Series 66: Chapter 6

To understand a customer's risk tolerance, an adviser should know information such as:

- How much of a loss the investor can tolerate (Aggressive Investor: 10%, 25% or even 50% vs Conservative: stable and safe) - Level of Tolerance for Market Fluctuation - Investment Temperament (goes w/first two bullet points) i.e. is the client bored with stable investments or anxious with volatile ones?) - Expectations regarding investment returns (My second favorite) - Client Investment Experience - Current Investment Holdings (goes with Investment Exp) - Investment Time Horizon (Short or Long Term) - The importance of tax considerations.

When making recommendations to an advisory client, what two factors carry the most weight?

1) Investment objectives and risk tolerance should determine recommendations to an individual advisory client.

Irrevocable Trust: 1) What's the main advantage of opening a Irrevocable Trust? 2) Does the Grantor have control over the trust?

1) The Main Advantage of a Irrevocable Trust is that any property placed in the trust is not includable in the trustor's estate for Federal estate tax purposes. 2) No. The settlor must give up all ownership in property transferred into the trust.

On the Exam its to remember these basics: 1) Whenever you see "low tax bracket," you should automatically eliminate what investment product? - Likewise, whenever you see "inflation protection," the answer should be?

1) The answer cannot be a municipal bond. 2) Th answer will be common stock (unless a TIPs is given as a choice).

What should an advisor establish in their consultation with the client?

1) They should complete an Investment Policy Statement that explains the investment objectives and investment strategy BEFORE EXECUTING A Trade.

Describe a Short Sale?

1) This a trade where the investor borrows money to sell from the broker dealer with anticipation of the stock price declining and buying back the stock at a lower price and profit by the difference between The SALES PRICE and the PURCHASE PRICE.

An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend? A) Mid-cap common stock mutual fund B) Municipal unit investment trust C) Money market mutual fund D) Ginnie Mae fund

Answer: A Mid-cap stocks have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection. There are several key words here to remember for the exam: - Whenever you see "low tax bracket," the answer cannot be a municipal bond. - Likewise, whenever you see "inflation protection," the answer will be common stock (unless a TIPs is given as a choice).

Suitability Information: 1) What does the balance sheet containing the client's assets have to include?

Assets: - Cash, CDs and Saving Accounts (Cash/Cash Equivalents) - Real Estate Holdings - Value and Composition of securities holdings - Pension and Retirement Accounts - Cash Value of Life Insurance Policies - Personal items such as jewelry and automobiles Liabilities: - Current Debt Obligations (Credit Cards, Estimated Tax Payments, and so forth) - Long Term Debt Obligations (Auto Loan, Mortgage and so forth) - Loans against insurance cash values - Loans against a 401k plan.

What's the only logical choice where a large amount of capital is to be raised?

C-Corporation

When it comes to transferability of ownership, what corporate form is the easiest?

C-Corporation - Selling Shares is usually pretty straightforward.

What's another name for strategic asset allocation?

Constant Ratio Plan. Based on the Ratio not Dollar

How does the scenario differ for an IA and B/D who has a client that refuses to answer some of the suitability questions on a new account?

IA/IAR cannot open a new account for any client that refuses to supply suitability information. - B/D or Agent can open a new account for a client that refuses to supply suitability information but unable to make any recommendations (only can accept unsolicited orders)

How does a constant dollar investment plan work?

In a constant dollar plan, an investor keeps a constant dollar amount of the portfolio in equity securities. If the equities' market value rises, the excess is transferred to fixed-income securities.

An investor who claims to be aggressive but is unwilling to sustain losses is?

Really a Conservative Risk Tolerance.

1) Would it be recommended for a client to purchase a 8% Municipal GO Bond if they're in the 18% tax bracket? Why?

The client's 18% tax bracket is too low to take full advantage of the bond's tax-exempt feature. This client might be better served by buying similar quality corporate bonds.

What investments gives the investor the least exposure to reinvestment risk?

Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon bonds paying no interest. Thus, there is no income to reinvest during the holding period and therefore no reinvestment risk.

What type of business entities will continue to exist as long as there's a least one member or shareholder?

- S Corporation - C Corporation - LLC - This doesn't include Sole Proprietorship, General or Limited Partnerships

1 ) What are the two custodial accounts for a minor?

- UGMA - Uniform Gift to Minor Act = Created in 1956 by Uniform Law Commissioners - UTMA - Uniform Transfers to Minor Act = created in 1986 by Uniform Law Commissioners

Suitable Recommendation: For Retirement: 1) What should you take in account when determining a client's retirement needs? 2) What does the Kaplan Book focus on regarding time horizon and retirement? 3) What are some investment vehicles that can be utilized by investors to avoid decumulation (running out of money) before death? 4) What does Kaplan mention as a popular type of VA for retirement and why

1) - Social Security - Pension Plan - 401k/retirement savings Plan - Insurance - Any investment outside the retirement plan. 2) It emphasizes GROWTH as important factor in Retirement Savings as a Long Term Investment, so Young Investors can afford to take more risk since there's a long time horizon = Equity. 3) To avoid Decumulation (or Running out of money), Annuity products would be a recommendable product (FA, FIA and VA). because payout is guaranteed for life. 4) They mention either the Longevity Annuity since its designed specifically to avoid decumulation. Also Deferred Annuity, since you can accumulate assets until ready to turn on income by annuitizing

1) What are the three possible replacement incomes for someone with disability: 2) What is covered by a company under worker compensation? 3) What does the amount received from social security depend on? 4) What purpose does disability insurance serve?

1) - Worker Compensation - Social Security - Disability Insurance 2) - Medical Expenses - Replace Loss Income - Provide death benefits to family 3) The worker's disability benefit will depend on a number of factors: Age and Income 4) It worthy to note, most employees under group medical, disability and life insurance programs supported fully by the employers, but If not, a person can purchase private disability insurance which the cost is derived from the client's income, needs and occupation.

What type of behavior by a Custodian would be considered improper handling of a minor's account?

1) A UGMA/UTMA can only be opened and managed as a CASH ACCOUNT ONLY. 2) A custodian may never purchase securities on MARGIN or Pledge Securities 3) A custodian must REINVEST all proceeds, dividends, and interests within a REASONABLE period of time Cash proceeds can be held in a Interest Bearing Account for a reasonable period of time. 4) Investment decisions must be consider a minor's age and custodial relationship basically cannot perform inappropriate investments: Naked Calling Writing, Commodity Futures, and high risk securities. 5) COVERS Call Writing is normally allowed. 6) Stock subscription rights and warrants must be either exercised or sold.

Revocable and Irrevocable Trust: 1) What does Revocable Trust mean? 2) What type of Trust is a Living Trust? 3) What does Irrevocable Trust Mean?

1) A revocable trust means the terms of the trust can be changed during the LIFETIME of the Grantor. 2) It must be a Revocable Trust since the Grantor is the only allowed to change the terms of the trust. 3) The Terms of Irrevocable Trust generally cannot be changed and the Grantor is giving up ownership in property being transferred to the trust.

1) Why does someone establish a trust? 2) What does every trust require? 3) What can a Trust be established for?

1) A trust is a legal entity that offers flexibility to an individual who wishes to Transfer Property 2) Trust Agreement 3) Its a legal entity that can be established for a variety of personal and charitable property transfer and established as the legal entity for a Corporate Retirement Plan.

Simple and Complex Trusts: 1) Describe the specifications for a trust to be considered a Simple Trust? 2) Describe how a Complex Trust works?

1) All earned income on assets placed in a Simple Trust must be distributed during the year it is received. ONLY The Interest NOT the Principal, actually Trustee cannot distribute the Principal since they're not authorized. 2) A Complex Trust may accumulate income. (unlike a simple trust) Also they're allowed to disburse Income and Principal at anytime according to the trust instructions. - Any Capital Gains are considered a part of the distributable net income.

