Ch. 10 Flashcards
The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity?
A Subchapter S Corporation
What are the different terms used to identify the individual sets up a trust?
Creator, maker, grantor, donor, trustor, settlor
Define vesting.
The right an employee gradually acquired by length of service at a company to receive employer contributed benefits
If a client wins $1 million, what should an agent or an IAR do?
Update the clients information that is on file
What retirement plans are available to the self employed?
Keogh plans and SEPs
If a mutual funds dividends are reinvested, what impact will this have in the cost basis of a clients shares?
If reinvested dividends are used to acquire additional shares, the clients cost basis will increase
When selling a primary residence, how much of the gain (if any) is excluded from taxes?
$250,000 for single filers or $500,000 for joint filers
___________ Partners are the primary contributors of capital to a limited partnership.
Limited
T/F: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.
T
T/F: Employees are fully vested in their own contributions.
T
Define a sole proprietorship.
A business that is owned by one person who is responsible for all management decisions and entitled to all profits.
What are some of the investments that are not suitable for IRA contributions?
Collectibles, insurance, and metals (except US gold and silver coins)
T/F: 529 plans allow for a five year front end contribution of $80,000 which avoids gift tax.
T; ($16,000 x 5 years)
What would an IAR consider when performing a capital needs assessment for a client?
The clients future earnings potential, expenses, and life expectancy, but also inflation expectations
T/F: the income of a C Corporation is subject to double taxation.
T; the corporation pays tax on its earnings, with any distributions being taxed to the owners (shareholders)
How is basis determined for the recipient of gifted securities?
Basis will be the donors cost or market value, whichever is lower
In calculating an IAs net worth, what assets are NOT included?
Homes, home furnishings, automobiles, goodwill, and pre paid expenses are not included
What factors are necessary to determine a persons tax status?
Age, marriage status or country of residence, earned income, and unearned income
IRA rollovers must be completed within ____ days.
60
What is a Simplified Employee Pension (SEP) Plan?
An employer sponsored IRA for the self employed and it’s employees
Only one IRA rollover is allowed per rolling _____ months.
12
What business structure does not provide for flow through of tax treatment?
C corporations
T/F: only one person must provide information to open a joint account.
False. Each owner must provide information to open a joint account.
List, some of the common financial goals.
Income, growth, preservation of capital, liquidity, tax relief, and speculation
What happens to a general partnership, when a general partner dies?
Typically, general partnerships dissolve upon the death of a general partner.
What document is filed with the state of legal domicile to create a partnership?
Certificate of limited partnership
The earnings generated in a revocable trust will be taxed to the ____________.
Grantor
For a qualified retirement plan, what document details, the plans needs, goals, time horizon, and investment philosophy?
The investment policy statement
When is an inter vivos trust established?
During the donors lifetime
Municipal bond interest is exempt from what tax?
Federal tax
Who is eligible to contribute to qualified annuity?
Public school employees 403b and certain nonprofit organization employees 501 C3
If not needed for a child education, may the funds and a 529 plan be transferred to a relatives 529 plan?
Yes
A gift of securities between spouses is subject to gift tax if it exceeds what dollar amount?
There is no limit on gift size between spouses. The gift tax exclusion of $16,000 per year does not apply to spouses
Which plans impose income limitations on the contributors, 529 plans or Coverdell ESAs?
The Coverdell ESA
What are the benefits of setting up an irrevocable trust?
It will reduce estate taxes and also avoid probate.
Identify the acronym: RMD
Required minimum distribution
A per capita trust would pass on the same ________ of the trust to each member of the next generation.
Percentage
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
Yes, provided the Keogh contribution is solely based upon the employees self employment income.
T/F: An order ticket includes the price of execution.
F; the price of execution is found in the customer confirmation
A SIMPLE 401k may be established by a ______________.
Small business
T/F: Ease of ownership transfer is an advantage to stock ownership as opposed to ownership in a partnership.
T; partnership interest are typically illiquid, whereas stock is easy to buy and sell.
Under the provisions of UGMA/UTMA, when does a minor obtain ownership of the assets in the account?
A minor is the owner at the time a gift is made, but it’s not gain control of the assets until he reaches legal age
An irrevocable trust will eliminate ______ and will reduce _______ tax liability.
Probate ; estate
How are S corporations treated for tax purposes?
S corporations have the same flow through treatment as partnerships (they are not taxable entities)
How much may be contributed to 529 plan and avoid gift tax?
