Ch 10 Investment Advisory Clients Flashcards
For employers offering SEP plans, where are contributions made on behalf of their employees directed?
In the employee’s individual SEP IRA
Which plans impose income limitations on the contributors, 529 plans or Coverdell ESAs?
The Coverdell ESA
How often may an individual roll over an IRA?
Once per rolling 12 months
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
What is the formula for calculating an individual’s personal discretionary income?
Income - Expenses = Discretionary Income
An irrevocable trust will eliminate __________ and will reduce _________ tax liability.
probate and will reduce estate tax liability.
When a limited partnership’s assets are sold for a capital gain, the gain is taxed when ________, not when ___________.
realized, not when distributed.
True or False: Limited partnership units are illiquid and require permission of the general partner to sell.
True
Why is a client’s profession relevant when determining suitability?
It may indicate the client’s level of sophistication and the potential need for liquidity
What business structure provides flow-through tax treatment and has a P&L reported on the owner’s personal tax return?
An S Corporation
If Joe is 55 years old, how much could he contribute to his IRA?
For anyone 50 or older, an additional $1,000 is allowed, making the maximum contribution $7,000.
True or False: When managing assets in a trust, the trustee should consider the grantor’s tax status.
False. Generally, the trustee should act in the best interests of the beneficiary, not the grantor.
Identify the acronym: ESA
Education Savings Account (Coverdell)
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
A SIMPLE 401(k) may not be established by a business that has more than ___ employees.
100 employees.
S-Corporations are not subject to _______ taxation.
double taxation.
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 does not gain control of the assets until he reaches legal age.
If Bruce intends to buy an IPO in his wife’s individual account, what is the regulatory issue?
Bruce must obtain signed third party authorization from his wife in order to complete this trade.
True or False: A stockholder is able to vote for a director, but not an officer.
True
A SIMPLE 401(k) may be established by a ______________.
small business.
True or False: S-Corporations may have foreign residents as owners.
False. All owners of an S-Corporation must be U.S. citizens or resident aliens.
A per capita trust would pass on the same __________ of the trust to each member of the next generation.
percentage
If an IAR’s client has just died without a will, from whom may she accept instructions?
From the intestate Administrator
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-U.S. person, the exclusion is denied.
Who is eligible for a 457 plan?
Employees of state and local governments
What is required to receive the tax benefits of a family limited partnership?
A legitimate business purpose is required. (If created solely for tax benefits, the IRS may disallow the benefits.)
What is the formula for calculating an individual’s personal net worth?
Assets - Liabilities = Net Worth
If a mutual fund’s dividends are reinvested, what impact will this have on the cost basis of a client’s shares?
If reinvested dividends are used to acquire additional shares, the client’s cost basis will increase.
True or False: Under ERISA, business decisions (e.g., choosing the type of plan) are made by fiduciaries.
False. Business decisions are made by settlors and are referred to as settlor functions.
Per IRS Publication 950, the gift tax annual exclusion is $______, but is adjusted by the cost of living (now $______).
$10,000, but is adjusted by the cost of living (now $16,000).
____________ governs the extension of credit by BDs.
Regulation T
What is ERISA?
Employee Retirement Income Security Act
In a limited partnership, which partner has unlimited personal liability and which has limited liability?
General partners (GPs) have unlimited liability, while the limited partners (LPs) have limited liability.
What two types of business can have a single owner and flow through tax treatment?
Sole proprietorships and Subchapter S-Corps
True or False: The amount left on a mortgage is found on a customer’s cash flow statement.
False. That would be a liability on the balance sheet.
What is the balance sheet equation?
Assets = Liabilities + Shareholders’ Equity
What are the contents of an estate?
The total assets and liabilities of a decedent
What is the recipient’s cost basis for a gift of a collectible (e.g., jewelry)?
It is generally the donor’s cost.
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
True or False: All corporate officers may effect transactions for the corporation.
False, only those named in the Corporate Resolution
What is the primary purpose of forming a family limited partnership (FLP)?
To minimize estate tax and gift tax liabilities
True or False: An order ticket includes the price of execution.
False. The price of execution is found on the customer confirmation.
According to ERISA, are there any standards that must be followed regarding how money is invested?
Yes. The plan’s trustee must abide by the Uniform Prudent Investor Act.
When must IRA withdrawals begin in order to avoid the late withdrawal penalty?
By April 1st of the year after an individual turns age 72
True or False: Employees are fully vested in their own contributions.
True
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 employee’s self-employment income.
The maximum number of shareholders in an S Corporation is _____.
100.
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
Employees who are 21 years or older with one year of full-time service
Identify the acronym: SEP
Simplified Employee Pension Plan
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
When receiving securities as a gift, how is the recipient’s cost basis calculated?
The cost basis is the lower of the donor’s original basis or the market value at the time of the gift.
What does it mean to say “a limited partnership is a pass-through investment?”
The results of the business venture (profits and losses) flow through directly to the investor.
The __________ is the person who has fiduciary control over a trust.
trustee
True or False: Employer contributions in a Money Purchase Plan are mandatory.
True
How are withdrawals from Roth IRAs 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.
What is the penalty for making excess contributions to an IRA?
6% of the excess
What are the general characteristics of a Joint Tenants With Right of Survivorship (JTWROS) account?
It has multiple owners and each has trading rights. If one owner dies, her account value passes to the other owner(s).
For what reasons may an individual take an early withdrawal from his IRA without penalty?
Death, disability, qualified higher education, home buyer ($10,000 limit), birth or adoption of a child ($5,000 limit)
For a qualified retirement plan, what document details the plan’s needs, goals, time horizon, and investment philosophy?
The investment policy statement
Reinvesting dividends in a mutual fund creates a ________ event.
taxable event.
When may an individual withdraw money from an IRA without penalty?
After he turns 59 1/2
The ________ tax rate is the rate that is used to tax the last dollar amount that a person earns.
marginal tax rate
When securities are gifted, the recipient’s holding period will be _______________________.
the same as the donor’s.
The _____________________ has the authority to regulate margin requirements.
Federal Reserve Board (FRB)
The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity?
A Subchapter S Corporation
How is basis determined for the recipient of gifted securities?
Basis will be the donor’s cost or market value, whichever is lower.
A branching trust would pass on a(n) _________ of the trust to the next generation.
equal share
Income and estate tax are examples of a ___________ or __________ tax.
progressive or graduated tax.
Is income generated by a limited partnership taxed once or twice?
Only once, and it is at the partner’s level. The program itself is not a taxable entity.
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
private pension plans.
