Ch 10 Investment Advisory Clients Flashcards
sole proprietorship
Pro: taxes pass through to owner meaning not taxed at business level and therefore only taxed once; owner is the taxable entity
Cons: Owner is liable
S corp
Max 100 shareholders
Flow through tax so only once l
Limited liability
All shareholders must be US residences or citizens
C corp
Unlimited # shareholders
Earnings subject to corporate taxation (FEIN)
Shareholders taxed on dividends (double taxation)
General and limited partnership
2+ partners
Flow through taxes (only partners pay, not business entities) reported on K1
Business can demand partners pay more money
Higher likelihood of triggering AMT
General: each partner can run and operate the business is unlimited personal liability. Don’t have to incorporate with state
Limited: at least one general and one limited partner. Limited partner is passive (can’t manage the business) investor with limited liability. File certificate of limited partnership to create
LLC
Flow through taxes
Limited liability
Similar to S Corp but easier to set up
Per stirpes vs per capital
Per stripes: divided among each branch of the family (eg dad was going to get 1/3 but he died so kids share 1/6 and 1/6). If no kids, surviving kids split it (eg they each get 1/2 instead of 1/3)
Per capital: divided among headcount (eg only children or grandchild). provided equally among each family member of a generation (eg two kids died and living grandkids share deceased parents share)
Who does fiduciary have obligation to for a trust?
Beneficiaries, not the grantor/donor
Simple vs complex trust
Simple: all income/earnings in trust distributed to beneficiaries each year. No principal distribution
Complex: may retain some earnings and distribute principal
Testamentary vs inter vivos trust
Testamentary: created at or after grantors death
Inter vivos aka living trust: created while grantor is living l
Know your customer rules
Both BDs and IAs need to understands basics like age, income, time horizon, assets, liabilities, risk tolerance, goals, etc.
It’s not enough to fit their risk tolerance, clients need to understand what they’re buying
ESG investment
Environmental, Social, Governance
Focused on long term sustainability in addition to profitability
Social: DEI, human rights, community
Governance related to board diversity, executive comp, shareholder activation (large shareholders can take control of the company)
How are dividends taxed? What about bond interest?
Dividend is Max rate of 20%
Bond interest is ordinary income
Common things that impact AMT
Certain:
municipal revenue bonds
activities related to limited partnerships
depreciation
Annual gift tax exemption
Currently $17K but exam might say $10K adjusted annually for inflation
Basis of a gift
Double basis rule
If gain: use original cost and holding period of donor
If loss: use market value at the time of the gift and holding period begins the day after the gift
Stock POA
Allows someone to transfer stock ownership to another party
Durable POA
In place for disabled or incapacitation
Certificate of incumbency
Issued by court to appoint guardian for minor or incompetent
Can claim SS on spouse after divorce?
Yes if:
married 10 years
62 or older
Benefit would be larger
Parties in interest vs fiduciary
Parties of interest:
Anyone that provides services to a retirement plan (eg BD who manages the plan)
Prohibited form selling/loaning to the plan or using plan for own benefit
Fiduciary:
Provides investment advice or discretionary authority over plan. Must adhere to ERISA 404(b) and (c)
ERISA 404(b)
Indica (evidence) of ownership
If you own retirement assets managed by a fiduciary, they must be kept within US
Basically like prudent investor standard but for retirement plans
ERISA 404(c)
Voluntsry guidelines for plan sponsors
Must select and monitor investment options lrhdeng
Provide appropriate investment choices and info about them
403(b) vs 457
Tax deferred
403(b):
For non profit employees (including teachers)
457:
For state or local government employees
Solo 401(k)
Literally only for self and spouse.
If you have even one employee, it can’t be used
Can have a Roth
IRA withdrawal exceptions
No penalty:
- Owner is disabled or dead
- Certain medical expenses
- Birth or adoption up to $5k
- First time home up to $10K
- Qualifying education expenses
- annuity
Definition of full time for retirement benefit purposes
1 year at 1000 hours OR
3 years at 500 hours
Coverdell vs 529
Coverdell: $2K/year max. After tax (no deduction) but grows tax free for education (any level). Can transfer to relative m
529: after tax (no deduction) but grows tax free for education (post secondary only). Can pay up to $10k for student loans. Can contribute up to gift tax amount with no gift taxes and can pre fund 5 years
Form CRS
Provided to client at or before they open an account
Details nature of customers relationship with their financial professional
Qualified dividends
Maybe by American corporation (included mutual funds) or certain foreign if stock traded in US
held 60 days for common stock or 90 for preferred stock
Max tax of 20%
How are government bonds taxed?
Federal just at federal level
Muni no federal but maybe state and/or local
Us territory has none
Mutual fund taxation
Dividends and capital gains distributed are taxed when received, even when reinvested
UGMA/UTMA
All states have UGMA but not all have updated to UTMA
registered in the name of 1 custodian for benefit of 1 minor
Income is taxed as unearned income
Consider irrevocable so gift taxation applies
No margin trading allowed
JTIC
Joint tenants in common
When one person dies, their portion refers to their estate and probate begins
Can divide any way, not just 50/50
Tenancy by entirety
For married couples only
One spouse can’t do anything without consent of other spouse
When one spouse dies, surviving spouse receives their interest
Bypass trust
Irrevocable
Used by parents to pass assets to children when second parent died
Children don’t have to pay estate taxes
HSA penalty
20% if non medical and under 65
IRA contribution penalty
6%
Roth IRA: when can earnings be distributed tax free and penalty if not qualified
59.5
Dead or disabled
Certain medical expenses or premiums
First time home up to $10k
Qualifying education
If none of these, 10% penalty on earnings
QDIA
Qualified default investment alternative
Required for some retirement plans (eg 401k)
Plans sponsor must invest in the QDIA which is prohibited from being infested in the employers securities
Many plans use target date mutual funds and balanced funds as their QDIA
Too heavy test
Key employees:
Own 5% +
Officers above a certain comp level
Considered top heavy if >60% of benefits go to key employees
Simple 401k
100 or fewer employees
Employer must make match up to 3% or non elective of 2%
No employee contributions
SEP
Good for self employed
Contributions are directed to SEP IRA
Keogh (HR10) plan
For self employed income only
Must make same contribution to eligible employees as owner
457
Allows more reasons to distribute without penalty
Governmental
Some types can be offered to just select groups
Can max out 457 and 403b or 401k
Private
Non profit organizations (eg members of a union, hospital, charitable organizations)
Cannot roll into qualified retirement plan
Master limited partnership
Type of limited partnership
Provided pass through income (ie no double taxation) but registers with SEC so stock can be sold on exchange
Only for companies in real estate or natural resources
Elder financial abuse
NASAA required reporting suspected abuse of eligible adults
Eligible adults:
65+ or mental impairment
Adult can designate a trusted contact person for advisor to contact
BD/IA can delay a disbursement if they think someone is taking advantage of an elder but must notify APS agency within 2 days. Max delay of 15 days or until it’s deemed to be safe or extended by APS to 25 days
SIPC
Securities investor protection corporation
Provides insurance coverage for BD customers in the event of insolvency
Max of $500K with only up to $250k to protect cash
Margin account protection is only for equity balance not market value
Doesn’t apply to personal accordions of firm officers or commodities accounts
Subscription agreement
Determines the suitability of a potential investor for a limited partnership
Tender offer vs offer of securities
Tender ofd is offer to buy a security from existing shareholders
Offer of securities would include an investor receiving a security as a bonus for purchasing another security (eg. Bought bonds and received a warrant as a bonus). Stock dividends are not considered an offer