1) Can person who donates securities or cash to a minor account take back the money? 2) Can the minor return the gift?

1) All gifts are irrevocable and the Donor has no control or say in the use of the funds. 2) A minor can only return the gift once they reach the age of majority and the funds are transferred into a their own account.

What are general custodial rules an investment adviser should know about an UGMA/UTMA Account: (6 rules)

1) All gifts are irrevocable and the minor doesn't have control of the assets until age of majority. 2) An account may have ONLY ONE Minor and Custodian 3) BUT a Custodian may act as the custodian for more than one minor account and Minor can be the beneficiary of more than one minor account. 4) a Donor of securities can act as custodian or appoint someone else. 5) The minor's parents have no authority or control over the minor's account unless they're the custodian. 6) The minor has the right to sue the custodian for improper actions.

1) Who must sign a new account form? 2) Who must sign a Joint Account Agreement?

1) An officer, partner, or manager (A registered principal) must sign the new account form, but NOT the client. 2) Requires the signature of all owners.

Describe a C Corporation

1) Are Subject to Double Taxation (Earnings/Income are taxable at Corporate Level and Shareholder Level) 2) A Sole Prop and C Corp are taxed on their income. Must file income on Form 1120 3) C Corp should be open if the business is expected to be very profitable since all pass-through entities cannot retain any earnings/income - thus they file Form 1120 4) Best Choice where a large amount of capital is to be raised. 5) The corporation's officers and directors are shielded from PERSONAL LIABILITY for the Corporation's debts and losses.

1) What does business cycle base their measurements on? 2) The business cycle model is broken down into 4 stages. List Them:

1) Business cycle reflect fluctuations in economic activity as measured by the level of activity in such as Macroeconomic variables: Rate of Unemployment and GDP . 2) - Expansion - Peak - Contraction - Trough

1-3) The custodian has full control over a minor's account to do what?: 4) What can a custodian not use the funds from UTMA/UGMA acct for on behalf the minor? 5) What can a custodian use the funds from UTMA/UGMA acct for on behalf the minor?

1) Buy and Sell Securities 2) Exercise Rights or Warrants 3) Liquidate, Trade or Hold Securities (Remember the reasonable time frame rule) 4) A custodian may not use the funds to pay expenses associated with raising a child. 5) Child's support, maintenance, benefit, education and general use

What business structure should you establish/recommend if the company expects to be very profitable?

1) C Corporation - instead of a Partnership, an LLC, or S Corporation because in those three, all earnings pass through to owners - nothing can be retained.

What business structures are considered to have double taxation? What business structures avoid double taxation? When a business structure is described as avoiding double taxation, what does that mean?

1) C Corporation Only. 2) General Partnerships, Limited Partnerships, S Corporations and LLC. 3) There is no taxation at the corporate level. Before distribution, the earnings are taxable to the corporation and then are taxed again to the shareholder when paid out as a dividend.

Simple and Complex Trusts: 1) Trustee is allowed to distribute principal? 2) Which trust has a time limit on distributing income earned?

1) Complex Trust. Can distribute principal based on the trust terms. 2) Simple Trust. All income earned must be disbursed in the year its earned.

1) An UGMA/UTMA account application must include the following information?

1) Custodian's name 2) Minor's name and social security number 3) The state in which the UGMA/UTMA is registered.

1)What the registration of minor account require? 2) Can funds be held in street name? 3)

1) Custodian's name FBO minor's name 2) Cannot be in street name or be in bearer form. Securities bought in a custodial account must be registered so that the custodial relationship is evident.

Taxation of Trust/Beneficiaries: 1) How is Distributable Net Income calculated? 2) Does the beneficiary receive the tax exemption from Municipal Bonds? 3) Is DNI taxable to the beneficiary even if the beneficiary didn't receive the income?

1) DNI equals the amount of distributed income to the beneficiary (or grantor in a living trust) MINUS any commissions or fees charged for buying or selling securities held in a trust MINUS any Realized Capital Gain reinvested in the corpus of the trust. 2) Yes. Tax-exempt interest from Municipal Bonds remain tax exempt to trust beneficiaries 3) Yes. Regardless of the beneficiary receiving the income they're still held responsible for the taxes.

Investment Objectives: 1) Investors seeking current income normally focus on individual securities and mutual funds that invest in what?

1) Fixed Income Securities: - Government Debt (Bonds & Notes and Agency Bonds) - Corporate Bonds and Notes - Preferred Stock - Utility Company Stock (Important to remember)

Suitable Recommendations: Speculation

1) High-Yield Bonds (Junk Bonds) 2) Volatile Stock 3) Option Trading on Stocks/Index Options 4) Commodity Futures

What are the types of beneficiaries a Grantor can list? 3) Can Income Beneficiary and Remaining Beneficiary be the same person?

1) Income Beneficiary = They receive the income during the term of the trust. 2) Remainder Beneficiary = Aka Contingent Beneficiary receives the remaining assets of the trust at the termination of the Trust. Ex. death(s) of the Income Beneficiary. 3) yes. someone can be listed as both.

Testamentary Trust: 1) When does a Testamentary Trust come into play? 2) What are the options for structuring the beneficiary interest? 3) Does the beneficiaries of the trust have control or a voice in the investment and allocation decisions? 4) Does a Testamentary Trust have the advantage of avoiding Probate?

1) It becomes active on death through the Will. 2) You can either: - The interest of all beneficiaries can be stated in the will - Or Allocation Decisions can be left to the Trustee. 3) The Trustee has full control of the management of investments and administration of the account based on the Trust terms. 4) No that's an advantage of the Living Trust. Assets that pass to a Testamentary Trust do not avoid probate, because the validity of the will's instructions to pass property to the trust must be substantiated in PROBATE COURT.

1) What does a Limited Power Attorney Authorize? 2) What does a Full Power Attorney Authorize? 3) What's does a Durable POA allow

1) It depends. The document specifies the level of access the person may exercise. 2) Allowed to deposit and withdrawal funds and make investment decisions for the account owner. 3) Its designed to provide that a specifically designated person maintains power over the account even upon the grantor's incapacitation, whether due to physical or mental causes

Margin Agreement: 1) What does the Credit Agreement disclose: 2) What does the Hypothecation Agreement state: 3) What does the Loan Consent Section Allow?

1) It discloses the term under which credit is extended based on SEC Rule 10b-16. - Must disclose the method for calculating interest - Must disclose conditions under which interest rates and charges will be changed. - The Firm doesn't need client's permission to change interest rates, but must send an assurance that interest rate statements will be sent with the same frequency normal statements are sent (Monthly and Quarterly) 2) The section is MANDATORY and gives the firm permission to Pledge (Hypothecate) securities held on Margin. 3) This section is optional, but client does consent to loan, a Firm can lend (rehypothecate) securities held on margin to other brokers usually for a short sale.

Taxation of Trusts: 1) What is Taxation of Trusts and Estates based on? 2) Which category of assets is subject to severe tax consequences? 3) So what triggers these severe tax consequences? 4) What's the tax rate for retained income in excess to the threshold? 5) What tax form does a Trust or Estate report their income?

1) Its based on what is DISTRIBUTED and what is RETAINED. 2) Its important to remember taxation on Retained (non-distributed) income has quite severe consequences. - So a Simple Trust avoid these severe tax consequences versus a Complex Trust 3) The IRS limits a Trust on how much RETAINED income they can have = $11,650.00 4) Any Retained Income in excess to $11,650 is subject to the Highest Tax Bracket of 35% which can have a significant impact on investment planning. 5) IRS Form 1041.

1) Describe the Expansion part of the business cycle: 2)Describe the Peak part of the business cycle: 3) Describe the Contraction part of the business cycle: 4) Describe the Trough part of the business cycle:

1) Its characterized by INCREASING business activity in sales, manufacturing and wages 2) When GDP increases rapidly and business reach their productive capacity. 3) When business activity declines 4) When the declining business levels off

How does a Tactical Asset Allocation work? 2) What would a PM do if the Stock Market was doing well lately?