I don’t wanna give up to $16,000 per year and avoid the gift tax
T/off: all corporate officers may affect transactions for the corporation.
False, only those named in the corporate resolution
When investing for an estate, the most suitable investments are normally ________-term. 
Short
Main individual with a Keogh plan fund an IRA?
Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax deductible
Identify the acronym: AGI
Adjusted gross income
T/off: the amount left on a mortgage is found on a customers cash flow statement.
False that would be a liability on the balance sheet
And investor buys a stock for $100 and receives a $10 dividend. If she sells for $95, what is the capital gain or loss?
Her loss is five dollars. The dividend is taxed separately and is not treated as a capital event
T/off: employer contributions in a money purchase plan our mandatory
True
How are withdrawals from a Roth IRA treated for tax purposes?
Withdrawals are tax free, if the account is open for at least five years, and is not considered an early withdrawal
A contribution of $________ can be made to a Spousal IRA for a non working spouse.
$6000
A branching trust would pass on a(n) ________ of the trust to the next generation.
Equal share
To become a limited partner, the __________ ________’s signature is required on the Subscription Agreement.
General partners
What is ERISA?
Employee retirement income security act
___________ retirement plans, need not meet IRS requirements for employee coverage, contribution limits, and vesting.
Nonqualified
S corporations are not subject to _______ taxation.
Double
Women’s individual withdraw money from an IRA without penalty?
After he turns 59 1/2
T/F: required minimum distributions apply to Roth IRA accounts
False. Required minimum distributions apply to traditional IRA accounts not Roth IRA accounts.
A limited partnership could be formed by a minimum of how many individuals?
2(1 general partner, and one limited partner)
What are some of the acceptable investments for an IRA contribution?
Stocks, bonds, mutual funds, and CDs
What does the partnership agreement define?
The rights, liabilities, and obligations of each partner
ERISA gave the US government jurisdiction over _______________ plans. 
Private pension plans
What are the general characteristics of a joint tenants with rights of survivorship account?
It has multiple owners, and each has trading rights. If one owner dies, her account value passes to the other owners.
In a 529 plan, what happens if the funds or withdrawn, but not used for qualified education expenses?
The earnings would be subject to ordinary income tax plus a 10% penalty
T/F: SEP’s require employees to become immediately vested in the full amount contributed
True
Regarding clients, list, some of the non-financial considerations and IAR must consider?
Age, occupation, time, horizon, investment, experience, and social values
What is the tax rate called that applies the last dollar amount a person earns?
Marginal tax rate
Reinvesting dividends in a mutual fund creates a ________ event.
Taxable
In a qualified annuity, how is the payout taxed?
The entire payout is taxes, ordinary income, since the annuity was funded with pretax dollars
T/off: spouses may give an unlimited amount to one another, and not be subject to the gift tax
True
T/S: required minimum distributions apply to SEP IRAs.
True. Required minimum distributions apply to IRA SEP plans.
Which education plan has a contribution limit of $2000 per year for the benefit of a child under the age of 18?
Coverdell education savings plan
Will estate tax apply when assets are left to a spouse?
Generally, there is no estate tax between spouses. However, if the spouse is a non-US person, the exclusion is denied.
T/F: when, investing in a 401(k) plan, all forms of taxes are deferred on the money contributed
False. Although, income taxes are deferred, unemployment and Medicare taxes must still be paid in the current year.
When receiving securities as a gift, how is the recipients cost basis calculated
The cost basis is the lower of the donors, original basis, or the market value at the time of the gift
_____Plans are college savings plans with high contribution limits up by state sponsors
529
If Bruce intense to buy an IPO in his wife’s individual account, what’s the regulatory issue?
Bruce must obtain sign third-party authorization from his wife in order to complete this trade
What is the formula for calculating an individuals, personal discretionary income?
Income - expenses =discretionary income
How is interest on municipal bonds treated for tax purposes?
Federal tax exempt, but may be subject to state and local tax
When a limited partnerships, assets are sold for capital gain, the game is taxed when________, not when __________.
Realized; distributed
T/F: stockholders able to vote for a Director, but not an officer
True
Why is the clients profession relevant when determining suitability?
It may indicate the clients level of sophistication, and the potential need for liquidity
Which annuity is funded with after tax dollars, qualified or nonqualified?
