the balance owed to the dentist for new crowns A. 1, 2, and 4 B. 1 and 4 C. 2 and 3 D. all 4

1. C 2. H 3. I 4. A 5. G 6. E 7. B 8. F 9. D

Match the investor objective with the appropriate suitability recommendation. A. Preservation of cap; safety Growth: B. Balanced/Moderate growth C. Aggressive growth Income: D. Greatest safety E. Tax-free income F. High-yield income G. From a stock portfolio H. Liquidity I. Speculation ____1. Tech stocks, sector funds, or cyclical stocks ____2. Money market fund - (DPPs, real estate, and annuities are not considered liquid) ____3. Volatile stocks, high-yield bonds, stock/index options ____4. Insured Bank CDs, money market instruments or funds, and T bills ____5. PS and utility stocks ____6. muni bonds or muni bond funds ____7. Lg cap stocks, defensive stocks ____8. Corp bonds or corp bond funds ____9. US gov bonds