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Series 66 > Ch 10 Investment Advisory Clients Part II > Flashcards

Ch 10 Investment Advisory Clients Part II Flashcards

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Series 66 flashcards
1
Q

What business structure does not provide for flow-through tax treatment?

A

C Corporations

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2
Q

Identify the acronym: UGMA/UTMA

A

Uniform Gifts to Minors Act / Uniform Transfers to Minors Act (governs custodial / minor’s accounts)

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3
Q

True or False: A gift made to an UGMA/UTMA account is the preferred method of funding a child’s college education.

A

False. The assets in an UGMA/UTMA account are owned by the child, which may reduce the eligibility for student aid.

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4
Q

True or False: Tax refunds are found on a customer’s cash flow statement.

A

True. Tax refunds are cash inflows (i.e. money coming into a customer’s account).

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5
Q

To become a limited partner, the _______ ________’s signature is required on the Subscription Agreement.

A

general partner’s

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6
Q

List some important considerations when determining the suitability of recommendations made to customers.

A

Investment objectives, financial situation, risk tolerance, tax status

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7
Q

A revocable trust will eliminate __________, but will not reduce _________ tax.

A

probate, but will not reduce estate tax.

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8
Q

True or False: Employers are required to contribute a specific amount to their employees’ SEP-IRAs.

A

False

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9
Q

What are the general characteristics of a Joint Tenants in Common (JTIC) account?

A

It has multiple owners and each has trading rights. If one owner dies, his account value passes to his estate.

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10
Q

List some retirement accounts that have required minimum disributions.

A

traditional IRAs, 401(k), 457, and 403(b) plans.

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11
Q

In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses?

A

The earnings would be subject to ordinary income tax plus a 10% penalty.

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12
Q

The maximum contribution to an IRA is ____% of earned income up to $_______.

A

100% of earned income up to $6,000.

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13
Q

What happens to a general partnership when a general partner dies?

A

Typically, general partnerships dissolve upon the death of a general partner.

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14
Q

Give two examples of non-qualified retirement plans.

A

Payroll deduction plans and deferred compensation plans

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15
Q

True or False: The income of a C Corporation is subject to double taxation.

A

True. The corporation pays tax on its earnings, with any distributions being taxed to the owners (shareholders).

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16
Q

What would an IAR consider when performing a capital needs assessment for a client?

A

The client’s future earnings potential, expenses, and life expectancy, but also inflation expectations

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17
Q

List some of the common financial goals.

A

Income, growth, preservation of capital, liquidity, tax relief, and speculation

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18
Q

In which type of trust could the grantor not also be the trustee?

A

A testamentary trust, since it is established by the estate of the grantor

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19
Q

True or False: Mortgage payments are found on a customer’s cash flow statement.

A

True. Mortgage payments are also found on the income statement.

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20
Q

______________ retirement plans need not meet IRS requirements for employee coverage, contribution limits, and vesting.

A

Non-qualified

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21
Q

If a client is reluctant to disclose information, what must an IAR do?

A

Use the information given and create a plan based on that information. An IAR may not make assumptions.

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22
Q

An investor buys stock for $100 and receives a $10 dividend. If she sells for $95, what is her capital gain or loss?

A

Her loss is $5 ($100-$95). The $10 dividend is taxed separately and is not treated as a capital event.

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23
Q

If a person receives a collectible (e.g. jewelry) as a gift, what is the cost basis for tax purposes?

A

The cost basis is usually the donor’s original cost (purchase price).

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24
Q

What are the differences between a simple and a complex trust?

A

A simple trust must distribute earnings, but not principal. Complex trusts may retain earnings or distribute principal.

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25
Q

True or False: SEPs require employees to become immediately vested in the full amount contributed.

A

True

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26
Q

True or False: A defined contribution plan provides employees with a fixed monthly payment at retirement.

A

False. This statement describes a defined benefit plan.

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27
Q

Describe the tax treatment of contributions made to a 529 Plan.

A

They are after-tax contributions that may possibly grow tax-free.

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28
Q

What are some of the acceptable investments for IRA contributions?

A

Stocks, bonds, mutual funds, and CDs

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29
Q

To whom will the earnings produced in an irrevocable trust normally be taxed?

A

The trust

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30
Q

Who is eligible to contribute to a qualified annuity?

A

Public school employees [403(b)] and certain non-profit organization employees [501(c)3]

31
Q

Regarding clients, list some of the non-financial considerations an IAR must consider?

A

Age, occupation, time horizon, investment experience, and social values

32
Q

Retirement goals, future college tuition, and remaining mortgage payments are examples of _______ needs.

A

capital needs.

33
Q

In a trust, all actions of the trustee must be for the benefit of the ______________.

A

beneficiary.

34
Q

What are the different terms used to identify the individual who sets up a trust?

A

Creator, maker, grantor, donor, trustor, settlor

35
Q

What does the Partnership Agreement define?

