Ch 10 Investment Advisory Clients

Question 1

For employers offering SEP plans, where are contributions made on behalf of their employees directed?

Answer 1

In the employee’s individual SEP IRA

Question 2

Which plans impose income limitations on the contributors, 529 plans or Coverdell ESAs?

Answer 2

The Coverdell ESA

Question 3

How often may an individual roll over an IRA?

Answer 3

Once per rolling 12 months

Question 4

In a qualified annuity, how is the payout taxed?

Answer 4

The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.

Question 5

What is the formula for calculating an individual’s personal discretionary income?

Answer 5

Income - Expenses = Discretionary Income

Question 6

An irrevocable trust will eliminate __________ and will reduce _________ tax liability.

Answer 6

probate and will reduce estate tax liability.

Question 7

When a limited partnership’s assets are sold for a capital gain, the gain is taxed when ________, not when ___________.

Answer 7

realized, not when distributed.

Question 8

True or False: Limited partnership units are illiquid and require permission of the general partner to sell.

Answer 8

True

Question 9

Why is a client’s profession relevant when determining suitability?

Answer 9

It may indicate the client’s level of sophistication and the potential need for liquidity

Question 10

What business structure provides flow-through tax treatment and has a P&L reported on the owner’s personal tax return?

Answer 10

An S Corporation

Question 11

If Joe is 55 years old, how much could he contribute to his IRA?

Answer 11

For anyone 50 or older, an additional $1,000 is allowed, making the maximum contribution $7,000.

Question 12

True or False: When managing assets in a trust, the trustee should consider the grantor’s tax status.

Answer 12

False. Generally, the trustee should act in the best interests of the beneficiary, not the grantor.

Question 13

Identify the acronym: ESA

Answer 13

Education Savings Account (Coverdell)

Question 14

Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?

Answer 14

Qualified

Question 15

A SIMPLE 401(k) may not be established by a business that has more than ___ employees.

Answer 15

100 employees.

Question 16

S-Corporations are not subject to _______ taxation.

Answer 16

double taxation.

Question 17

Under the provisions of UGMA/UTMA, when does a minor obtain ownership of the assets in the account?

Answer 17

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.

Question 18

If Bruce intends to buy an IPO in his wife’s individual account, what is the regulatory issue?

Answer 18

Bruce must obtain signed third party authorization from his wife in order to complete this trade.

Question 19

True or False: A stockholder is able to vote for a director, but not an officer.

Answer 19

True

Question 20

A SIMPLE 401(k) may be established by a ______________.

Answer 20

small business.

Question 21

True or False: S-Corporations may have foreign residents as owners.

Answer 21

False. All owners of an S-Corporation must be U.S. citizens or resident aliens.

Question 22

A per capita trust would pass on the same __________ of the trust to each member of the next generation.

Answer 22

percentage

Question 23

If an IAR’s client has just died without a will, from whom may she accept instructions?

Answer 23

From the intestate Administrator

Question 24

Will estate tax apply when assets are left to a spouse?

Answer 24

Generally there is no estate tax between spouses. However, if the spouse is a non-U.S. person, the exclusion is denied.

Question 25

Who is eligible for a 457 plan?

Answer 25

Employees of state and local governments

Question 26

What is required to receive the tax benefits of a family limited partnership?

Answer 26

A legitimate business purpose is required. (If created solely for tax benefits, the IRS may disallow the benefits.)

Question 27

What is the formula for calculating an individual’s personal net worth?

Answer 27

Assets - Liabilities = Net Worth

Question 28

If a mutual fund’s dividends are reinvested, what impact will this have on the cost basis of a client’s shares?

Answer 28

If reinvested dividends are used to acquire additional shares, the client’s cost basis will increase.

Question 29

True or False: Under ERISA, business decisions (e.g., choosing the type of plan) are made by fiduciaries.

Answer 29

False. Business decisions are made by settlors and are referred to as settlor functions.

Question 30

Per IRS Publication 950, the gift tax annual exclusion is $______, but is adjusted by the cost of living (now $______).

Answer 30

$10,000, but is adjusted by the cost of living (now $16,000).

Question 31

____________ governs the extension of credit by BDs.

Answer 31

Regulation T

Question 32

What is ERISA?

Answer 32

Employee Retirement Income Security Act

Question 33

In a limited partnership, which partner has unlimited personal liability and which has limited liability?

Answer 33

General partners (GPs) have unlimited liability, while the limited partners (LPs) have limited liability.

Question 34

What two types of business can have a single owner and flow through tax treatment?

