Unit 18 - Study and Practice Questions

socially responsible investing

investing in companies that have met criteria for environmental or social sustainability

Which type of joint account does not avoid probate?

tenants in common

philanthropic funds

wealthy individuals may set up donor-advised funds that allow for flexibility and tax advantages

Options Disclosure Document (ODD)

"Characteristics and Risks of Standardized Options - Delivery: - to customer, at or before a/c is approved - revised version no later than next confirm - Must accompany or precede an option worksheet

Per stripes

"by way of" or "by branches". Distribution where a beneficiary's share of the policy's proceeds will be passed down to the beneficiary's living child or children in equal shares should the named beneficiary predecease the insured.

Opening a Fiduciary Account

-Proper documents must be submitted and verified by the broker dealer -Speculative transactions are generally not permitted -Margin accounts only are allowed if authorized by legal documentation -fiduciaries must make wise and safe investment choices -Many states publish a legal list of securities approved for fiduciary accounts -fiduciaries may not share in the profits, but may charge a reasonable fee for services

Undivided Interest

-ownership by two or more persons that gives each the right to use the entire property -means that no tenant has a designated interest in any specific asset in the account

3 trust parties

1) Settlor 2) Trustee 3) Beneficiary

3 Types of Joint Accounts

1) Tenants in Common (TIC) 2) Joint Tenants with Right of Survivorship (JTWROS) 3) Tenants by the Entirety

2 Things Only an Account Owner Can Do

1) control investments within an account 2) request distributions of cash or securities from the account

A full power of attorney allows an individual who is not the owner of an account to: (2 things)

1) deposit or withdraw cash or securities 2) make investment decisions for the account owner

Trust Suitability Issues

1) difficult to modify trusts 2) margin trading is not permitted 3) conflicts of interest arise when investment adviser is also a trustee 4) unique tax considerations 5) conflicts between grantor and beneficiary may exist

2 Basic Types of Trading Authorizations

1) full powers of attorney 2) limited powers of attorney

3 Legal Requirements for Opening Up Various Accounts

1) legal capacity - person is of age and has capacity to enter an agreement 2) employment information 3) the Customer Identification Program notice - for the government to help fight money laundering by using identity verification

Which business entities have limited liability for owners as well as flow-through income or loss?

1) limited partnership 2) LLC 3) S Corporation

Which business entities have flow-through but unlimited liabilty?

1) sole proprietorship 2) C corporation

6 Examples of Fiduciaries

1) trustee 2) executor 3) administrator 4) guardian (conservator) 5) custodian 6) receiver of trustee in bankruptcy

If a durable power of attorney, what happens to purchases and sales upon death of person?

A durable power of attorney survives the physical or mental incompetence of the grantor, but no the death of either party. This means that orders entered after the time of death of the grantor, even if the purchase or sale was decided upon before death, are not accepted.

Tenants in Common (TIC)

A form of joint ownership of an account whereby a deceased tenant's fractional interest in the account is retained by his estate and NOT passed to the surviving tenant

Difference between living will and durable power of attorney

A living will is a written document making your specific end-of-life wishes known. The durable power of attorney appoints someone to act on your behalf and make the decisions. So, if you want to be sure your wishes, such as organ donation, are followed, prepare a living will.

What is the easiest business to set up, especially if you don't expect much liability?

A sole proprietorship. However, because the business and the owner are inseparable, there is unlimited liability and no limits to the amount of the loss (if any) that may be claimed on the proprietor's tax return

Living trust (inter vivos trust)

A trust created by a property owner during his/ her life time for the purpose of providing financial care for the family or self. These trusts contain instructions for managing the trust upon the incapacity or death of the grantor

Complex Trust

A trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries

Revocable Trust

A trust that the grantor may change or revoke.

Irrevocable Trust

A trust that, once set up, the grantor may not revoke. The settler must give up all ownership in property transferred into the trust.

Which of the following business structures is most appropriate for retaining money in the business? (a) C corporation (b) sole proprietorship (c) LLC (d) S Corporation

A! Only in the case of a C corporation is money retained not subject to tax on the personal level. In all of the other choices, any income is passed through to the owners making it inefficient to accumulate funds in the business

A client has an account where, upon her death, she desires that her only son will receive 50% of account value and her 4 daughters will receive 12.5% each. The easiest way to accomplish this would be to title the account (a) TOD (b) JWTROS (c) tenants in common (d) in trust for the children

A! TODs requires no additional legal work and allows the account owner to designate beneficiaries in whatever percentages she wants.

Simple Trust

All income earned on assets must be distributed in the year they are received

Can the grantor of the trust also be the trustee and/or the beneficiary?

