Chapter 10 Flashcards
Ch 10 INVESTMENT ADVISORY CLIENTS
What does the ‘reasonableness’ standard under FINRA’s suitability guidelines dictate?
A recommendation must be suitable for at least some investors.
What must new customers of a broker-dealer provide according to the Customer Identification Program (CIP)?
A physical (street) address.
What does Section 404(c) of ERISA require from a retirement plan?
To offer at least three core investment options and provide enough information to make an informed investment decision.
Can an employer offer its own stock as an investment option in employees’ retirement accounts under Section 404(c) of ERISA?
Yes, but it is not required.
What are the elements of a trust?
- Settlor’s intention to create the trust
- Subject matter
- Trustee to act as fiduciary
- Beneficiary
How is the trust of a decedent distributed by branch?
If each branch of the family is to receive an equal share of an estate.
How is the trust of a decedent distributed per capita?
If each beneficiary receives an equal percentage.
In a Per Capita Trust, how do beneficiaries receive their share?
Beneficiaries receive an equal percentage of the trust.
In a Branching Trust, how do beneficiaries receive their share?
Beneficiaries receive an equal share.
How is income from a revocable trust taxed?
At the grantor’s tax rate, and the grantor pays income taxes.
How is income from an irrevocable trust taxed?
At the trust’s tax rate, and the trust pays income taxes.
Do both revocable and irrevocable trusts avoid probate?
Yes.
What do health savings accounts (HSAs) provide for qualified medical expenses?
Tax-free withdrawals.
What is the minimum work history required for collecting full Social Security benefits?
40 calendar quarters.
What is the full retirement age for Social Security?
Between the ages of 66 and 67 depending on the year of birth.
If a person has reached full retirement age and continues to work, how are their Social Security benefits affected?
The benefit amount will not be reduced by the person’s earnings.
If a person has NOT yet reached full retirement age and continues to work while collecting benefits, what happens to their benefits?
$1.00 of the benefit payment is deducted for every $2.00 of earnings above an earnings limit.
What can a divorced person receive if their marriage lasted 10 years or longer?
50% of her ex-spouse’s full retirement amount if her own benefit is less.
Will the spousal collection of Social Security benefits continue if the main spouse remarries?
Yes.
What happens to the benefits collection if the collecting spouse remarries?
The benefits collection will cease.
What is the threshold for a gift tax to apply?
Gifts exceeding $19,000 per person, per year, adjusted for inflation.
How do gifts given over a person’s lifetime affect their estate for estate tax purposes?
They will reduce the value of the estate.
What happens to the cost basis of community property assets when one spouse dies?
It steps up to the market value at the time of death.
What is the purpose of a Transfer on Death (TOD) account designation?
To avoid probate, not estate taxes.
What are qualified IRA investments?
- Fixed or variable annuities
- REITs
- Common stocks
- Corporate or government debt
- U.S. gold minted coins
- Real estate
What must be considered when evaluating IRA holdings that include municipal securities?
Immediate suitability consideration.
What is the first step for an IAR upon the death of an advisory client?
Identify the beneficiaries.
Does a joint tenants in common (JTIC) account ease the probate process?
No.
What does JTIC ownership allow each owner to do?
It gives an undivided interest in property and permits an individual owner to appoint her own beneficiary(ies) after her death.
How are withdrawals from a qualified retirement plan taxed?
100% are taxed as ordinary income.
What is created to divide a person’s retirement account during a divorce?
A Qualified Domestic Relations Order (QDRO).
Are spouses benefitting from a QDRO subject to early withdrawal penalties?
No.
In a non-qualified retirement plan, what is taxed as ordinary income at the time of withdrawal?
Only the earnings.
What amount of gains are excluded from taxes upon the sale of a primary residence for a single tax return?
$250,000.
What amount of gains are excluded from taxes upon the sale of a primary residence for a joint tax return?
$500,000.
What is a SIMPLE 401(k)?
An employer-sponsored retirement plan for businesses with no more than 100 employees.
What are the conditions for a SIMPLE 401(k)?
- Employer cannot offer any other retirement plan
- Not subject to non-discrimination rules
What is a deferred compensation plan used for?
As an incentive to retain employees.
In deferred compensation plans, who provides the ultimate credit?
Employers.
How much can two individuals in the same household contribute to two IRAs?
$14,000 total ($7,000 each).
What may create a deductible loss in a Roth IRA?
When all Roth accounts are closed and the amount received is less than the investment, minus distributions.
Can an individual purchase real estate in an IRA?
Yes, as long as it is not the primary residence, vacation home, or business location.
Why is owning municipal bonds in an IRA most likely unsuitable?
IRAs offer tax advantages that are more beneficial when held in a taxable account.
Are beneficiaries taxed on income distributed by a trust?
Yes, but not on the principal that remains in the trust.
Who are primary beneficiaries?
The first to receive payments if an annuity owner dies or out of a trust account.
Who are contingent beneficiaries?
They will only be paid after the primary beneficiary dies.
What can IRAs be funded only by?
Cash.
What investments may not be included in IRAs?
- Collectibles
- Gold
- Commodities (except U.S. minted gold coins)
What does investing in gold provide to a portfolio?
A hedge against inflation.
What can distributions from a 529 plan pay for?
Tuition at a foreign university.
What is another term for a 529 plan?
Qualified Tuition Plan (QTP).
Is a 529 plan more effective in saving for college than a trust?
Yes.
Who owns the assets in a 529 plan?
They are not owned by the beneficiary.
What amount can individuals withdraw annually from their 529 plans for private school tuition?
$10,000.
What is the maximum initial gift to front-load a 529 plan per beneficiary?
$95,000.
What is the maximum contribution for a Coverdell Education Savings Account (CESA)?
$2,000.
What happens to the recipient’s basis when assets are inherited?
It is the market value at the time of the donor’s death.
Under the UGMA, who has custody of the assets?
The custodian, not the minor.
How can a person avoid taxation when distributing an estate?
Donate any amount exceeding the estate tax exclusion to charities.
What does a person’s attitude toward money influence?
Whether a person is interested in investing or making a personal purchase.
What do limited liability companies (LLCs) provide?
Pass through of both income and losses to its owners.
What are the owners of an LLC referred to as?
Members.
How do LLC members report income?
On Form K-1.
What is the formula for personal net worth?
Assets - Liabilities
What is the formula for discretionary (Net) Income?
Income - Expenses