1) Its considered a short-term portfolio adjustments based on the Portfolio Manager adjusting the portfolio mix between different asset classes (Stocks, Bonds and Cash/MMF) based on the current market conditions. 2) They would reallocate more of the funds to Stock from Bonds/Cash/MMF

1) Can a Settlor also be the Trustee or Beneficiary? 2) Can a Trust have more than one trustee and do they have to be an individual? 3) Can a Minor or Incompetent Adult be a Settlor, Trustee or Beneficiary?

1) Its rare but its allowed. 2) A Trustee can be one or more competent adult or an entity in the business of trusteeship. - So you can hirer a company to handle the fiduciary responsibilities of a Trustee 3) A minor or incompetent adult can only be listed as a beneficiary

Mixed Margin Account: What does this mean? How do you calculate the Net Equity?

1) Its when the margin account contains a long and short position? Two Calculations: Long Position: Current Market Value Long - Debit Balance Short Position: Credit Balance - CMV Short then you Long - Short Position = Net Equity; If Net Equity is a negative number you owe money.

Joint Accounts: There are many items and transactions that require both parties of the joint account to sign or endorse. List them:

1) Joint Tenant Agreement (Not the New Account Agreement) 2) Suitability Information is required on all of the tenants in the account. 3) All checks for deposit or being withdrawn from the account must be endorsed by both parties 4) All securities sold from a joint account must be signed by all tenants

1) What's the Regulation T 50% requirement called? 2) What's the Margin Maintenance or Maintenance Call? Who sets this limit? 3) How can you calculate the Margin Maintenance/Maintenance Call? 4) What happens if the maintenance call isn't met?

1) Known as the Margin Call - it defines the initial call for Funds when making a margin transaction: Reg T at 50% 2) Regulation T sets the Margin Call, but the SRO (FINRA and the NYSE) set the margin maintenance requirement. This is the established minimum level of equity in a margin account allowed before a call made to the investor for additional funds. Margin Maintenance =25% for Long Margin Accounts 3) Market Value - Debit Balance 4) The Firm can liquidate your assets and there's no rule for which assets they must liquidate. Doesn't have to be the security purchased on margin.

Suitable Recommendations: Growth 1) Balanced/Moderate Growth: 2) Aggressive Growth:

1) Large Capital Stock; Defensive Stocks 2) Technology Stocks, Sector Funds or Cyclical Stock

Death Benefits: 1) When considering retirement and death, what's a good suggestion to include your portfolio, especially with reducing potential substantial estate tax liability? 2) How does life insurance effective against paying substantial estate taxes? 3) How are premiums paid on life insurance treated?

1) Life Insurance is an important component of customer's portfolio since its a great resource to use against paying estate taxes and avoiding liquidating other income producing or growth products in the portfolio you've passed on. 2) Proceeds from Life Insurance policies made to beneficiary are EXEMPT FROM FEDERAL INCOME TAXES. 3) They're Non-deductible.

1) What business entities has LIMITED LIABILITY for owners as well as flow-through of income or loss are? 2) What business entities has Limited Liability but No Flow Through. 3) What business entities has Flow-through but Unlimited Liability?

1) Limited Partnership, S Corporations and LLC. - This does not include the Entities debt. 2) C Corporation 3) Sole Proprietorship and General Partnership

Living Trust versus Testamentary Trust: 1) Which trust's main advantage is the avoidance of probate? Does this avoid estate taxes? 2) Which trust must list a successor trustee in the trust terms?

1) Living Trust Only. The living trust main advantage is the avoidance of probate but is still subject to ESTATE TAX. This is important to remember Estate Taxes are not avoided. 2) Living Trust requires a successor custodian to be listed to take over in the event of the trustees' death.

Margin: 1) What does the Margin Agreement include? 2) When does the Margin Agreement need to be signed by the client based on NASAA policies?

1) Margin Agreement includes; - Credit Agreement - Hypothecation Agreement - Loan Consent (Optional) 2) Its considered an unethical business practice, if the customer doesn't sign a written margin agreement PROMPTLY AFTER the INITIAL Transaction in the account.

An investor diversifying a corporate bond portfolio should worry about these three factors:

1) Maturity (Intermediate v Long-Term) 2) Issuer (Treasury Bond versus Corporate Bond versus non-US issuer) 3) Quality (Credit Rating)

Suitable Recommendations: Liquidity 2) What would never be considered a liquid investment?

1) Money Market Funds - T-Bills, Banker Acceptance, Commercial Papers 2) Annuities, DPP and Real Estate are illiquid

1) What type of Accounts can be opened as a TOD? 2) What type of account can be considered a TOD? 3) One of the main reasons for opening a TOD is to avoid assets going to ?

1) Only an Individual or Joint Account. 2) Most types of paper assets: - Savings and Checking Accounts - CDS - Stock -Bonds - and Other Securities 3) Going to the Estate. Thus a deceased client's will has no authority over a TOD account. ***The TOD account does NOT AVOID ESTATES TAXES if applicable

1) When can a custodian be reimbursed for reasonable expenses incurred in managing an UTMA/UGMA Account?

1) Only if they were NOT the DONOR. Other than that a custodian can be compensated for services rendered.

Investment Objectives: 1) What category does a CD, Savings Account and Money Market Funds best fit? 2) What's a typical concern of these types of investors? 3) What's the pro and con of this investment objective? 4) If you see a question on the exam about what product best represents Capital Preservation, what do you select?

1) Preservation of Capital 2) Most concerned with Safety. Unwilling to tolerate any losses or risk. 3) A client is sacrificing a potential higher return for reduced market risk. 4) A BANK CD no hesitation. Jumbo CDs have interest rate risk. Bank CDs have no interest rate risk!

1) What vehicles are commonly used for their tax deferral features? 2) If a client wants to purchase a product for income and tax advantage, what should you recommend? 3) What's important to remember about Municipal Bond Funds and the way they're taxed? 4) How can a Municipal Bond be considered a potentially more profitable product than Corporate Bonds who pay a higher income amount?

1) Qualified Retirement Plans and Tax-Sheltered Annuity - Contributions are tax-free and deferred with all income until withdrawn. - Also 529 plans, Coverdell Plans and Roth IRA Plans. 2) Municipal Bond and Municipal Bond Funds 3) Only Income is Exempt from Federal (Potentially State) Taxes, Any Capital Gain are fully taxable. Capital Gains occur when the bond is sold for a price that is greater than the investor's cost basis (investment) in the bond. 4) Yes, Municipal Bonds pay a lower interest rate than Corporate Bonds, but sometimes based on the client's tax bracket (HIGHER TAX BRACKET) may result in higher returns on an AFTER-TAX Basis.

1) List the three parties who must be listed in a Trust Agreement to be considered a valid trust? 2) What are the different names used to describe a Settlor?

1) Settlor, Trustee and Beneficiary. 2) Settlor = Grantor, Maker, Trustor or Donor.

Sole Proprietorship: Describe:

1) Sole Proprietorship is the easiest type of business to setup as long as they don't expect much liability. 2) Sole Proprietorship and Partnership are considered to have flow through of BUT with UNLIMITED LIABILITY. 3) File their business information on a Schedule C. 4) Sole Proprietorship and C Corporations are the only two business structures taxed on their Income.

1) What's the easiest business to set up, if they don't expect much liability? 2) What's the easiest business to set up, if they do expect a potential high level of liability?

1) Sole Proprietorship, if they don't expect much liability because if the business could face an unlimited amount of liability and no limits on the amount of losses that may be claimed on the proprietor's tax return. 2) Partnership and LLC would be the better recommendation since they pass-through all liability to investors and considered easy to setup and dissolve.

