Chapter 9 Part 3 Flashcards
Investors who indicate speculation as an investment objective are seeking investments
that have the potential for above-average returns. Investment advisers are responsible for disclosing to the client that investments offering greater profit potential also carry a higher degree of risk. With these investments, it is possible for a client to lose his entire principal. Some of the speculative activities may involve day trading in margin accounts, or investing in asset classes such as derivatives, hedge funds, small- or micro-cap stocks
As we have just discussed, some investors have substantial incomes that are subject to tax at high marginal rates. These clients often look for investments that will provide them with
tax relief. Some investments, such as municipal bonds, produce income that is tax-exempt-the investor docs not pay taxes on the interest. Other investments are tax-deferred-the investor does not pay taxes on the income the investments produce until a later date
A tax credit provides
a dollar-for-dollar reduction of the investor’s tax liability, while a deduction reduces an investor’s taxable income
An individual account is opened by, and for
one person. That individual would be acting purely on her own behalf and not for any other person or entity. She is also the only one who may direct activity in the account unless a third party has been authorized in writing
The type of account that can be opened for a minor would be a
Uniform Gifts to Minors Act (UGMA) account or a Uniform Transfers to Minors Act (UTMA) account
All the securities in a UGMA (or UTMA) account must be registered in the name of
a custodian on behalf of the minor
Each UGMA/UTMA account may have only one
custodian and one minor. In order to invest money for multiple children in a custodial account, a separate account must be established for each minor
When a custodial account is opened, the minor’s
Social Security number is used. If the child is 18 or younger, any income produced by the investments is subject to special tax rules. A portion of the investment income is taxed at the child’s rate. Another portion, however, may be taxed at her parent’s rate. Once the child reaches 19, all the investment income that she receives from the account is taxed at her own rate (which is usually much lower than her parent’s tax rate).
Gifts to minors in UGMA/UTMA accounts are always
irrevocable—-the donor may not take it back no matter what happens. Moreover, the donor must be an adult (although she may be a different person than the custodian). She may give an unlimited amount of cash and/or securities. However, the donor will be required to pay gift taxes if the total value of the gift exceeds $14,000 per year
Investments in a custodial account must be made
prudently, taking into consideration the trade-off between risk and reward. Investing on margin is not allowed. However, speculative investments are permitted as the account’s risk profile is reviewed as a whole as opposed to each investor being judged independently
When the minor reaches the age of majority, the custodian is responsible for making sure that the account is transferred to the
minor’s name. Once the minor comes of age, the securities are hers to do whatever she wants with them.
Should the custodian die, the courts will appoint a
guardian or adult member of the minor’s family as a successor custodian. A minor child age 18 or older may designate a successor custodian by signing a notarized letter appointing a custodian
Joint accounts are established when
two or more persons have ownership rights to an account. An agent who opens a joint account must obtain information from each individual involved in the account, since all recommendations made must be suitable for all joint owncrs. In addition, all parties involved in the account must sign the account documents. However, all tax events will be recorded under a single lax ID number. Either party in a joint account may buy or sell assets without the consent of the coowners, but checks and securities must be issued as the account is titled
Joint tenants with right of survivorship accounts usually have
two owners, generally a married couple. In a JTWROS account, if one party dies, the survivor will automatically own all of the assets in the account
With tenants in coommon accounts, if one owner dies, that person’s portion of the account
reverts to her estate. If a client wants to leave her share of the account to someone other than the coowner, this account structure should be used. though the assets in a tenants in common account are usually split 50-50, the account can be divided in any way the tenants specify. The individual investments in the account are not designated for each tenant since each owner is assumed to own his share of each individual position
