SERIES 65 CHAPTER 16 PART 1
When does a customer have to receive the OCC Options Disclosure Document?
At or prior to accepting the customer's first order to trade options covered by the ODD
A feature of which of the following business entities is limited liability but no flow-through of earnings or losses?
Corporation
Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her?
General Partnership
If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability?
He pays no estate tax.
Which of the following types of businessowners has unlimited liability for the business's debts?
Owner of a sole proprietorship
Which of the following individuals may not open a joint account?
Parent and a minor
Small corporations that satisfy certain criteria can elect not to pay income tax at the corporate level but instead pass their earnings through to their shareholders. These corporations are known as
S corporations.
If a client wishes the assets in her account to pass directly to specific beneficiaries after her death, her account should be titled
TOD.
Which of the following statements regarding grantor trusts is not correct?
The grantor may be taxed on trust income only if the grantor actually received the income.
A customer and his spouse own shares in the ABC Fund as joint tenants with rights of survivorship. If the customer dies, what happens to the shares in the account?
The spouse would own all the shares.
Obtaining all of the following complies with the regulations regarding customer identification programs (CIPs) except
a PO Box, instead of a physical address, if it is the primary mailing address.
Among the clients of a broker-dealer could be
a foundation.
Mary Whiting has been a customer of yours for several years. Now that her oldest child is out of the house and living on his own, she wants to open a joint account with her son. If the account is opened tenants in common and Mary contributes 75% of the funding, it is correct to say that
both Mary and her child have an undivided interest in the account.
An S corporation is characterized by
flow-through tax treatment
A form of business structure that exposes all personal assets of the owner to creditors is
the sole proprietorship
One of the situations that investment adviser representatives may encounter is the death of a client. When that happens, orders may be accepted from
the trustee in intestacy.
One respect in which an LLC differs from an S corporation is that
there is no statutory limit on the number of investors in an LLC
When an account is opened tenants in common (TIC), it means that
upon the death of one of the cotenants, that individual's share passes to the estate.
Three years ago, a customer bought 200 shares of ABC for $60.50 per share. Upon her death, she left the shares to her husband when ABC was trading at $98.25. If her husband sells the shares for $99.25, what is his cost basis for tax purposes?
$98.25
Which of the following documents would aid an investment adviser in its responsibility to fully understand the needs of a client when making investment recommendations?
An investment policy statement.
One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a general partnership or a C corporation. Among the advantages of operating as a general partnership are I. ease of dissolution II. ease of raising additional capital III. flow-through of income or loss IV. limited liability
I and III
Dr. Howard dies. Which of the following life insurance policies will be included in his gross estate? I. Policy I—owned by Dr. Howard; he is the insured and his wife is the beneficiary. II. Policy II—owned by Mrs. Howard; she is the beneficiary. III. Policy III—originally owned by Dr. Howard; Mrs. Howard is the insured and he gave the policy to his daughter 5 years ago. IV. Policy IV—owned by Dr. Howard; Mrs. Howard is the insured and he is the beneficiary.
I and IV
Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur? I. The proceeds will be exempt from income tax. II. Some of the proceeds ($850,000) will be subject to income tax. III. The proceeds will be included in Clara's estate for estate tax purposes. IV. The proceeds will not be included in Clara's estate.
I and IV
If 150 investors want to form a corporation to limit their financial liability to the amount of money they invest and do not want to be responsible for any debt that the corporation incurs, they would most likely form
a C corporation
One of your longtime advisory clients has been critically injured in an automobile accident. The client is in the ICU at the local hospital, unable to communicate. You would be able to accept orders for the account
from a person who has a written durable power of attorney over the account.
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can
have a check drawn on the account payable to the trustee for expenses.
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can
have a check drawn on the account payable to the trustee for trustee expenses.
One of your clients runs a small business, currently organized as a sole proprietorship. Among the primary reasons why the client might consider changing to an LLC is
limiting his personal liability.
When a will calls for property to be distributed per stirpes, it means that
the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants.
A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust?
$6,500
Several entrepreneurs form an S corporation. Under which of the following circumstances will the entrepreneurs risk losing their tax benefits? I. 150 new investors buy into the corporation during the year. II. 1 new member is a nonresident alien. III. 50% of the corporation's income is derived from passive investments in limited partnerships. IV. The corporation issues several classes of stock.
I, II, III, and IV
An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale?
Long-term capital gain of $4,750
A client purchases 1,000 shares of the ABC Global Growth Fund when the NAV is $8.75 and the POP is $9.21. Three years later, the client makes a gift to her daughter when NAV is $9.50 and POP is $10.00, and the daughter elects to receive all distributions in cash. Two years later, she sells all shares when the NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale?
Long-term capital gain of $5,040
A client is completing a new account form that contains questions about the investor's investing experience and knowledge. More than likely, what type of account is being opened?