1) What other type of portfolio strategy is a Passive Management Style similar to? 2) What other type of portfolio strategy is an Active Management Style similar to?

1) Strategic Asset Allocation 2) Tactical Asset Allocations

What makes a TIC different to a JTWROS?

1) TIC allows the joint tenants to divide the ownership in anyway desired, So interest can be unequal. versus JTWROS the ownership is divided evening 50/50. 2) Claim of Deceased tenants assets: TIC goes to Deceased Tenant's Estate and JTWROS goes to surviving tenant.

1) What is Risk Tolerance? 2) Client's Financial Status versus Risk Tolerance? 3) When selecting a specific type of investment what three factors are most important?

1) The Attitude toward Risk and Safety. 2) A client's risk tolerance is the most important factor for an investment decision regardless of the client's financial status. (REMEMBER) 3) - Risk Tolerance - The client's aversion to risk. - The client's investment objective - The amount available for investing (Shouldn't be rent money or money that affects your day to day living)

Taxation of Trust/Beneficiaries: 1) Who's responsible for paying taxes on Distributable Net Income? 2) Is Commission and Fees subtracted from the DNI or Retainable Income?

1) The Beneficiary is responsible. - Beneficiary is held responsible paying taxes on DNI - In a Living Trust, the Grantor is responsible for paying taxes on DNI - The Trust is responsible for paying taxes on Retainable Income above $11,650 at 35% tax bracket. 2) Its subtracted from the Distributable Net Income.

1) What is "Incident of Ownership" and what type of concern does this create for life insurance and estate taxes? 2) What do most people do to avoid "Incident of Ownership?" 3) What is considered "Incident of Ownership"

1) The Incident of Ownership is a significant concern when it comes to passing on life insurance to an Estate. Usually a Life Insurance Policy that holds Incident of Ownership, will forfeit over the entire death benefit to Federal Estate Tax purposes in the INSURED INDIVIDUALS ESTATE. 2) They'll choose to have their life insurance policy owned by their spouse. This simple move keeps the proceeds out of the insured's estate. 3) - Retains the right to designate beneficiary - Transfer Ownership of an insurance policy (assign) - choose how dividends or policy proceeds will be paid - Borrow money from the accumulated cash value of the policy - Or Perform any other functions that are rights of ownership

What type of information must be collected on the Investment Policy Statement? First, list the two categories of information listed and then provide a detail summary of the information?

1) The Investment Policy Statement consists of Objectives and Constraints. 2) A) Objective Section: - Risk Tolerance: Based on self-evaluation, objective questionnaire, client's prior investment experience - Return Requirements: - Minimum Annual Income Requirements - Accumulation amount needed to meet financial goals B) Constraints - Liquidity Needs - When is cash needed? For Defined Benefit Plans, this may be high; for individual retirement plans this may be low. - Time Horizon - Time frame in which goals must be attained. - Tax Bracket Information - Laws and Regulations - Unique Circumstances and/or preferences

1) Whose SSN# is used and referenced on a UGMA/UTMA Account?

1) The Minor's SSN#

Strategic Asset Allocation: 1) What's the basic strategy they use? 2) What would be your strategic asset allocation? 3) What tool does this strategy use to keep pace with the target allocation in a bullish or bearish market? 4) Can you explain how the tool works on a timing basis

1) The allocation is based on a Long Term Investing. They suggest subtracting a person's age from 100 to determine the percentage of the portfolio to be invested in stock. 2) 100 - 28 = 72 so 72% invested in Stock and 28% in Bonds and Cash. 3) A Portfolio Rebalancing. It can be either on a timing basis or whenever the client's proportion of stocks and bonds are out of balance. 4) Let say client is 25 years old = 75% Stocks and 25% Bonds and Cash. Lets say the portfolio manager rebalances every quarter and this last quarter the market was bullish and value of acct (cost basis $100k) is $125 = $100k stock and $25 bonds/cash. The PM will sell $6,1250 shares of stock and stock would be rebalanced to $93,750 stock and $31,250 bonds/cash

Bypass Trust and Portability of Unused Estate Tax Exemption Under ATRA 2012: 1) How much can one spouse leave another spouse at their death without the surviving spouse incurring estate tax? 2) What's the advantage to this Estate Planning Rule?

1) The amount is UNLIMITED. John Doe dies and leaves his estate worth $7M to his surviving spouse. The full amount will transfer incurring no estate taxes. 2) When you transfer an estate from person a to person b you can transfer $5.34 Million without paying estate taxes. So 5.34 Million is exempt from Estate Taxes. Well this rule allows a surviving spouse to use/transfer any of the unused decease spouse $5.34 exemption. So Remember spouse can transfer an unlimited amount of their estate funds to the surviving spouse with out paying estate taxes, so now the surviving spouse can pass on $10.68 Million (Spouse = $5.34 and Surviving Spouse = $5.34 Million) to their Estate at death to be exempt from estate taxes.

Joint Accounts: When a client dies who does the money belong to? 1) Tenants in Common (TIC) 2) Joint Tenants with Right of Survivorship (JTWROS) 3) Transfer on Death Account (TOD)

1) The deceased tenants fractional interest in the account is retained by the tenant's ESTATE 2) Goes to the surviving tenant. 3) The Account holder lists a beneficiary on the account. - TOD account is considered the easiest type of account registration to avoid probate.

1) How does the Tax Strategy: Assets and Income shifting used these days? 2) What Acct Type is commonly used to shift assets and income?

1) The idea for a client to shift investment assets and income to a person in a LOWER Tax Bracket. Most common use is placing funds in your elderly parent's name which will remove the income from your client and let the parent receive the income directly with LITTLE or NO Tax Liability. 2) A Trust.

Time Horizon: 1) What's the Golden Rule for suggesting an investment based on Time Horizon? 2) What does Kaplan say about investment selection when it comes to planning for college education and retirement?

1) The longer the Horizon, the MORE MARKET RISK the account can Accept and Vice Versa. 2) TIME HORIZON is the most important factor. Remember time horizon of 3-5 years should be SAFE and Liquid = Money Market Funds.

1) What are the two most significant keys to the success of an Active Management Style? 2) What's the Passive Management Style base their decision on? - What are the basic traits of a Passive Management Style:

1) The manager's stock picking and market timing ability to outperform market indexes. 2) They believe you cannot outperform an market index so they construct their portfolio to mirror an index i.e. S&P 500. - They seek LOW-COST MEANS of generating consistent, long-term returns with minimal turnover. - Seek Long Term Returns - Seek Minimal Turnover.

1) Describe a S Corporation: 2) What are some unique characteristics of S-Corporation?

1) The profits and losses are passed through directly to the shareholders IN PROPORTION to their ownership in the S Corporation. - Make sure to watch out for someone being a control person = 10% or more. - Owners/Shareholders are only responsible for the amount they contributed and loaned the corporation. (NOT Corporation's Debt) 2) - Cannot have more than 100 shareholders who: - Are not a Non-Resident Aliens as shareholders - Only own one class of stock (presumably common) 3) Tax form issued is Form 1120 Make sure to be able to compare LLC to S Corp. They're very similar, but LLC allows an unlimited amount of "MEMBERS" versus S Corp = 100 "Shareholders"

Value Style of Management: 1) What type of stock does a Value Style of management focus on? 2) What is an excellent indicator of Value Style 3) What type of P/E ratio and dividend payment best represents Value Style? 4) Stock performance purchased by Value Management style would be ______ of thei 52 week price range

1) They focus on UNDERVALUED or OUT-OF-FAVOR securities whose price is Relatively Low to the company's earnings or book value and whose earnings prospects are believed to be unattractive by investors and securities analyst - Value investors tend to use fundamental analysis and do not determine value from charting. 2) company's financial statements. 3) Low P/E ratio with dividends offering a reasonable yield 4) Value investment managers are more likely to buy stock that are at the BOTTOM of their 52 week price range.

