5. Other Investment Vehicles Flashcards
is a tax-advantaged savings plan designed to encourage saving for future education costs.
- allows money saved to be used for qualified expenses for K-12 and post-secondary education
- are state sponsored, which means they are defined as a municipal fund security
which means these plans must be accompanied or preceded by an official statement or offering circular (similar to a prospectus)
529 plan
Tax benefits: In some states, contributions to a 529 plan may be tax-deductible on your state tax return.
No income restrictions: There are no income restrictions for participating in a 529 plan, allowing anyone to start saving for college.
With no limits on the amount that can be contributed, a 529 plan can also serve as a way to transfer wealth to future generations.
Professionally managed and offer a range of investment options, making it easier to choose the right investment strategy for your needs.
Contributions to a 529 plan are considered gifts under federal tax law
Prepaid tuition plans for state residents and Savings plans - for residents and non-residents
Are considered two types of?
529 Plans
The more popular option is the savings plan, which allows donors to save money to be used later for education expenses
True or false
A 529 plan covers qualified education expenses such as tuition, room and board, and books.
True
Withdrawals for non-qualified expenses will be subject taxes on any gains and a 10% penalty on the gains
True or false?
Few states allow contributions to in-state plans to be tax deductible. So, don’t worry about advising a client who is opening an out of state 529 of any tax implications
False
Almost all states allow contributions to in-state plans to be tax deductible
If a client mentions opening a out-of-state 529 plan, you must advise the client that certain tax advantages may not be available to out-of-state donors
Which of the following does not have regulatory jurisdiction over the structure or sale of 529 plans?
A. SEC
B. IRA
C. MSRB
D. DEPARTMENT OF EDUCATION
D.
The department of education does define what is or is not a school, but that is it as far as a 529 plan goes.
The 529 plan is a type of securities account (SEC) that is sponsored by individual states (MSRB), and provides certain tax incentives (IRS)
is a type of education savings plan that allows parents, grandparents, and others to pre-pay a student’s future tuition costs at today’s prices. The plan allows the account owner to lock in the cost of tuition at participating schools and guarantee that the funds will cover tuition costs, regardless of future inflation or tuition increases.
Prepaid tuition plan
- Is considered a hedge against inflation regarding tuition costs
Are generally formed as a trust in which municipalities can purchase shares or units in the _______ investment portfolio.
- Not required to register with the SEC, as they fall under the exemption list.
- can be an attractive investment option for local governments looking for a safe, liquid, and cost-effective way to invest their funds.
(LGIPs) local government investment pools
Our tax-advantaged savings accounts for individuals with disabilities and their families.
- the beneficiary of the account is the account owner, and income earned by the accounts is not taxed.
- limited to individuals with significant disabilities where the age of onset occurred before turning age 26.
- contributions are made on after tax basis and our limited to a specific dollar amount per year
Achieving a better life experience accounts
(ABLE)
All the following are true for an Achieving a Better Life Experience account except:
A. The account must be open before the beneficiary turns 26
B. The account owner and the beneficiary must be disabled
C. The income is tax-free
D. The onset of the disability must have occurred before the owner turned 26
A.
The account does not need to be opened before the owner turns 26, but the qualifying disability does need to have begun before that age. Income from an ABLE account is received tax-free.
Is an unincorporated association of two or more individuals?
Partnerships
What has the following characteristics?
The business is not taxed as an entity. The following tax consequences flow to the Owners:
- Income
- Expenses
- Credits
- Deductions
- Losses
Direct Participation Programs (DPP)
The most common type being a Limited Partnership
True or false?
In a general partnership, all partners in the business have responsibility and manage the business
True
A general partnership is a type of business structure in which all partners have unlimited personal liability for the debts and obligations of the partnership. In the securities industry, a general partnership refers to a partnership in which all partners are active in the management and operations of the business and share equally in the profits and losses.
True or false?
All owners in a partnership may be held liable for actions of the partnership.
True
There is no liability protection
True or false?
The partnership is a tax reporting entity meaning they report their business results
And also a tax paying entity
False.