Options
Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax?
When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000
Walter and Wanda Willingham are new client's. While reviewing their holdings, you notice an account at a local bank titled, "Walter Willingham, in Trust for Walter Willingham, Jr." The account provides that, upon Walter's death, the assets in the account will pass to his son. This is an example of
a Totten trust.
A registered broker-dealer would not be able to open an account for
a deceased individual.
A registered broker-dealer would not be able to open an account for
a person deemed mentally incompetent.
With respect to taxation, an investment adviser representative should not
draft tax and estate documents to ensure compliance with current law to provide substantial after-tax returns.
Ebony sets up a revocable trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any income to the trust will be taxable to
the grantor.
William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate?
$175,000
The Wrights live in Texas, where Maria Wright has had an extremely successful cattle business for a number of years. As a very generous person, how much money can Maria give to her spouse, a Canadian citizen, in 2022 without incurring gift tax consequences?
A limited amount because her spouse is not a U.S. citizen
Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax?
An unlimited amount
According to the USA PATRIOT Act of 2001, account identification and verification procedures should be applied to which of the following? IV. New individual accounts II. New business accounts III. Existing individual accounts IV. Existing business accounts
I and II
Which of the following statements regarding an S corporation owner and an owner of an LLC are true? I. Creditors have very limited recourse rights to the owners. II. They may not be nonresident aliens. III. They both are considered stockholders. IV.Both receive the tax benefit of owning flow-through entities.
I and IV
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 certain sum of money into a trust for the benefit of the daughter. Because Jones knows he won't live forever, he arranges for the Fidelity Bank and Trust Company to have control over the assets. In this case, I. Sam Jones is the grantor. II. Sam Jones is the trustee. III. Fidelity Bank and Trust Company is the trustee. IV. Sam Jones's daughter is the beneficiary.
I, III, and IV
Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? I. An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer II. An account opened by a sole proprietor in the name of the company III. An account opened in the name of ABC Corporation, an S corporation by one of its shareholders IV. An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager
II and III
Which of the following pieces of customer information must an agent attempt to obtain when opening a new account? I. Emergency contact person II. Financial condition III. Investment objective IV. Education
II and III
In which of the following business structures does the owner assume full liability? I. S corporation II. LLC III. Sole proprietorship IV. General partnership
III and IV
Three sisters are interested in forming a business together. They have three initial concerns I. maximizing their benefits from the fact that the business is not expected to earn money for at least the first two years; II. making sure that the business will be able to continue in the event that one or two of the sisters dies; and III. minimizing their personal liability for the obligations of the business. On the basis of the sister's concerns, which form of business is appropriate for the situation?
LLC.
A feature of which of the following business entities is limited liability for owners, as well as flow-through of income?
Limited partnership
Which of the following entities would issue a Schedule K-1?
Limited partnership
Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated?
Living will
Which of the following is federally tax exempt for a corporation?
Municipal bond interest
An individual purchased a variable life insurance policy 10 years ago with a guaranteed death benefit of $100,000. The annual premium for this policy was $2,000 per year. The individual dies and, due to outstanding performance of the separate account, leaves a death benefit to the beneficiary of $121,000. What are the income tax consequences to that beneficiary?
No tax is due.
A business organized as which of the following pays federal income tax on its income?
Sole proprietorship
Under the provisions of the Internal Revenue Code, which of the following business forms is not required to file a separate tax return?
Sole proprietorship
Your advisory client is an 86-year-old woman who is presently in the hospital, unable to communicate due to a severe stroke. For the past 6 years, she has followed the practice of making annual gifts of stock to her children and grandchildren on her birthday. Because her 87th is coming up later this month, her oldest son approaches you and asks you to continue the policy.
Without a proper durable power of attorney being produced, you cannot do anything.
The type of trust created by a will that becomes operative at death is
a testamentary trust.
An advantage of structuring a business operation as an S corporation rather than a C corporation would be
avoiding double taxation.
There are number of potential sources of income to a client that would have to be reported on their Form 1040 tax return. Among them could be all of these except
death benefit received from a life insurance policy.
Richard, Tim, Sam, and Fred have a regular golf foursome every weekend. During one of their outings, they decide it is time they did something constructive with their money by opening an account with a brokerage firm. If the account is opened tenants in common, suitability information would be required on
each of the four individuals
Increasingly, many institutional investors, especially those in the philanthropic arena, are using ESG factors when considering where to invest their funds. Those factors are most accurately described as
environmental, social, and governance.
An estate account is opened with Family Asset Protectors (FAP) a registered investment adviser. Management decisions regarding the account must be made at the direction of the
estate's executor or administrator.
A long term client contacts you to inform you that his lawyer has drafted a trust agreement and wants to name you trustee. You accept, and several months later, the beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should
follow the terms of the trust.