Growth Style of Management: 1) What type of stock does a Growth Style of management focus on? 2) What is an excellent indicator of Growth Style? 3) What type of P/E ratio and dividend payment best represents Growth Style? 4) Stock performance purchased by Growth Management style would be ______ of thei 52 week price range 5) Why do investors select growth companies?

1) They focus on companies whose earnings are growing faster than the most other stocks and are expected to do so. 2) Earnings momentum is an excellent indicator of that. 3) High P/E Ratio with LITTLE to NO DIVIDENDS! 4) Growth investment managers are more likely to buy stock that are at the HIGH of their 52 week price range. 5) Investors select growth companies for capital gain potential, not for investment income.

Market Capitalization: 1) Describe the Market Capitalization Options: 2) Under what circumstances can a small cap fund outperform a large cap fund 3) List the different $ of market cap companies?

1) They're managed portfolios that are based on the Amount of Shares Outstanding X Current Market Value = - The Smaller the company the larger degree of risk in an economic downturn. 2) But in a strong economy, small, fast-moving companies with a concentrated product line in a fast-growing sector can dramatically outperform larger, more bureaucratic companies. 3) Large Cap Companies = $10 Billion or more Mid-Size Cap Companies = $2 Billion - $10 Billion Small-Size Cap Companies = $300M - $2 Billion Micro-Cap Companies = $300M or less.

Suitability Information: 1) When collecting information about the client's assets and liabilities, what are you preparing? 2) Do you list a client's salary, income and dividend payments, or amount paid for expenses on a family balance sheet? 3) What are you determining from the family balance sheet? 4) What are you determining from the Family Income Statement?

1) They're preparing a Family Balance Sheet. 2) No. Only Assets and Liabilities. You'll find information about the client's income on their FAMILY INCOME Statement. 3) You're determining the Overall Net Worth and Liquidity of the client (Liquid Net Worth) DUH! 4) You're determining the Client's Cash Flow based on their Income and Expenses?

1) What does the Positive or Negative Margin calculate? 2) How do you calculate the Positive or Negative Margin?

1) To determine if you've made a profit. 2) Two items must collected: - Earnings from Margin - Interest Rate Charged for the Margin Loan. = Earnings - Interest Rate Charged = Either a Positive or Negative Margin.

Suitable Recommendations: Income 1) Safety: 2) Tax-Free Income: 3) High-Yield Income 4) From a stock portfolio

1) US Government Bonds (T-Bills, T-Notes, T-Bonds US Agency Bonds) 2) Municipal Bonds and Municipal Bond Funds 3) Corporate Bonds and Corporate Bond Funds 4) Preferred Stock and Utility Stocks

Investment Objectives: Current Income 1) What current income investment would you recommend for someone whose very conservative but wants income? 2) When reviewing recommendations for clients who want income producing product, what should be your Primary Concern? 3) What's the second Primary Concern?

1) US Government Securities because there's NO DEFAULT RISK 2) Time Horizon! When does the client needs the money! - 2 years or less = Money Market Fund - 5-10 years = Corporate Bonds - Higher Risk and Higher Reward, but should still look at risk tolerance. 3) RISK TOLERANCE = Safe/Low Reward vs High Risk/High Reward

Risk Tolerance: 1) What's an aggressive investor's risk tolerance usually like: 2) What's an conservative investor's risk tolerance usually like: 3) What's an very conservative investor's risk tolerance usually like:

1) Willing to RISK greater amounts and withstand market volatility in exchange for the CHANCE at Higher Returns. - Maybe willing to sustain (10%, 20% or even 50%) losses on investments 2) Wants a safe and stable income. - Looking for an interest payment on debt securities or relatively predictable dividends from STABLE Companies, such as utility company. 3) Unwilling to sustain even modest losses

Is it okay to split ownership of a TIC account between two people 60/40? - What happens in the event of a tenants death? What happens to pending transactions?

1) Yes. Ownership interest in a TIC account can be unequal. 2) What percentage of ownership goes to the decease tenants estate and all pending transactions are cancelled immediately.

1) Can a Firm have their own maintenance call limit?

1) Yes. The individual firm may require a Minimum of 35% or even Higher.

Investment Objectives: Capital Growth 1) what type of investments best-fit a capital growth objective? and Why? 2) What does a Large Capital stock target? 3) What type of investment would be suitable for a older client looking for growth? Why?

1) You're looking for an investment provides means to preserve and increase BUYING POWER of an investor's money over and above the inflation rate. - Large Capital Growth Stock/Funds - Aggressive Growth Stock/Funds 2) They invest in some of the largest and most respected companies. 3) Large Cap Growth since they may need liquid investment in 3-5 years (intermediate time horizon) or someone who are more comfortable knowing they have invested in a fund that is less risky.

Investment Objectives: 1) What's the best type of product for a client who mentions they want capital preservation with No risk of loss? 2) Is a Bank CD subject to interest rate risk? 3) What type of bank usually offer the best interest rates? Chase?

1) a Bank CD. 2) IMPORTANT TO REMEMBER: No Bank CDs eliminate interest rate risk and they're FDIC Insured. 3) You already know it! Smaller Banks

What level risk tolerance is a Baa Rating? Low, Moderate or High?

A Baa rating (the lowest investment grade) is consistent with a client's willingness to accept moderate risk

Your 30-year-old client has $100,000 to invest and she is willing to assume a moderate amount of risk, but would also like to have $10,000 available for a down payment on a home in six months. Which of the following asset allocation strategies would best suit her situation? A) 50% government bond fund, 50% large-cap fund. B) 70% large-cap stock fund, 20% balanced fund, 10% money market fund. C) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund. D) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund.

Answer: B A high concentration (70%) in large-cap securities for growth and inflation protection is the most appropriate asset allocation for the client profile. The client also has 10% in a money market fund for liquidity purposes (down payment of a house) and the rest in a balanced fund. - This question wants to address the liquidity need of the client, which should always be Money Market Funds. Also the client's age is 30 years old, so the strategic asset allocation is used 100 - 30 years = 70% stock and the client should be selecting balanced/moderate growth = Lap Cap Stock or Defensive Stock.

A client is in the 28% marginal federal income tax bracket, and the 3% state income tax bracket. Which of the following investments would produce the highest after-tax yield for the client? A) The answer cannot be determined using the information provided. B) Public purpose municipal bond yielding 6%. C) Federally backed Treasury note yielding 7%. D) AAA corporate bond yielding 7.75%.

Answer: B Since your client is in the 28% tax bracket, he has to earn more than the 6% on a taxable bond for the yield to be equal to, or higher than, the tax-free bond. That number can easily be calculated because 72% of the taxable amount must be equal to or greater than the 6% return (6% ÷ 72% = 8.33%). The 8.33% is higher than the return on the other bonds listed, so the public purpose municipal bond would produce the highest retained return. This would be even more appropriate if the issue was tax exempt in the client's state.

A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable? A) Treasury receipts. B) Municipal GOs. C) Investment-grade bond funds. D) High-yield bond funds.

Answer: D High-yield bonds yield more than investment-grade bonds. Since the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds that yield less.

1) What is margin expense derived from? What do you need to know about margin interest on the exam: 2) How the IRS allows tax advantage regarding margin expense. 3) There's one exception to this certain type of margin expense advantage 4) And The Limits to the advantage and how this can be critical.

1) "margin" interest -- the interest your broker charges you when you borrow against your brokerage account. 2) Margin Interest is a TAX-DEDUCTIBLE EXPENSE. 3) One exception is margin interest expense for Municipal Securities are NON-DEDUCTIBLE. (No such thing as Double Tax-Break) 4) Investors are limited on how much margin interest expense can be considered tax-deductible. They're limited to deducting to the extent they do not exceed their net investment income: dividends, income and capital gains.