Nonqualified
There is a____percent penalty for early withdrawal from an IRA
10
What is the primary purpose of forming a Family limited partnership or FLP?
To minimize the state tax and gift, tax liabilities
The maximum number of shareholders in an S corporation is ______
100
Identify the acronym: IRA
Individual retirement account
With some important considerations when determining the suitability of recommendations, made to customers
Investment objectives, financial situation, risk tolerance, tax status
What are the contents of an estate?
The total assets and liabilities of a decedent
In a limited partnership, which partner has unlimited personal liability in which has limited liability?
General partners have unlimited liability, while the limited partners have limited liability
A __________ is required to open an account for a partnership
Partnership agreement
What is required to receive the tax benefits of a family limited partnership?
A legitimate business purposes required, if created solely for tax benefits, the IRS me disallow the benefits
If an IAR’s client has just died without a will, from whom may she accept instructions?
From the interstate administrator
T/F: When formulating a financial plan, it is always important to consider the clients liquidity needs.
T
If a client is reluctant to disclose information, what must an IAR do?
Use the information given and create a plan based on that information. An IAR may not make assumptions.
Identify the acronym: SEP
Simplified employee pension plan
IRA contributions must be made in what form?
Cash
Who establishes a testamentary trust?
The estate of the deceased
What amount may be gifted without being subject to the gift tax?
A gift of 16,000 per recipient, per year is permitted
What are the differences between a simple and a complex trust?
Hey simple, trust must distribute earnings, but not principal. Complex trusts me retain earnings or distribute principal.
T/S: a gift made to an UGMA/UTMA account is the preferred method of funding a child’s college education
False. The assets in an UGG/UTMA account are owned by the child, which may reduce the eligibility for student aid.
What is the difference in owners liability, when forming an LLC as opposed to a sole proprietorship?
The owners of an LLC, have limited liability, while the other owner of a sole proprietorship has unlimited personal liability
How much may be contributed to a Coverdell each year?
And after tax contribution of 2000 is allowed per year
When securities are gifted, the recipients holding period will be ___________.
The same as the donors
Which annuity allows for pretax, contribution, qualified, or nonqualified?
Qualified
What is the recipients cost basis for a gift of collectible?
It’s generally the donors cost
What business structure provides flow through tax treatment and has P&L reported on the owners personal tax return?
An S corporation
What is the balance sheet equation?
Assets =liabilities + shareholders equity
In a trust, all actions of the trustee must be for the benefit of the ____________. 
Beneficiary
What is the formula for calculating individuals personal net worth?
Assets - liabilities = net worth
To whom all the earnings produced in an irrevocable trust, normally be taxed
The trust
When selling inherited securities, how is the beneficiaries cost basis calculated
The cost basis is the assets market value at the time of death, a stepped up cost basis
T/F: when conducting her clients financial analysis, liquid investments, would be considered long-term assets
False. Liquid investments would be considered current assets.
T/F: Under ERISA, business decisions (choosing the type of plan) are made by fiduciaries.
F; Business decisions are made by settlors and are referred to as settlor functions.
If an employer makes a Keogh contribution on its own behalf, what must be done for his employees
A contribution at the same percentage must be made for the employee
What does it mean to say a limited partnership is a pass through investment?
The result of the business venture, profit and losses, flow through directly to the investor
Contributions to a Keogh plan are solely based on ___________ income.
Self employment
What is the penalty for making excess contributions to an IRA?
6% of the excess
__________ government the extension of credit by BDs
Reg T
What is adjusted gross income?
An individuals taxable income (wages, commissions, tips, dividends, and interest)
When must IRA withdrawals begin? In order to avoid the late withdrawal penalty?
Hi April 1 of the year after an individual turns age 72
The ________ is the person who has fiduciary control over a trust
Trustee
In which type of trust could the grantor not also be the trustee?
A testamentary trust, since it is established by the estate of the grantor
How often me an individual roll over an IRA?
Once per rolling 12 months
What is an advantage to being formed as a corporation as opposed to a partnership?
Partnerships are dissolved due to the death of any of the partners, while corporations continue
What two types of business can have a single owner and flow through tax treatment?
Sole proprietorships and subchapter S corps
T/S: access contributions made to an IRA will still be deductible and will grow tax deferred
False. Excess contributions are non-deductible, and will not grow on a tax deferred basis.
For what reasons man individual taken early withdraw from his IRA without penalty?
