Unit 18 Quizzes

******An advantage of structuring a business operation as an S corporation rather than a C corporation would be A) avoiding double taxation B) limited liability C) simplicity when raising capital through a public offering D) the C corporation is limited to a maximum of 100 shareholders while no such limit exists for the S corporation

*******A Because an S corporation is taxed like a partnership, all earnings (or losses) flow directly through to the shareholders. This avoids the double taxation inherent in receiving a share of the profits (through dividends) from a C corporation. It is the S corporation that is limited to 100 shareholders. That is why it is not suitable for raising capital through a public offering. The shareholders of both S and C corporations enjoy the benefit of limited liability.

***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? A) General Partnership B) C Corporation C) S Corporation D) Limited Partnership

***A Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

****Which of the following accounts could be opened with a TOD designation? I Individual II Joint tenants in common III Joint tenants with rights of survivorship IV UTMA

***A The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.

**One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box B) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts C) the CIP requires date of birth while the regulators only require proof of legal age D) the CIP requires a statement of the customer's goals while the regulators only require current financial information

**C The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

Which of the following actions should be taken by an agent when a client decides to open an options account? A) Review with the client the risks involved when trading options before the first options trade B) Assure that an options agreement has been signed prior to the first trade taking place C) Provide an options disclosure document no later than 15 days after the first trade D) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade

A It is imperative that suitability and risk be addressed with the client before allowing option trading to take place. The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading takes place in the account.

*******Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can A) have a check drawn on the account payable to the trustee for expenses B) have funds withdrawn from the account at the direction of the beneficiary C)place the securities in the trust fund in a noncustodial brokerage account D)arrange to have the trust's funds pledged to support a loan for the trustee

A**************** The trustee can be reimbursed for expenses that are reasonable. * A trust account must be managed by the trustee and not by the beneficiary. * *Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document.* Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts.

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account, is A) Totten trust B) passbook savings account C) demand deposit account (DDA) D) revocable trust

A The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.

The distributable net income (DNI) of a simple trust would not include A) interest received on municipal bonds. B) dividends received. C) interest received on corporate bonds. D) reinvested capital gains.

D It is capital gains that are reinvested in the corpus (body) of a simple trust which are not part of DNI. Although the interest on municipal bonds in not taxable, it is still included as part of the DNI.

The account approval will indicate the: - date the options disclosure document (ODD) is furnished to the customer; - nature and types of transactions for which the account is approved (e.g., buying, covered writing, uncovered writing, spreading, and discretionary transactions); - name of the agent assigned to the account; - name of the supervisor approving the account; - date of approval; and - dates of verification of currency of account information. Within 15 days after a customer's account has been approved for options trading, the broker-dealer must obtain from the customer a written agreement that the customer is aware of and agrees to be bound by FINRA rules applicable to the trading of option contracts and that the customer has received a copy of the current ODD

***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 Answer: C ***The steps in opening an options account occur in the following order: obtain essential facts about the customer; give the customer an ODD; have the manager approve the account; enter the initial order; and have the customer sign and return the options agreement within 15 days.***

**One of your clients dies. You could legally take instructions regarding the individual's estate from A) the administrator in intestacy B) the spouse of the deceased C) a CPA who prepared the deceased's tax return D) a person with durable power of attorney

**A If an individual dies without a will (intestate), the state will appoint an administrator in intestacy who, just as an executor for one who had a will, has control over the deceased's assets. A durable power of attorney, just like any other power, expires upon the death of either party to the power.

**A man is planning to start his own glass-sculpturing business. He wants to be able to deduct his anticipated losses for the first 2 years. He anticipates that the enterprise will borrow money from lenders and is willing to personally guarantee the debt. He also wants to attract other investors but does not want to give up control of the day-to-day business decisions. What business form do you recommend? A) S corporation B) General partnership C) Limited partnership D) C corporation

**C A limited partnership with him as general partner would allow for additional investment capital without giving up management control. C corporations do not allow deductibility of losses; S corporations do not allow guaranteed debt to be included in the taxpayer's basis. General partnerships could allow the other partners to more easily control the day-to-day operations than a limited partnership, in which the other investors (presumably limited partners) would not be permitted to take a role in the running of the business.

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 A) follow the beneficiary's instructions. B) amend the IPS and process the order. C) contact the grantor of the trust. D) follow the trust's IPS and refuse the order.