1) What are three strategies utilizing an investment for reducing taxes:

1) - Asset and Income Shifting - Tax Deferral - Tax-Free Income

Cost Basis: Net Capital Gains and Losses What do you need to know: 1) The different treatment of stock dividends and splits for cost basis versus reinvestment of dividends:

1) - Stock Splits and Dividends: The amount of shares is added to the original cost basis share amount and the cost basis is adjusted by (Original Cost Basis (Purchase amt) divided by New Share amount) and the acquisition date of the new shares is adjusted to the original purchase date. - Versus Reinvested Dividend: The New Share Amount (20 shares) and their cost of new shares (total $200) are added to the original cost basis.

Dollar Cost Averaging: 1) What's the main purpose of dollar cost averaging? 2) What does dollar cost averaging require? 3) What happens in month when there's a down market versus up market?

1) dollar cost averaging will produce an average cost per share that is less than the average price per transaction. 2) A method where you invest the SAME DOLLAR AMOUNT in a Mutual Fund or Stock on Regular periodic interval (Monthly or Quarterly). 3) In a down market, your average purchase amount will purchase you a higher amount of shares versus a up market your average dollar amount will purchase a less amount shares.

Is a Grantor Retained Annuity Trust considered a revocable or irrevocable trust?

A Irrevocable Trust, even though the grantor retains interest by the grantor.

1) Watch out for questions based on what type of capital gains can be offset by other types of securities capital losses. What the answer?

A realized capital gain on a security may be offset by a capital loss realized from the sale of any type of security, including municipal bonds, equities, corporate bonds, or REITs.

How are real estate property run the risk of losing their status of passive income

If they use the property for personal use for the greater of 14 days or 10% of the amount of days property is rented out during the year = 30 max days

What type of client is a Municipal Bond best suited for?

Municipal bonds are better suited for individuals in high tax brackets and offer little upside appreciation potential.

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?

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.

1) Who has the authority to name beneficiaries? Grantor/Settlor or Trustee?

Only the Grantor/Settlor/Donor/Maker. The Trustee main responsibility is administer the trust based on the instructions of the trust agreement for the beneficiary

What is a basic assumption in an active management investment style?

Some securities are mispriced and value can be captured through security selection. An investment manager using an active management investment style believes that by using investment expertise he can select securities that are undervalued to achieve superior returns over time.

What type of management style does the this description represent? managers actively manage their portfolios, switching the percentage of holding in each asset category according to the performance of the asset class. An aggressive growth manager would actively pursue specific growth securities such as stocks and not allocate funds between bonds, real estate, or other asset categories.

Tactical asset allocation

Why is a GRAT popular?

The reason that GRATs are popular as estate planning tools is that they allow the grantor to reduce the size of their estate. It also provides the grantor with a regular source of income while the annuity is being paid out. - A Grantor Retained Annuity Trust, or GRAT for short, is a special type of irrevocable trust that allows the Trustmaker/Grantor to gamble against the odds and, if the Trustmaker/Grantor plays their cards right, then a significant amount of wealth can be moved down to the next generation for virtually no estate or gift tax dollars.

Describe a Limited Liability Corporation:

- A LLC combines the benefits of a Limited Liability with the tax advantage of a Partnership (Flow Through of taxable earnings) - Benefits of a Limited Liability means the members (shareholders) are only responsible for their own invested amount (Contributions and Loans). - Avoid Double Taxation - The LLC participants are known as Members not Shareholders (S Corp and C Corp). - All investment objectives and financial constraints are based on all member's suitability since they pass-through gains and losses on a limited capacity. - Behind a Sole-Prop, A Partnership and LLC are generally easier to form and dissolve than a C Corporation - Members receive a SCHEDULE K-1 for reporting income tax. (Same for S Corp)

What type of Non-Financial Information must an IA/IAR collect for suitability purposes.

- Age - Tax Status - Martial Status - Number and Age of Dependents - Investment Experience - ATTITUDES and Values - Current and Future Family Health Care Needs - Current and Future Family Educational Needs - Employment of Family Members - Employment Stability

1) What are you determining from the family balance sheet? 2) What are you determining from the Family Income Statement?

- Assets and Liabilities = Net Worth and Liquid Net Worth - Income and Expenses = Cash Flow.

1) Watch out for questions about tax filing deadlines for LLCs..

- In the case of sole proprietorships, partnerships, and LLC's with only one member, the return dates are the same as for the individual tax return, April 15th. versus - In the case of S corporations and LLC's with more than one member​ electing to be treated as a corporation​, that is always March 15.

List Critical Taxation Issues and their impact on investment decisions:

- Non-distributed (retained) income is subject to CRITICAL taxation (35%) for any retained income exceeding $11,650. - Any income earned that exceeds $1,900 in an UTMA/UGMA account is taxable at the highest tax bracket of the minor's parents. So keeping it below $1900.00 is tax free income in a UTMA/UGMA account. - Owning Life Insurance in a Trust with the grantor being the person who holds incident of ownership. If this is the case, the life insurance policy is taxable to the Estate of the Grantor (Insured) not the trust or beneficiary. insured - Major Tax Benefit for a GRAT is the ability for the Grantor to be the income beneficiary and then pass on the remaining balance to the remainder bene potentially estate and gift tax free if the rate of return of the life of the Income stream exceeds the IRS rate of return (3%). BUT 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. - Owning a ILIT (Irrevocable Life Insurance Trust) w/ Crummey power, which allow premiums paid by the insured may qualify for the ANNUAL GIFT TAX EXCLUSION (currently $14k

What type of bond is typically suitable for funding a college education plan

- Zero Coupon Bonds and TIPS

1) How's Capital Need Analysis used? 2) So now you know how its used, but should life insurance at the minimum provide for? 3) What is not a risk associated with Life Insurance when performing the capital need analysis?

1) A capital needs analysis is used to determine how much life insurance is necessary to meet future needs. - Based on Life Expectancy - And Projected client's future earnings 2) - Payoff the client's mortgage and other debts - Income for the surviving spouse for a reasonable time - College Tuition - and Estate Taxes if the taxable estate will exceed $5.34 Million in 2014 - Market Risk since the figure determined by this analysis takes into account inflation risks.

Capital Losses: 1) How can someone who experiences a capital loss use it for their benefit? 2) You must know the yearly limit on maximum deduction using capital losses.

1) All capital losses are deductible and can be used to offset earned income up to certain limit each year, but the remaining unused amount can be carried over. The maximum deduction of net capital losses against other income in any one year is $3,000

What is important to know about life insurance and taxation to the beneficiary

1) Death Benefits paid to the beneficiary of a life insurance policy are NOT subject to income tax. 2) Don't confuse this with Estate Tax, THEY might be subject to ESTATE TAX, but it is not considered taxable income for purposes of paying income tax.

Gift Taxes: What should you know about gift tax: 1) There's a lifetime Max limit and Annual limit on Gift Taxes 2) What trick must you be aware concerning a gift made between spouses? 3) Pretty simple rule: Max Annual limit is important to remember and if you exceed it you must file a Form 709 by tax filing deadline.

1) During the lifetime of person, you're allowed up to $5.34 Million in lifetime gifts without incurring a gift tax. - ANNUALLY you're limited to $14k per person, so Husband and Wife can gift $28k 2) Generally there is an UNLIMITED Exclusion based on the marital deduction rule, but if the Spouse is not an US Citizen then they're limited

Individual Income Taxes: 1) Alimony is considered taxable to? Surrendering or Ex Spouse? 2) Does the Surrendering spouse receive any form of benefit?