Death, disability, qualified, higher education, homebuyer $10,000 limit, birth or adoption of a child $5000 limit
Income and estate tax are examples of a ___________ or __________ tax.
Progressive; graduated
T/off: mortgage payments are found on the customers, cash flow statement
True. Mortgage payments are also found on the income statement.
Describe the employees who must be eligible to contribute to an ERIS a qualified plan
Employees who are 21 years or older with one year of full-time service
List some retirement accounts I have required minimum distributions
Required minimum distribution supply to traditional IRA’s 401(k)s 457’s and 403B plans
Identify the acronym: ESA
Education savings account
To open any account on behalf of a corporation, what document must agents and IAR’s examine?
Corporate resolution
The ____________ has the authority to regulate margin requirements.
Federal reserve board
According to ERISA, are there any standards that must be followed, regarding how many is invested?
Yes. The plans trustee must abide by the uniform prudent investor act.
Under Reg T, does the payment date requirement apply to cash or margin accounts?
Payment is required within four business days for both (100% in a cash account but 50% in a margin account)
T/F: IRA contributions must be made in cash.
True. Although IRA contributions must be made in cash, the account may be invested in various securities.
How is a Roth IRA contribution different from a traditional IRA contribution?
The Roth IRA contribution is always made on an after tax basis
A simple 401(k) may not be established by a business that has more than_____employees.
100
Identify the acronym: AMT
Alternative minimum tax
The maximum contribution to an IRA is _____% of earned income up to $_______.
100%; $6,000
Grandparents contributing to a grandchild’s 529 plan may give how much money and still avoid gift tax consequences?
Frontloading, five years of contribution to the loud; therefore, each could contribute $80,000 for a total of $160,000
If a person receives a collectible as a gift, what is the cost basis for tax purposes?
The cost basis is usually the donors original cost or the purchase price
Retirement, goals, future college, tuition, and remaining mortgage payments are examples of _______ needs.
Capital
Who is eligible for a 457 plan?
Employees of state and local governments
What are the general characteristics of joint tenants in common accounts?
It has multiple owners in each has trading rights. If one owner dies, his account value passes to his estate.
When is an individual eligible to make tax deductible contributions to a traditional IRA?
We’re not covered by an employer sponsored plan, or one covered by a plan and below in adjusted gross income limit
T/F: limited partnership units are in liquid in require permission of the general partner to sell
True
A revocable trust will eliminate ________, but not reduce ______ tax.
Probate; estate tax
What form of business provides owners with limited liability and income that flows through to its investors?
A limited liability company
Per IRS Publication 950, the gift tax annual exclusion is $_______, but is adjusted by the cost of living (now $_______).
$10,000; $16,000
T/off: a defined contribution plan provides employees with a fixed monthly payment at retirement
False. The statement describes a defined benefit plan.
Describe the tax treatment of contributions made to a 529 plan.
They are after-tax contributions that may possibly grow tax free
Anyone with ________ income may contribute to an IRA.
Earned
The ______ tax rate is a rate that is used to text the last dollar amount that a person earns
Marginal
T/off: when managing assets in a trust, the trustee should consider the grantors tax status
False. Generally, the trustee should act in the best interest of the beneficiary not the grantor.
Identify the acronym: UGMA/UTMA
Uniform gifts to minors act/uniform transfers to minor act (governs custodial/minors accounts)
Give two examples of non-qualified retirement plans
Payroll deduction plans, and deferred compensation plans
For employers offering SEP plans, where are contributions made on behalf of their employees directed?
In the employees individual SEP IRA
What is the benefit of establishing a revocable trust?
It avoids probate
T/F: tax refunds are found on a customers cash flow statement
True. Tax refunds or cash, inflows money coming in to a customers account.
T/S: employers are required to contribute a specific amount to their employees SEP IRAs
False
How are withdrawals from a traditional IRA treated for tax purposes?
If all contributions were deductible than the entire withdrawal is taxed as ordinary income
If Joe’s 55 years old, how much can you contribute to his IRA?
For anyone, 50 or older, and additional 1000 is allowed, making the maximum contribution $7000
Without incurring gift, taxes, individuals may give gifts up to $________ per year to any number of persons.
$16,000
Is income generated by a limited partnership taxed once or twice?
Only once, and it is at the partners level. The program itself is not a taxable entity.
T/off: S corporations may have foreign resident as owners.
False. All owners of S corporations, must be US citizens or resident aliens.