A

The rights, liabilities, and obligations of each partner

36
Q

If an employer makes a Keogh contribution on its own behalf, what must be done for its employees?

A

A contribution at the same percentage must be made for the employee.

37
Q

Identify the acronym: IRA

A

Individual Retirement Account

38
Q

When selling inherited securities, how is the beneficiary’s cost basis calculated?

A

The cost basis is the asset’s market value at the time of death (a stepped-up basis)

39
Q

If a client wins $1 million, what should an agent or an IAR do?

A

Update the client’s information that is on file

40
Q

Under Regulation T, does the payment date requirement apply to cash or margin accounts?

A

Payment is required within four business days for both (100% in a cash account, but 50% in a margin account).

41
Q

True or False: Excess contributions made to an IRA will still be deductible and will grow tax-deferred.

A

False. Excess contributions are non-deductible and will not grow on a tax-deferred basis.

42
Q

What form of business provides owners with limited liability and income that flows through to its investors?

A

A limited liability company (LLC)

43
Q

True or False: When investing in a 401(k) plan, all forms of taxes are deferred on the money contributed.

A

False. Although income taxes are deferred, unemployment and Medicare taxes must still be paid in the current year.

44
Q

How are S Corporations treated for tax purposes?

A

S Corporations have the same flow-through treatment as partnerships (i.e., they are not taxable entities).

45
Q

When selling a primary residence, how much of the gain (if any) is excluded from taxes?

A

$250,000 for single filers or $500,000 for joint filers

46
Q

What is a Simplified Employee Pension (SEP) Plan?

A

An employer-sponsored IRA for the self-employed and its employees

47
Q

Identify the acronym: AGI

A

Adjusted gross income

48
Q

Define a sole proprietorship.

A

A business that is owned by one person who is responsible for all management decisions and entitled to all profits

49
Q

What is the tax rate called that applies to the last dollar amount a person earns?

A

Marginal tax rate

50
Q

The earnings generated in a revocable trust will be taxed to the __________.

A

grantor.

51
Q

Identify the acronym: AMT

A

Alternative Minimum Tax

52
Q

True or False: When conducting a client’s financial analysis, liquid investments would be considered long-term assets.

A

False. Liquid investments would be considered current assets.

53
Q

What is an advantage to being formed as a corporation as opposed to a partnership?

A

Partnerships are dissolved due to the death of any of the partners, while corporations may continue.

54
Q

What factors are necessary to determine a person’s tax status?

A

Age, marriage status, state or country of residence, earned income, and unearned income.

55
Q

To open any account on behalf of a corporation, what document must agents and IARs examine?

A

Corporate Resolution

56
Q

What retirement plans are available to the self-employed?

A

Keogh Plans and SEPs

57
Q

True or False: Required minimum distributions apply to SEP IRAs.

A

True. Required minimum distributions apply to IRA SEP plans.

58
Q

Contributions to a Keogh plan are solely based on _________________ income.

A

self-employment income.

59
Q

How are withdrawals from a Traditional IRA treated for tax purposes?

A

If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.

60
Q

True or False: IRA contributions must be made in cash.

A

True. Although IRA contributions must be in cash, the account may be invested in various securities.

61
Q

What are some of the investments that are not suitable for IRA contributions?

A

Collectibles, insurance, and metals (except U.S. gold and silver coins)

62
Q

How is a Roth IRA contribution different from a Traditional IRA contribution?

A

The Roth IRA contribution is always made on an after-tax basis.

63
Q

When investing for an estate, the most suitable investments are normally _______-term.

A

short-term.

64
Q

Who establishes a testamentary trust?

A

The estate of the deceased

65
Q

When is an inter vivos trust established?

A

During the donor’s lifetime

66
Q

May an individual with a Keogh Plan also fund an IRA?

A

Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.

67
Q

What is the benefit of establishing a revocable trust?

A

It avoids probate.

68
Q

In calculating an IA’s net worth, what assets are NOT included?

A

Homes, home furnishings, automoblies, goodwill, and pre-paid expenses are not included.

69
Q

A ___________________ is required to open an account for a partnership.

A

Partnership Agreement

70
Q

What are the benefits of setting up an irrevocable trust?

A

It will reduce estate taxes and also avoid probate.

71
Q

What is adjusted gross income (AGI)?

A

An individual’s taxable income (e.g., wages, commissions, tips, dividends, and interest)

72
Q

True or False: Ease of ownership transfer is an advantage to stock ownership as opposed to ownership in a partnership.

A

True. Partnership interests are typically illiquid, whereas stock is easy to buy and sell.

73
Q

What is the difference in owner’s liability when forming an LLC as opposed to a sole proprietorship?

A

The owners of an LLC have limited liability, while the owner of a sole proprietorship has unlimited personal liability.

74
Q

What document is filed with the state of legal domicile to create a partnership?

A

Certificate of Limited Partnership

Series 66 (21 decks)

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