SIE 22 Nonqualified Accounts

corporate accounts

***Must obtain a copy of the corporate charter as well as a corporate resolution - resolution authorizes both the opening of the account and the officers designed to enter orders - the resolution is a resolution of the BOD

Joint tenants with right of survivorship (JTWROS)

- A form of joint ownership - a deceased tenant's fractional interest in the account passes to the surviving tenant(s). - undivided interest in account - common for couples

trust account

- Account established by one individual (grantor) to be held for the benefit of another (beneficiary) - creates a fiduciary responsibility - grantor may appoint a trustee: manages assets for the benefit of the beneficiary

joint accounts

- a bank account held by 2+ persons (co-owners) - each individual having some form of control over the account - account agreements: any/all tenants may transact business in the account - checks must be payable to the names registered and ensured for deposit by al tenants - by mail, only one address needed

Coverdell Education Savings Account (ESA)

- after-tax contributions up to $2,000 / student per year for < 18y/os - contribution limits: reduced/eliminated for higher income taxpayers - growth and income is deferred - no tax deduction - distributions are tax-free (for qualified education expenses) - non qualified distributions are subject to income tax + 10% penalty for amounts in excess of principal - if account isn't depleted by age 30, funds must be distributed to individual subject to income tax + 10% penalty OR transferred into another beneficiary's ESA

limited POA

- allows appointed person to have some (but not total) control over account - doc specifies level of access that the person may exercise - can buy / sell stocks - canNOT withdraw assets

sole proprietor account (d/b/a account)

- effectively the property of the business owner - may have a business associated with it in addition to owner's name - checks deposited made payable to account owner or business nmae

Tenants in Common (TIC)

- joint account (unequal or equal interest) - deceased tenants fractional interest in account is retained by that tenant's estate and is not passed to the surviving tenants - tenants should have agreement as to what % of the account is owned by each - if no agreement, assumed its equal

individual accounts

- one beneficial owner - account holder = only person who can control the investments w/in the account and request distributions of cash/securities from account - there can be additional appointments only by the owner or court

authorization from partners

- partnerships must have written partnership agreement - states which of the partners can make transactions for the account

UTMA vs UGMA

- types of custodial acccounts 1. UTMA - allow for real estate to be titles in custodial name (UGMA does not) 2. UGMA - may be held in custodial name until beneficiary turns 25 (21 in some states) - UGMA accounts are available to minor at age of majority for state

types of education savings accounts

1. Coverdell Education Savings Account (ESA) 2. 529 Plans

rules for an RR - custodial accounts

1. account may only have ONE custodian and ONE minor / beneficial owner 2. only an individual can be a custodian for a minor's account 3. a minor can be the beneficiary for more than one account; a person may serve as a custodian for more than one account; as long as each account benefits only one minor 4. donor of securities can act as a custodian or can appoint someone else 5. unless they are acting as custodians, parents have no legal control

what a custodian has full control over:

1. buy/sell securities 2. exercise rights, warrants, or 3. liquidate, trade, or hold securities - may also use property in the account in any way deemed proper for the minor's support, education, maintenance, general use, or benefit - however, acct. not normally used to pay raising a child

limitations on custodial accounts

1. may be opened and managed as cash accounts only 2. custodian may not purchase securities on an account on margin or pledge them as collateral for a loan 3.custodian must reinvest all cash proceeds, dividends, and interest within a reasonable time; cash proceeds may be held in non-interest bearing custodial account for reasonable period 4. investment decisions must take into account a minor's age and custodial relationship; commodities futures, naked options, and other high-risk securities are example of inappropriate investments; covered call writing allowed 5. stock subscription rights/warrants must be exercised or sold 6. custodian cannot delegate away judiciary responsibility; can grant trading authority and investment decisiosn 7. custodian may loan to an account but cannot borrow 8. may be reimbursed for reasonable expenses incurred 9. custodial accounts are under minor's SS #; taxed at minor's tax rate

2 types of joint accounts

1. tenants in common (TIC) 2. Joint Tenants w/ Right of Survivorship (JTWROS)

Who are fiduciaries?