1) Ex-Spouse 2) All alimony payments are tax-deductible and the alimony payment amount is eligible for contribution to the ex-spouse's IRA

Determining which shares to sell: What do you need to know: 1) What are the three accounting methods used?? 2) What happens the investor doesn't select an accounting method? 3) When can FIFO be bad decision to use? 4) Be able to identify when Share Identification can be advantageous to use 5) Be able to identify when Average Cost Basis can be advantageous to use and how IRS controls this method.

1) FIFO, Share Identification and Average Cost Basis 2) If not selected, IRS assumes the investor is using FIFO. 3) Using FIFO in a rising market can create adverse tax consequences since your going to be paying taxes on the capital gains. 4) ONLY ON STOCK, It uses the accounting technique to select the shares to sell that provides the lowest cost basis, so can be used to sell at an tax advantage since your selling shares with the lowest capital gains. 5) Average Cost Basis is the preferred method of accounting with Mutual Funds. Also Must know the IRS permission is required to change from this method.

What do you need to know about Filing (Tax) Status 1) What is filing (tax) status solely based on? 2) Being able to determine what the better tax status option is for someone who falls under two categories 3) What are the five categories 4) The deadline for determining your tax status for the year?

1) Filing Status is determined solely by one's marital status. 2) - When Married, filing as married filing jointly is better than filing separately since it offers the lower tax obligation - When not married, If allowed filing as Head of Household is the better option than as a Individual. (Especially a single parent with children. 3) - Single - Married Filing Jointly -Married Filing Separately - Head of Household - Widowed with Dependent Child 4) The end of the year.

1) At what price does a someone who reinvests their interest, dividends or capital gains pay? Offering Price or NAV? 2) Dividends must be reported as dividend income and will be taxed as either?

1) NAV. 2) Either Ordinary Income or as a qualifying dividend with a max rate of 15%

1) Besides Unlimited Deduction on Martial Deductions and Charitable Deductions, what else is deducted from the Estate Taxes due? 2) When deciding on the date of valuation for Estate taxes what should be the main determination?

1) Funeral Expenses, Charitable Expenses and Debt of the Decedent. 2) To take advantage of an anticipated decline in the stock market by using the alternative valuation date of 6 months after death.

Business Tax Forms: 1) What form does some file a tax return? 2) What section of the Form 1040, does a: - Sole Proprietorship file? - Members of a Partnership file? 3) Now important to remember a Partnership (company not members) don't file the form 1040, but must file what type of form? 4) What type of tax form does a LLC file? 5 What tax form does a C corp file?

1) Its called Form 1040. Sole Proprietorship and Members of Partnerships. 2) - Sole Prop = Schedule C - Partnership = Schedule K-1 3) Its an informational return form called Form 1065 4) Trick Question: LLC can be a one person LLC or two or more persons - One Person LLC file Schedule C - Two Persons or More file Schedule K-1. 5) Only Business type that must pay income tax is C Corp by filing Form 1120 at (usual max) Rate of 35% or sometime 39%.

Tax Advantage questions on the Exam: 1) Be prepared to compare different investment products to determine which investment will make the investor pay the least amount of income taxes. What's the key to these questions. 2) When you see a question about what type of product should a client select for increasing current income and pay taxes on that income at less than his marginal tax rate?

1) Knowing the difference between the types of income is generated from these products and their tax treatment. - Look for products that generate income from qualified dividends (Max 15% or 20%) is going to be less that income generated from interest earned on any other product (Fixed Securities in particular) since they're taxed as ordinary income tax marginal tax rate 2) Alway look for the product that produces the highest amount of qualified dividends (max 15%) versus income (taxed as ordinary income tax)

Cost Basis: Net Capital Gains and Losses What do you need to know: - What's the advantage of a Long Term Capital gain versus Short Term Capital Gain. - How do you calculate the Net Capital Gains and Losses to determine the Net Capital Amount - How can Net Capital Losses be beneficial?

1) Long Term Capital Gains are offer a lower tax rate, they're taxed at 15% tax rate vs. Short Term Capital Gains are taxed at an ordinary income tax rate. 2) Its a three part step:: 1st) Add up All short term capital gains and losses. 2nd) Add up All long term capital gains and losses 3rd) Subtract Short Term Capital

Random pieces of info: 1) What's the deadline for S Corp to file their 1120S tax return? 2) What's the tax form is used for the computation of the estate tax? 3) What tax form does someone file if they must report gift tax?

1) March 15. 1120s are due 2½ months after the end of the year 2) IRS Form 706 3) IRS Form 709

You must know the difference between marginal tax rate and Effective Tax Rate

1) Marginal Tax Rate is the rate that you pay on EACH DOLLAR you receive as INCOME IN EXCESS to your Marginal Tax Rate. - Effective Tax Rate = Is the OVERALL RATE of Tax you pay on your TOTAL TAXABLE AMOUNT.

Corporate Taxation: 1) Watch out for questions about Federal Tax Exemptions for Corporations. 2) You must know the tax deduction granted to corporations on dividends - What type of dividends don't receive a tax deduction. 3) How are capital gains treated

1) Municipal bonds are tax exempt for corporations as well as for individuals. Kaplan has multiple questions attempting to trick you about corporations having to pay fed tax on municipal bonds which isn't true. 2) dividends are taxable but at a reduced rate for corporations due to the 70% dividend exclusion. 3) That break does not apply to the dividends on foreign securities. 4) No special treatment just considered capital gains.

Indexing Management Technique: 1) Active or Passive Management Technique? 2) Describe the style of management used? 3) Based on the style of management, what are common are the common traits and features? 4) What trait of an Index Management is different than Buy and Hold? 5) Why does indexing portfolio popular with certain investors who don't like Active Management Styles?

1) Passive Management Technique 2) They construct a portfolio to mirror the components of a particular stock index such as the S & P 500 3) Similar to Passive Management: - Not Actively Management - Low Turnover Rate - Low Expense Ratio - Lower Transaction Costs 4) Indexing and Buy and Hold Techniques are very similar except Tend to be More Tax Efficient. 5) Like all passive management styles, they believe that active investment managers seldom outperform market indexes , thus ETF and Index funds are popular for passive management strategy.

What to know about Dividend Income: 1) Must know there's two types of dividend income. 2) What are the two types taxed at? 3) When taking the test what defines a dividend as qualified?

1) Qualified and Non-qualified 2) Qualified = Max 15% versus Non-Qualified = Ordinary Income 3) assume all us corp stock dividends are qualified unless stated other wise.

Passive Income: What the test requires you to know: 1) Where does passive income and losses come from? 2) The difference between income type a General Partner reports versus a Limit Partner 3) How can passive net income be determined and how it can be used.

1) Real Estate Property, Limited Partnerships and Enterprises (regardless of business structure) 2) General Partners report Earned Income and Limited Partners report Passive Income 3) Passive Net Income is calculated by subtracting passive losses to passive gains. - Passive Losses can only offset "PASSIVE" GAINS.

Individual Income Taxes: Series 66 may concern with Regressive vs Progressive 1) Taxes is what they consist of 2) What demographic is the taxes most costly to 3) and how to determine someone's marginal tax rate.

1) Regressive Taxes are Sales, Excise, Property, Gas and Payroll Taxes) Payroll is not Income Taxes (salary earnings) versus Progressive Taxes are Estate and Income Taxes. 2) Regressive taxes are costlier for low income taxpayer since they're taxed at the same rate to everyone and low income taxpayers spend a larger percentage of their income on regressive taxable products. - Progressive Taxes are costlier to High Income because they're based on your income level. - Marginal Tax Rate is based on your income level Tax bracket = Single Income = Joint Income 25% TB = $37,450 to $90,750 = $74,900 to $151,200 28% TB $90,750 to $189,300 = $151,200 to $230,450 33% TB = $189,300 to $411,500 = $230,450 to $411,500 35% TB = $411,500 to $413,200 = $411,500 to $464,850 39.6% Tax Bracket = $413,200+ $406,750 (2014) = $464,850+ and $457,600 (2014)

Buy and Hold Technique: 1) Active or Passive Management Technique? 2) Describe the style of management used? 3) Based on the style of management, what are common are the common traits and features? 4) What type of expense ratio does a Mutual Fund using Buy and Hold Technique have?