Answer 34

Sole proprietorships and Subchapter S-Corps

Question 35

True or False: The amount left on a mortgage is found on a customer’s cash flow statement.

Answer 35

False. That would be a liability on the balance sheet.

Question 36

What is the balance sheet equation?

Answer 36

Assets = Liabilities + Shareholders’ Equity

Question 37

What are the contents of an estate?

Answer 37

The total assets and liabilities of a decedent

Question 38

What is the recipient’s cost basis for a gift of a collectible (e.g., jewelry)?

Answer 38

It is generally the donor’s cost.

Question 39

How is interest on municipal bonds treated for tax purposes?

Answer 39

Federally tax-exempt, but may be subject to state and local tax

Question 40

True or False: All corporate officers may effect transactions for the corporation.

Answer 40

False, only those named in the Corporate Resolution

Question 41

What is the primary purpose of forming a family limited partnership (FLP)?

Answer 41

To minimize estate tax and gift tax liabilities

Question 42

True or False: An order ticket includes the price of execution.

Answer 42

False. The price of execution is found on the customer confirmation.

Question 43

According to ERISA, are there any standards that must be followed regarding how money is invested?

Answer 43

Yes. The plan’s trustee must abide by the Uniform Prudent Investor Act.

Question 44

When must IRA withdrawals begin in order to avoid the late withdrawal penalty?

Answer 44

By April 1st of the year after an individual turns age 72

Question 45

True or False: Employees are fully vested in their own contributions.

Answer 45

True

Question 46

May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?

Answer 46

Yes, provided the Keogh contribution is solely based upon the employee’s self-employment income.

Question 47

The maximum number of shareholders in an S Corporation is _____.

Answer 47

100.

Question 48

Describe the employees who must be eligible to contribute to an ERISA qualified plan.

Answer 48

Employees who are 21 years or older with one year of full-time service

Question 49

Identify the acronym: SEP

Answer 49

Simplified Employee Pension Plan

Question 50

Define vesting.

Answer 50

The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits

Question 51

When receiving securities as a gift, how is the recipient’s cost basis calculated?

Answer 51

The cost basis is the lower of the donor’s original basis or the market value at the time of the gift.

Question 52

What does it mean to say “a limited partnership is a pass-through investment?”

Answer 52

The results of the business venture (profits and losses) flow through directly to the investor.

Question 53

The __________ is the person who has fiduciary control over a trust.

Answer 53

trustee

Question 54

True or False: Employer contributions in a Money Purchase Plan are mandatory.

Answer 54

True

Question 55

How are withdrawals from Roth IRAs treated for tax purposes?

Answer 55

Withdrawals are tax-free if the account is open for at least five years and is not considered an early withdrawal.

Question 56

What is the penalty for making excess contributions to an IRA?

Answer 56

6% of the excess

Question 57

What are the general characteristics of a Joint Tenants With Right of Survivorship (JTWROS) account?

Answer 57

It has multiple owners and each has trading rights. If one owner dies, her account value passes to the other owner(s).

Question 58

For what reasons may an individual take an early withdrawal from his IRA without penalty?

Answer 58

Death, disability, qualified higher education, home buyer ($10,000 limit), birth or adoption of a child ($5,000 limit)

Question 59

For a qualified retirement plan, what document details the plan’s needs, goals, time horizon, and investment philosophy?

Answer 59

The investment policy statement

Question 60

Reinvesting dividends in a mutual fund creates a ________ event.

Answer 60

taxable event.

Question 61

When may an individual withdraw money from an IRA without penalty?

Answer 61

After he turns 59 1/2

Question 62

The ________ tax rate is the rate that is used to tax the last dollar amount that a person earns.

Answer 62

marginal tax rate

Question 63

When securities are gifted, the recipient’s holding period will be _______________________.

Answer 63

the same as the donor’s.

Question 64

The _____________________ has the authority to regulate margin requirements.

Answer 64

Federal Reserve Board (FRB)

Question 65

The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity?

Answer 65

A Subchapter S Corporation

Question 66

How is basis determined for the recipient of gifted securities?

Answer 66

Basis will be the donor’s cost or market value, whichever is lower.

Question 67

A branching trust would pass on a(n) _________ of the trust to the next generation.

Answer 67

equal share

Question 68

Income and estate tax are examples of a ___________ or __________ tax.

Answer 68

progressive or graduated tax.

Question 69

Is income generated by a limited partnership taxed once or twice?

Answer 69

Only once, and it is at the partner’s level. The program itself is not a taxable entity.

Question 70

ERISA gave the U.S. Government jurisdiction over ___________________ plans.

Answer 70

private pension plans.