Although it doesn't happen often, the grantor of the trust can also be the trustee and/or beneficiary

estate account

An account held in the name of a decedent that is administered by an executor or administrator of the estate.

suitability for joint accounts - 2 brother's example

An example you might see on the exam has 2 brothers with a TIC account. One brother is an accredited investor under Rule 501 of the Securities Act, while the other is far from it. In this case, suitability is usually based on the lowest common denominator (the non-accredited brother).

Grantor Retained Annuity Trust (GRAT)

An irrevocable trust that pays a fixed annuity to the grantor (settlor) for some defined term, and pays the remainder interest of the trust to a non-charitable beneficiary. *KEY WORD = GRANTOR RETAINED

A socially responsible mutual fund would probably invest in companies (a) generating high returns (b) acting with high ethics and morality (c) located in a single geographic area (d) with a major presence on social media

B!

If 3 individuals have a tenants in common with a firm and one individual dies, then (a) the account must be liquidated and the proceeds split evenly among the 2 survivors and the decedent's estate (b) the 2 survivors continue as cotenants with the decedent's estate (c) probate is avoided on the estate of the deceased cotenant (d) the account is converted to joint with rights of survivorship

B! In the case of a TIC account, the decedent's estate becomes a tenant in common with the survivors

Three friends plan to start a new business. It is anticipated it will be several years before the business turns a profit. Which of the following types of business organization would be best if they wish to limit their liability while, at the same time, being able to receive favorable tax treatment for the expected losses? (a) C corporation (b) S Corporation (c) general partnership (d) sole proprietorship

B! The only way to limit liability is through a corporation, LLC, or limited partnership

Sam Jones has been a successful businessman and is concerned that his youngest daughter will not be able to live within her means. To protect this from happening, Jones places a large sum of money into a trust for the benefit of a the daughter. Because Jones knows he won't live forever, he arranges for the Fourth Fidelity Bank and Trust Company to have control over the assets. Which of the following statements is NOT true? (a) Sam Jones is the grantor (b) Sam Jones is the trustee (c) Fidelity Bank and Trust Company is the trustee (d) Sam Jones' daughter is the beneficiary

B! everything else is correct because Sam Jones funded the trust making him the grantor

When it comes to transferability of ownership, which is the best business entity?

C corporation because selling shares is usually pretty straightforward

what are C corporations subject to in terms of taxation?

C corporation earnings are subject to double taxation. Before distribution, the earnings are taxable to the corporation and then taxed again to the shareholder when paid out as a dividend. Distributions from LLCs and S corporations are taxed only once because there is no taxation at the business entity level.

Which business entity has limited liability but no flow-through?

C corporation

When an agent with a broker-dealer opens a new options account for a client, in which order must the following actions take place? I. obtain approval from a qualified supervisor II. obtain essential facts from the customer III. obtain a signed options agreement IV. Enter the initial order (a) I, II, III, and IV (b) I, II, IV, and III (c) II, I, IV, and III (d) II, I, III, and IV

C!

A new account is opened for joint tenants with rights of survivorship. All of the following statements are true EXCEPT (a) orders may be given by either party (b) mail can be sent to either party with the permission of the other party (c) checks can be drawn in the name of either party (d) in the event of death, the decedent's interest in the account goes to the other party

C! Although either party may enter an order, any money or securities delivered out of the account goes to the other party

For which of the following types of clients would the suitability requirements be somewhat more relaxed? (a) a guardian of an orphan (b) a charity (c) a foundation (d) an executor

C! Foundations are generally funded by their founders who usually give those managing the money greater flexibility

Which are/is the easiest type of company to dissolve? (a) Partnerships (b) LLCs (c) Partnerships and LLCs (d) C Corporation (e) S Corporation

C! Partnerships and LLCs are generally easier to form and dissolve than a C Corporation

Durable Power of Attorney

it is 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

Several investors open an account in joint tenancy. For suitability purposes, financial information is required on which of the following investors? (a) the majority of investors (b) the largest investor only (c) only the one authorized to trade the account (d) all of the investors

D! When a joint account is opened, to be able to make suitable recommendations, financial information should be obtained on all of the account owners

A living will is used to (a) avoid the cost and time of probate (b) eliminate, or at least reduce, estate taxes (c) ensure that the author's assets are properly distributed after death (d) express the author's end-of-life wishes

D!

Which of the following individuals may not open a joint account? (a) two spouses (b) three sisters (c) two friends (d) parent and a minor child

D! A joint account may be opened by two or more individuals who have legal standing. A minor may not be a party in a joint account because minors are not legally considered a person.

Geraldine invested $25,000 in an S corporation, along with nine other investors who invested the same amount. Within a year, the corporation needed additional equipment, so Geraldine lent $10,000 to the business from her own funds. Her basis is now $35,000. If the corporation experiences a $400,000 loss, what happens to Geraldine's investment?