As with all investors, it is important that trusts have an investment policy statement (IPS). If the beneficiary of a trust requests that the trustee use trust assets to enter an order that is considered a prohibited transaction under the IPS, the trustee should
follow the trust's IPS and refuse the order.
An individual established an irrevocable trust. The individual's two adult children were named equal beneficiaries of the trust. Several years after the death of the grantor, one of the children fell upon hard times and asked the trustee for a greater share of the trust's income. Under trust law, the trustee
must be impartial when following the terms of the trust.
A woman wants to buy from an agent who is not registered in her state. She decides to use a friend's address in the state in which the agent is licensed. This action is
not acceptable because there are no circumstances under which you are permitted to use someone else's address as yours
A high net worth individual wishes to know when a gift can be made this year without being obligated to pay gift tax. You would respond that there is no gift tax when the gift is made to
the American Red Cross.
There is a number of different ways in which a business may be structured. Of the following choices, the only one placing a limit on the maximum number of investors permitted is
the S corporation.
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes?
$0.00
One of your customers would like to be able to reduce current taxable income. Contributions to which of the following would be an appropriate recommendation?
A donor advised fund
Which of the following is most commonly used when the author wants to express end of life wishes?
A living will
A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use?
Complex trust
Which of the following would generally not result in any income tax liability?
Death benefit proceeds from a life insurance policy
Limited liability is a characteristic of being an owner of a general partnership an interest in a limited partnership shares of an S corporation a sole proprietorship
II and III
An investor inherits 1,000 shares of the ABC Global Growth Fund when the NAV is $9.50, the bid price is $9.00, and the ask price is $9.15. Two years later, the investor sells all shares when the NAV is $14.25, the bid is $14.50, and the ask is $14.60. What are the tax consequences of this sale?
Long-term capital gain of $5,500
A broker-dealer would not be able to open an account for
a deceased person
An investment constraint that is unique to private foundations is the requirement to
distribute 5% of its assets each year as qualifying distributions.
During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from
the person appointed as administrator of the estate.
Which type of individual account allows for investments held in that account to go straight to a named beneficiary outside of probate?
TOD account
Two sisters might wish to open an account as tenants in common (TIC) rather than JTWROS in order to
ensure that their respective shares go to their heirs instead of the surviving sister.
Mr. Peabody Fawcett and his sister, Ms. Gwenyth Paige-Newberry open a brokerage account at your firm with an initial deposit of $11 million. The account is opened as tenancy in common (TIC) with Peabody owning 40% and Gwenyth the balance. Several years later, Peabody is fatally injured while playing polo. As a result
40% of the value of the account will be transferred to an estate account in his name and 60% will be transferred into an individual account in her name
Among the differences between C corporations and S corporations is I. the liability assumed by the shareholders II. the number of allowable shareholders III. the tax treatment of the corporation's earnings IV. residency requirements of shareholders
II, III, and IV
An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except
a minor.
If a new joint tenants with rights of survivorship account is opened by two related individuals, all of the following statements are true except
checks may be drawn in the name of either party
The customer identification program (CIP) requires that certain information relating to new customers be obtained. Included in that requirement for individual clients who are citizens of the United States are all of the following except
current employment status
If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on
the market value of the securities on the date of gift.
Regarding the treatment of estates by the IRS, it would not be correct to state any of the following except
the maximum tax rate on estates is the same as that on gifts.
All of the following statements relating to an account registered as tenants in common are true except
upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s)
Your clients, a married couple, are trying to decide whether to open an account as joint tenants with right of survivorship or tenants by the entirety. You might point out to them that one of the differences to consider is that:
a JBE account requires the consent of both parties to make a trade.
A client of yours is getting older and is concerned about having her wishes met relating to medical issues when she is no longer capable of communicating them. The most appropriate vehicle for her would be
a living will.
Which of the following is not a characteristic of a corporation?
Existence terminates when an owner dies.
Carmen Lobianco, who has been highly successful in business, has a thirty-year-old son. The son has been a quite a spendthrift. Lobianco is afraid the son will not be able to live within his means. To protect this from happening, Lobianco places $2,500,000 into a trust for the benefit of the son. To provide added safety, Lobianco arranges for the Amalgamated Bank and Trust Company to have total control over the assets. In this case, which of the following is not correct?
Carmen is the trustee.
Liam died with the following assets and liabilities: $200,000 in securities left to his wife, a $650,000 home left to his wife (the home cost $150,000), a $250,000 life insurance policy with his daughter as beneficiary, and $75,000 in debts and estate expenses. What is Liam's gross estate?
$1,100,000.
A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are true? I. For gift-tax purposes, the value of the gift is $3,000. II. For gift-tax purposes, the value of the gift is $7,000. III. The son's cost basis on the stock is $3,000. IV. The son's cost basis on the stock is $7,000.
II and III
One of your clients has named you as the trustee for a trust he has established. The beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should
follow the terms of the trust.