1) Similar to a Passive Management Technique 2) Investment Managers rarely trades in the portfolio. Buy-and-hold strategies - in which the investor may use an active strategy to select securities or funds but then lock them in to hold them long term 3) - Lower Transaction Cost - Long Term Capital Gains Taxes. 4) A Mutual Fund with a Low Expense Ratio.

Business Taxation: 1) Only business type with unlimited amount of loss (no liability protection) and why? 2) Why isn't a General Partnership included in question 1? 3) How about Limited Partnership? 4) Does a partnership file a tax return?

1) Sole Proprietorship since Only person in the business who has unlimited potential loss of personal assets. 2) General Partnership also provide no liability protection to the partners, so unlimited potential loss, but THEY are COLLECTIVELY and SEPARATELY are liable for any losses 3) All member's maximum loss is WHAT has already been invested (Their investment amount) PLUS any funds committed (Loaned) but not yet contributed. 4) No. They file an information return since they do NOT Pay taxes since they pass through all earnings to members.

Wash Sales: What do you need to know and LOOK OUT FOR!!! 1) That the IRS treats various ways of purchasing the same stock as a Identical Purchase? 2) What is considered an Identical purchase for BONDS.

1) Substantially identical securities include stock rights, warrants, options and convertible securities 2) Must have ALL the following same features: - Coupon Rate - Maturity - Issuer If they don't all match then its not considered a wash sale.

Cost Basis Info: Inherited Securities: 1) What must you know about the cost basis for inherited securities? 2) What trick(s) must you watch out for concerning cost basis for inherited securities?

1) The cost basis is adjusted for the beneficiary. The cost basis for the inherited shares are the FMV as of DATE OF DEATH! 2) This Step Up of cost basis doesn't apply when inheriting an annuity.

Alternative Minimum Tax (AMT) What do you need to know: 1) What's the purpose of the Federal Government enforcing the AMT tax on municipal bonds purchases 2) How is the AMT tax enforced or applied. 3) Must be able to list the certain items that are considered favorable tax treatment and must be added back.

1) The purpose of the alternative minimum tax is to ensure that certain taxpayers pay a tax consistent with their wealth and income. 2) The excess of the alternative tax over the regular tax is added to the regular tax amount. The taxpayer does not have the option of paying the alternative tax or the regular tax depending on his tax bracket. 3)

Wash Sales: What do you need to know: 1) What the reason for the rule? 2) What's the parameters of the rule 3) How does the IRS prevent a wash sale from being used. How does it affect the cost basis?

1) This rule ties into the IRS tax deduction allowed on capital losses. Essentially a customer cannot purposefully take a capital loss on a security and then repurchase the identical security within 30 days and use the deduction against it. 2) You're ineligible for tax deduction on a capital loss if you sell at a loss and repurchase BEFORE and AFTER the trade date establishing the loss. 3) Any loss that was disallowed is added to the repurchased share's cost basis.

Individual Income Taxes: 1) Series 66 wants you to be prepared to know the differences between Alimony Payments and Child support. How is child support treated for taxation purposes?

1) Unlike Alimony Child Support payments are non-deductible to the surrendering spouse and nor is any of it reportable as income to the ex-spouse.

Diversification Management Technique: 1) What type of risk does diversification reduce? 2) Describe The Type of Diversification: - Geographic - Sector/Industry - Type of Security

1) Unsystematic Risk such as Business Risk. They're purchased based on the idea one type of investment's price moves down while another moves up in order to offset one another. 2) - Geographic diversification disburses risk if growth rates vary in separate parts of the country. - Diversifying holdings among industries helps as different economic situations affect some industries more than others. - Diversifying types of securities helps as bonds react differently from stocks and real estate to changing economic situations.

Estate Taxation: What tricks to watch out for: 1) When dealing with a death of a spouse where the beneficiary is the spouse.

1) Watch out for questions asking how much Estate Tax is owed. Because there is NONE...there is an unlimited marital deduction

Cost Basis Info and Tax Deductions: What do you need to know: 1) You must know how the cost basis is handled when the investor donates to non-charity vs. charity?

1) When an investor donates shares the donee (recipient) becomes responsible for the cost basis based on the original cost basis value versus. - Donation to a Charity, the cost basis is adjusted to the FMV on the date of donation to the donee and the BIG ADVANTAGE for the donor is Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than one year.

Estate Taxes: What you must know! There's quite a few steps to determining how much and when the estate taxes are due. List them

1st) Determining the Taxable Estate - Must determine and subtract the deductions: Funeral Expenses, Charitable Expenses and Debt of the Decedent. - Secondly, must determine and subtract the unlimited martial and charitable deductions from the Taxable Estate. - 2nd) Executor's choice: Must determine the date of estate valuation: either date of death or six months of decedent's death. 3rd) Must File Form 706 reporting the Estate Taxes by Deadline. The deadline is NINE MONTHS after DOD unless an extension is filed. - Any extension filed will the estate will charged interest.

Market Capitalization: What type is the most appropriate recommendation for a moderate risk client seeking long-term capital gains who also values professional stock selection?

A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. T

What the purpose of an Investment Policy Statement?

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.

The most advantageous tax benefit available to a taxpayer is. Explain each one A) a tax credit. B) a tax deduction. C) straight-line depreciation. D) a short-term capital loss.

Answer: A - A tax credit permits a dollar-for-dollar reduction in a person's tax liability. - A tax deduction only reduces the client's taxable income by the amount of the deduction; it is not a dollar-for-dollar reduction in tax liability. - Straight-line depreciation functions like a tax deduction in reducing taxable income only. - A capital loss, short or long term, may be used to reduce capital gains and, if losses are greater, reduce income up to $3,000 per year. But, once again, that is a deduction, not a credit

As part of your annual review for clients, you perform a net worth computation. You have computed a specific client's net worth at $500,000. This client calls you and asks what his net worth will be after withdrawing $4,000 from his savings account to pay off credit cards, taking another $5,500 to deposit to his IRA and buying a $25,000 home theater system using store credit. You would respond that the client's net worth is now: A) $500,000.00 B) $466,000.00 C) $475,000.00 D) $491,000.00

Answer: A In each case, we have an asset offsetting a liability so there is no change to the net worth.

John Jones dies in June, 2014, leaving the proceeds of his $400,000 life insurance policy to his wife. When computing his gross estate A) only half is included in the gross estate because of the marital deduction B) all $400,000 is included C) none is included because the estate is less than $5.34 million D) none is included because the beneficiary is his wife

Answer: B All of a deceased person's assets are included in the gross estate. Whether or not an asset is subject to estate tax is a different story and not part of this question. One way to have removed the policy from the gross estate would have been by using an ILIT.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) There will be no tax consequences. B) He will offset $1,000 ordinary income this year. C) He will have a $1,000 gain. D) He will have a $1,000 loss to carry over to the next year.

Answer: B Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.

salary of $70,000 and this is their first attempt at financial planning. Which of the following should be the first step taken by the financial planner? A) Pay off credit card debt. B) Determine a reasonable fee for designing the plan. C) Establish an emergency fund. D) Set goals and dates for reaching them.

Answer: C There are many questions on the exam where you will be forced to choose between two possible answers, only one of which is correct. In many cases, it is strictly a matter of opinion, but only NASAA's opinion counts. This is one of them. Goal setting is important, but the regulators feel that the first step in any plan is making sure that there is a "rainy day" fund. We can argue about that because some will say that a good plan can be used to establish that fund where none has existed before. But, please go with the right choice.

A wealthy individual has set up a GRAT. During the term of the trust, how is the income taxed?

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.