Geraldine's portion is $40,000. However, she may deduct only $35,000 of the loss because that is the amount of her basis.

Remainderman

One entitled to receive a remainder interest in some estate sometime in the future.

beneficiary

Person for whose benefit property is held in trust

Example of Remainderman

The husband dies and has arranged for his wife to have full use of their home until she passes away. At that time, any surviving children will inherit the home. They are the remaindermen.

C Corporation

The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders

Jill establishes a trust under which her husband, Julian, is to receive all income produced by the trust property for as long as he lives. Upon Julian's death, their daughter, Janet, will receive the trust principal. Julian is the primary beneficiary. Until Janet's death, who is the contingent beneficiary?

Until Julian's death, Janet is a contingent beneficiary because her benefit depends on the occurrence of an event, in the case, Julian's death.

In a JTWROS, what happens upon death?

Upon the death or declaration of incompetency of any of the account owners, account ownership passes to the survivors; a right of succession occurs and the other party or parties becomes the sole owner of the account

Sole Proprietorship

a business owned and managed by a single individual

Limited Liability Company (LLC)

a form of business ownership that offers both limited liability to its owners and flexible tax treatment *owners are MEMBERS, not shareholders *have tax advantages of a partnership

Power of Attorney

a legal document authorizing someone to act on your behalf

Trust

a legal entity that offers flexibility to an individual who wishes to transfer property and as a legal entity for corporate retirement plans

Limited Power of Attorney

a limited power of attorney allows an individual to have some, but not total, control over an account. The document specifies the level of access the person may exercise

Investment Policy Statement (IPS)

a written statement of objectives and investment strategy before making recommendations to the client

What does limited power of attorney allow for?

allows entering of buy and sell orders but not the withdrawal of funds. Entry of orders and withdrawal of funds is only allowed if full power of attorney is granted

S Corporation

although taxed like a partnership, offers investors limited liability associated with corporations in general *profits and losses are passed through directly to the shareholders in proportion to their ownership in the S corporation

Who is considered for an individual account?

an individual account may be for a natural person, a trust, or a deceased person through an estate account

Whenever the test uses the term "joint tenants", what should I assume?

assume it means JTWROS (not tenants in common)

impact investing

can be defined as "the intentional allocation of capital to generate a positive social or environmental impact that can be - and is - measured"

example of program-related investment

helping bring new drugs to market more quickly by providing necessary funding

Transfer on Death (TOD)

individual account with a named beneficiary-assets transferred directly to the named beneficiary upon death of account holder *simplest way to keep assets held in a brokerage account

trustee

individual or other party holding legal title to property held for benefit of another person

Totten Trust

not a trust, but rather a bank account with a beneficiary clause *usually these are REALLY old bank accounts and are not very common

Tenants in the Entirety

- Must be married - Right of survivorship (Cannot Will) - Cannot partition or convey real property without both signatures - most commonly used for ownership of real property (real estate)

How do general partnerships avoid taxation?

Partnerships allow the business' profits and losses to flow directly through to the investors for tax purposes, thus avoiding double taxation of profits at the business and individual levels

settlor

Person who supplies property for the trust

Fiduciary Account

an individual is granted fiduciary responsibility to enter trades for the account, make all of the investment, management, and distribution decisions, and must manage the account in the owner's best interest

fiduciary

anyone legally appointed and authorized to represent another person, act on that person's behalf, and make decisions necessary to the prudent management of that person's account

joint account

owned by two or more persons, and each is allowed control over the account

Joint Tenants with Right of Survivorship (JTWROS)

ownership that stipulates that a deceased tenant's interest in the account passes to the surviving tenants. Regardless of contributions, each JTWROS account owner has an equal and undivided interest in the cash and securities account

Limited Partnership

partnership in which only one partner is required to be a general partner *typical case is Direct Participation Programs

General Partnership

partnership in which partners share equally in both responsibility and liability

If a company expects to be very profitable, should they structure as a C corporation or partnership?

should be a C corporation because earnings can be retained

Which 2 types of business structures are taxed on their income?

sole proprietorship and C corporation

If a TIC agreement provides for 60% ownership interest by one owner and 40% ownership interest by the other, what happens upon death?

that fraction of the account would pass into the deceased owner's estate upon death

What is the key difference between a simple and a complex trust?

that the simple trust must distribute all of its annual income, whereas a complex trust is not obligated to do so

Testamentary Trust

the settlor retains control over assets until death. The individual's will stipulates that, at death, the testator's property is to be placed in trust for the benefit of one or more beneficiaries

How are TODs referred to when bank accounts?

they are called "Payable-on-death"

What is the benefit of structing a business as a general partnership, an LLC, or an S corporation?

they do not include double taxation

program-related investment

those where the foundation (more common for them then charities) makes a charitable distribution