This is only half true. The partnership is not a tax paying entity
The owners would pay any taxes
is a type of investment vehicle that allows individuals to directly invest in specific assets or projects, typically in the form of limited partnerships, real estate investment trusts (REITs), or oil and gas drilling programs. These programs offer the opportunity for investors to participate in a specific project or asset, sharing in the profits or losses of the underlying investment.
- are not tax directly as a corporation would be, instead, the income or losses are passed directly through to the owners of the partnership- the investors
- investors are then individually responsible for satisfying any tax consequences
- considered highly a illiquid as there is virtually no secondary market for an investor to divest they’re interested!
Direct participation programs
is a type of business structure in which one or more general partners manage the day-to-day operations, while limited partners provide capital and share in the profits, but do not participate in management.
- are typically passive investors who are protected from personal liability for the debts and obligations of the partnership. The general partners, on the other hand, are responsible for the management of the partnership and are personally liable for the debts and obligations of the partnership.
- the businesses themselves are not tax paying entities.
- pass through to investors a share in the income, gains, losses , deductions, and tax credits of the business entity
- the investors (partners) but then have the responsibility to report individually to the IRS
- greatest disadvantage is the lack of liquidity in the partnership interest
Limited partnerships
Interest in the business is not freely transferable
Limited partnership
True or false?
Property in limited liability partnerships is usually held in the form of a tenants in common, which provides limited liability and no management responsibilities to the limited partners
True
General partners and limited partners are two owners in a ?
Limited partnership
Have unlimited liability, meaning that they can be held personally reliable for business losses and debts
- Their role is to manage all aspects of the partnership and have a fiduciary responsibility to use the invested capital in the best interest of the investors
- Decisions legally bind the partnership
- may not compete personally with the business, borrow money from the partnership, or commingle the partnership funds with their personal assets
General partners (GPs)
Have limited liability, meaning that they can’t lose more than they invested.
- No business management responsibilities, and in fact, should they participate in any day-to-day management of the business, they can lose their limited liability status and be considered a GP
- have the right to vote on overall business objectives and the right to receive a cash distributions, capital gains, and tax deductions generated by the business
- have the right to inspect all books and records
- have the right to sue the GP if the GP does not act in the best interest of the business
Limited partners
Enjoy several advantages such as
- An investment managed by others
- Limited liability (can only lose the amount invested)
- Passive Income (often can be offset with passive losses for tax purposes)
Limited partners
True or false?
LPs maybe sold through private placements or public offerings?
- these investors must be accredited investors, meeting income and net worth criteria and must have substantial investment experience
True
Generally, _____ are liquidated on a predetermined date specified in the partnership agreement.
- Early shut down may occur if the partnership sells or disposes of its assets or if a decision is made to dissolve the partnership by the limited partners holding a majority interest
When dissolution occurs, the _____ must settle accounts in the following order
- Secured lenders
- Other creditors
- Limited partners - first, for their claims to shares of profits and then for their claims to be return of a contributed capital
- GPs
LPs, GPs
invest in raw land, new construction, or existing properties
Depending on the properties held by the program, they can provide investors with:
- Capital growth potential - Property value increases
- Cash flow (income) - collected from rents
- Tax deductions- from mortgage interest expense and depreciation allowances for wearing out the building/capital improvements
- Tax credits - for government-assisted housing and historic rehabilitation (tax credits are very strong incentives because they reduce tax liability dollar for dollar)
Real estate programs
Include speculative or exploratory (wildcatting) programs to locate new oil deposits (consider the riskiest developmental programs that drill near existing producing wells in hopes of locating new deposits ) and
Oil and gas programs
Costs associated with drilling, such as wages, supplies, fuel, and insurance that have no salvage value when the program ends
- these can be written off (deducted) in full in the first year of operation
Intangible drilling costs
Are associated with items that have some salvage value at the end of the program, such as drilling equipment
- costs are deductible over seven years taken as depreciation
Depreciation = Each year it is worth less and less.
Tangible drilling costs
Tax deductions meant to compensate investors in oil or gas programs (or any other resource or mineral) for their diminished supply. (Depletion of resources) after it is taken out of the ground and sold.
- think less and less is gotten out of the work.
Depletion allowances