**D *A trustee is the classic example of a fiduciary* - one responsible for handling the assets of another person. Construction of the IPS for a trust is generally done with the consent of the grantor of the trust to make sure that the grantor's wishes are met. Therefore, it would be considered imprudent for the trustee to engage in any transaction specifically prohibited by the IPS.

One of the portions of the USA PATRIOT Act of 2001 that affects the opening of an account for a new customer is A) the customer identification program B) the Transportation Security Administration (TSA) C) the requirement to obtain suitability information D) the "know-your-customer rule"

A The customer identification program (CIP) is mandated by the PATRIOT Act and requires that broker-dealers (and other financial institutions) obtain certain specified information about new customers. The "know-your-customer" rule was written many decades before the PATRIOT Act. The PATRIOT Act, through the CIP, is concerned with validating identity, not suitability

When does a customer have to receive the OCC Options Disclosure Document? A) Within 15 days of account approval by the firm's designated options supervisor B) Before accepting the customer's first order to trade options covered by the ODD C) Within 5 business days of the first options trade D) With the confirmation of the first options transaction

B When opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an options disclosure document titled Understanding the Risks and Uses of Options, the broker-dealer satisfies the risk disclosure requirements. There are 2 alternatives for meeting the delivery requirement. It may be done before or at the time the broker-dealer approves that customer's options account OR before or at the time the BD accepts the customer's first order to trade the listed options covered by the ODD.

A grantor retained annuity trust is a planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize A) income taxes. B) excise taxes. C) estate taxes. D) property taxes.

C A GRAT (granter retained annuity trust) is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.

In a trust, the person who establishes the trust and decides on its terms is A) the beneficiary B) the trustee C) the grantor D) the fiduciary

C The grantor, sometimes called the settlor, is the person who establishes the trust and specifies its terms. *The person who administers the trust is the trustee*, and the person who receives distributions from the trust is the beneficiary. Interestingly, trust law would permit the grantor to also be the beneficiary and/or the trustee.

Which of the following types of businessowners has unlimited liability for the business's debts? A) Shareholder of a corporation B) Limited partner C) Owner of a sole proprietorship D) Member of a limited liability company (LLC)

C The owner of a sole proprietorship has unlimited personal liability for the debts of the business, and this is one of the main disadvantages of sole proprietorships. Limited partners, members of limited liability companies, and shareholders of corporations are not personally liable for the debts of the business.

******Which of the following are fiduciaries? I Executor of an estate II Administrator of a trust III Custodian of an UGMA account IV Investment adviser representative granted with discretionary authority over the account A) II, III and IV B) I and II C) I, II and III D) I, II, III and IV

D Each of these persons is in a relationship of trust to the customer and is therefore a fiduciary.

An agent may open a joint account for which of the following? I Lee and his 13-year-old son, Tom II Mary and Kelley, 2 adult college roommates III Jerry and Mark, friends and partners in business for more than 20 years IV Melinda and her minor nephew, John, for whom she is guardian A) II and IV B) I and III C) I and IV D) II and III

D Joint account owners share ownership of the account and must be adults. A minor may not legally exercise control over an account and may not be an owner of record of an account. Remember that a joint account is owned by 2 or more persons and, under both state and federal law, a minor is not a person.

Joint Accounts: - If a security is purchased, and a certificate is issued, it must be in the name of all of the tenants. (when that security is sold, all of the tenants must sign that certificate) - The check for the proceeds must be made payable to all of the tenants and it will be sent to the address designated in the account documents. TIC ownership (or JTIC): deceased tenant's fractional interest in the account is retained by that tenant's estate and is not passed to the surviving tenant(s). - Ownership of a TIC account may be divided unequally. JTWROS: deceased tenant's interest in the account passes to the surviving tenant(s). Regardless of contributions, each JTWROS account owner has an equal and undivided interest in the cash and securities in the account tenancy by the entirety: created only by married persons. - important difference between a tenancy by the entirety and a JTWROS or TIC is that in this form of ownership, the consent of the other tenant is required before the other tenant can sell or give away his interest in the property. - As with JTWROS, upon the death of one of the spouses, the deceased spouse's interest passes to the surviving spouse. - considered similar to the community property laws found in some states.

Test Topic Alert - Tenants in common can own unequal interests in the account (but still always have undivided interest), unlike joint tenants with right of survivorship, who always share equally. - Tenants by the entirety are considered a single owner—no separate shares. - TIC does NOT avoid probate. - Checks or distributions must be made payable in the account name and endorsed by all parties.