Client Recommendations & Investment Strategies Flashcards
Draw a table of business formations
What’s the difference between living and testamentary trust?
Testamentary is based on will.
What’s the difference between simple and complex trust?
Simple: must distribute income annually, so it’ll be taxed annually
Complex: may accumulate, so only taxed when it’s distributed
Trust: what’s the difference between per stirpes vs. per capita?
Say there are three brothers, ⅓ each
A brother dies, and has 5 kids
Usually, his kids split his ⅓, this is called per stirpes
If it is now split 7 ways, then it’s called per capita
CAPM Theory
How much an investment is expected to return depends on how risky it is compared to the market
Efficient Market Hypothesis
Weak: price/volume, historical info … technical analysis can’t consistently beat it
Semi strong: public info … technical and fundamental can’t consistently beat it
Strong: public and private info … not even insider trading can consistently beat it
Modern Portfolio Theory
Diversify by building a portfolio with different asset classes that don’t correlate (stocks vs bonds)
The Efficient Frontier
For every return, there is an optimal risk level, plotted on the curve line. Anything below the curve indicates that the portfolio is suboptimal.
403B
401k but for public schools and tax exempt orgs (non profits, religious etc)
4 - retirement
B - boys - school
457
401k for government workers
Money Purchase Plan
Employer have to contribute but employees don’t
Defined benefit vs defined contribution
Defined benefit: % of average salary of last 3 years … benefits older employees
Defined contribution: like 401k … however much you put into it the company will match X%
ERISA
Employee Retirement Income Security Act:
401K must have at least 3 options (moderate, aggressive, conservative) for people to choose
Eligibility (21 yrs old, 1000 hours/12 months works): This means employers are not required to offer 401k to those under 21, but they can.
How does the 4 limit/stop work?
Buy limit
Sell limit (take profit): once limit price is hit, you can’t sell for lower than this
Buy stop
Sell stop (stop limit): next market order once stop is hit
Do growth companies have high or low PE ratios?
High
High negative correlation means high or low diversification?
High
DCA
Average cost < Average price
QDRO
When a couple divorces, their retirement fund:
He/she can withdraw without the 10% penalty before turning 59.5, but it’ll still be taxed as income
AGI (Adjusted Gross Income)
It’s the income that you pay tax on.
The alimony you receive is part of AGI.
But child support is not.
Step up basis (inheritance tax)
Scenario A: grandma bought 1000 shares of Cola at $1/share (value of $1k), dies, and at her date of death, it’s worth $100/share (value of $100k). You inherit it and sell it for $105k. Your capital gain (step up basis) is only $5k.
Scenario B: grandma gives it to you right before she dies. Now your capital gain is $104k!!!
How does estate tax work?
Estate refers to everything of value (all assets and liabilities)
Valuation can be done either at date of death OR 6 months later
Then choose the lower of the two (death to 6 months after death) for estate tax
As long as the estate tax is paid within 9 months of the death date
How does gift tax work?
Limit is $17k for the giver
If you go over the $17k, you have to file a tax form which adds to your lifetime limit (but you likely won’t need to pay tax on that)
JTWROS: what does it stand for, who gets it, probate required?
Joint account: If one dies, the account is automatically transferred without a probate (formal process… will and etc)
Always 50/50
JTIC: what does it stand for, how many people can use it, who gets the money, probate required?
Joint accounts for non spouses:
When one dies (say brother sister account), his portion goes to his estate
For JTIC, you do have to designate %
More than 2 individuals can use it
Does not avoid probate
TBE: what does it stand for, who can use it, process of giving
Tenancy by the Entirety account: ONLY married. The most important difference vs JTWROS and TIC is that the consent is required from one tenant before the other can give away her interest.
This is usually used for real
estate.
Single owner — no separate shares
Has protection against the other party’s creditors.
Totten Trust (POD), and does it require probate?
Grandpa wants to gift assets to grandchildren, but only upon his death because he wants access to them while he’s alive
requires no probate
529 plan
Donor retains control
Doesn’t have to give it: AS LONG AS IT’S USED FOR EDUCATION PURPOSES
So the parents can use it themselves to go back to school
9 = jiu = long
Coverdell plan
Similar to 529 but have a $2k per child per year limit
Cover = limit
Dell = student computer
The Uniform Gifts to Minors Act (UGMA)
It’s like setting up a savings account for your kids
No limit on how much you can gift (although you could pay taxes)
You can re-register a minor’s account solely in her age at what age
Age of majority (legal age depending on what state you are in)
Irrevocable gifts
Unlike 529, this doesn’t have to be used for education
Uma Thurman giving her baby a gify
UTMA
Like UGMA, but you can designate an age from legal age up to 25
Summary Plan Document
Your 401k sponsor must give you this
Investment Policy Statement
Your 401k sponsor hires an advisor. That advisor is not required to give you an IPS.
For traditional IRA, at what age must you start withdraw money?
70.5
For most retirement funds, at what age can you start withdraw must?
59.5, or face a 10% fee
Trust: what supplies the assets?
Settlor, Grantor (can be trustee, beneficiary)
Trustee
Individual or entity appointed to manage and administer the assets held in the trust according to the terms outlined in the trust document
Beneficiary
The person who gets the property
Remainderman
Heirs of beneficiary
Revocable vs Irrevocable Trust
Revocable: settlor can change it
Irrevocable: settlor gives up all ownership
Who’s the B/D for listed exchanges and unlisted (OTC) exchanges?
Listed: DMM / Specialists
OTC: MM
Dividend Discount Model
Use dividends to figure out the value of a stock.
Present value of the stock = Dividend per share / required rate of return
Ex: Suppose we have a company that just paid a dividend of $2.00 per share. If we’re looking for a 10% return on our investment, our price is 2/10% = $20
When there is a triggering event, how soon do you have to file the 8k?
4 business days
Net capital requirement for IA
Discretionary: 10k
Custody: $35k