1. trustee 2. executor designated to decedent's will to manage affairs of their estate 3. court-appointed administrator to liquidate estate of a person who died w/o will 4. court-designated guardian; handle minor's affairs until minor reaches age of majority; or to handle incompetent person's affairs 5. custodian for minor 6. receiver in bankruptcy 7. conservator for incompetent person

Corporate Resolution

A document stating that the corporation's BOD has authorized particular individuals to act on behalf of the corporation. - necessary for opening a corporate account -a RR must get: 1. the business' legal right to open an investment account 2. An indication of any limitations placed on the securities in which the business can invest 3. Who will represent the business in transactions

529 Plans

Education savings plans - no annual contribution limit - no age limit - no income limit for donor - contributions subject to gift tax - state-sponsored municipal fund securities - k-12 and post-secondary educaiton 1. prepaid tuition plans for state residents (lock in current tuition) 2. savings plans for residents and non-residents

limits of fiduciary accounts

RR must be aware of: 1. proper authorization must be given b/c of necessary court docs filed w/ verified BD 2. speculative transactions generally not permitted 3. margin accounts only permitted if authorized legal documents establishing fiduciary accounts 4. prudent investor rule requires fiduciaries to make wise and safe investmetns 5. many states publish legal list of securities approved for fiduciary accounts 6. fiduciary may not share in account's profits, but may charge service fee

beneficial owner

The person(s) entitled to the benefits of ownership even though another party (a broker or bank would be the nominal owner) actually holds the security

power of attorney (POA)

a legal instrument used by a principal (person, not a firm) to grant legal authority to one or more agents to make certain legal and financial decisions on behalf of the principal - can be full or limited - does not take away owner's authority to manage the account

irrevocable trust

a trust that cannot be altered or ended by its creator

living trust

a trust that is created and funded by the grantor during the grantor's lifetime

revocable trust

a trust whose terms the trustor retains the rights to change

all of the following are true of a 529 college savings plan EXCEPT: a. distribution must be complete by the beneficiary's 30th birthday b. there are no taxes due for distributions used for qualified education expenses c. there is no income limit for the person making a contribution d. there is no annual contribution limit

a. distribution must be complete by the beneficiary's 30th birthday - there is no beneficiary age limit for 529 plans, either for contributions or distributions

If 3 individuals have a tenants in common (TIC) account with your firm and one individual dies, then: a. the two survivors continue as covenants, along with the decedent's estate b. the account must be liquidated and the proceeds split evenly between the two survivors and the decedent's estate c. trading is discontinued until the executor names a replacement for the deceased d. the account is converted to joint tenants with rights of survivorship

a. the two survivors continue as covenants, along with the decedent's estate - in a TIC, the estate replaces the decedent tenant - eventually, the decedent's portion of the account will be distributed to the estate's beneficiaries

custodial accounts

accounts set up for minors - established under: 1. uniform gift to minors act (UGMA) or 2. Uniform Transfers to Minors Act (UTMA)

fiduciary

any person legally appointed and authorized to represent another person to act on their behalf and make decisions necessary in managing account

durable POA

appointee who legally speaks on behalf of incapacitated

a trust formed during the grantors lifetime that may be modified only by the original grantor(s) is normally called: a. an irrevocable living trust b. a revocable living trust c. an A-B trust d. a life insurance trust

b. a revocable living trust - if a grantor forms and funds a trust in their lifetime, it is a living trust - if anyone has the power to modify the trust, it is revokable

a corporation opening a brokerage account must present all of the following documents except: a. a new account form b. an authorization from the state department of corporations c. a copy of the corporate charter d. a resolution of the board of directors

b. an authorization from the state department of corporations

an individual opens an account with your firm. she tells you that upon her death, she wants any assets in the account to be divided equally among her 3 children. she also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than others, but she does not want to incur any significant legal defense. you would suggest that the account be opened: a. as a joint account with right of survivorship b. as a joint account with tenants in common c. as an individual transfer on death (TOD) account d. under a discretionary power

c. as an individual transfer on death (TOD) account - an individual account with a TOD designation would be best; a TOD designates that an owner(s) may add to an account that allows the owner to pass all or a portion of the account to a named beneficiary(s) at death - a joint account would make the children owners of the account - a discretionary power does not accomplish the owner's desire to transfer the account on her death

which of the following investments would NOT be allowed in a custodial account? a. covered call options b. small-company stocks from an emerging market c. blue-chip stocks d. uncovered call options

d. uncovered call options - uncovered call options with their inherent (unlimited) risk are not appropriate for a custodial account - covered calls are allowed - as are most common stocks

full POA

grants appointed person the power to deposit/withdraw cash/securities and make investment decisions for the account

Transfer on Death (TOD)

individual account with a named beneficiary-assets transferred directly to the named beneficiary upon death of account holder - avoids probate b/c estate is bypassed - does not avoid estate tax - may be added to individual accounts and JTWROS

non qualified accounts

those not part of a retirement plan - some accounts are tax-deferred but most are not

decedents trust

trust funded by a will or some other estate process - assets placed in trust AFTER the owner passes

partnership accounts

unincorporated association of 2+ individuals - usually opened for business purposes