Financial Profile

Question 1

What are 3 broad categories of clients?

Answer 1

Personal Customers, Institutional Customers & Fudiciary Customers

Question 2

What is an individual account?

Answer 2

An Account where a single person wishes to open an account for his or her benefit. To
open an account for an individual, no special paperwork is needed.

Question 3

Individual Account Held TOD, Transfer on Death, Pay on
Death

Answer 3

Most states now allow an
individual account to be held “TOD” - Transfer on Death, also called Pay on Death
(“POD”). TOD registration allows the customer to maintain control over the account,
but upon death, the account assets transfer to the named beneficiary, bypassing the
estate and bypassing probate. No one can contest the transfer

Question 4

Totten Trust, TOD Account at a Bank

Answer 4

note for the exam that banks have a similar type of account to “TOD” registration
called a “Totten trust.” This is not really a trust account, since any adult can open one
without a trust document. These are usually small bank accounts where a beneficiary
is named to receive the account balance at the depositor’s death. Often, the
beneficiary does not even know of the existence of the account. The depositor can
revoke the “Totten trust” at any time without penalty.

Question 5

Joint Account

Answer 5

An account where more than one person, say a husband and wife, wish to open an
account, for their mutual benefit. Three options are available for joint account ownership:

Question 6

Joint Tenants with Rights of Survivorship

Answer 6

Each party owns an “undivided interest” in the account. If one party dies, the
other person is the sole owner of the account. This ownership option is most
common for a husband and wife. Note that it can also be used by two people
who are unmarried living in a committed relationship, or other similar “familytype” relationships.

Question 7

Tenants by Entireties

Answer 7

method of joint ownership that is only available to a married couple
(this is a test point) and which is only available in a limited number of states. Like
JTWROS, if one dies, the surviving spouse becomes the sole owner of the
property. The main difference between JTWROS and Tenants by Entireties is
what happens if one of the account owners is sued. Tenants by Entireties treats
the ownership of the account as one entity, and if one of the owners is sued and
a judgment is obtained, the assets in the account cannot be seized. In contrast,
with JTWROS, the joint tenants are not considered to be a single legal entity. If a
single spouse was sued and a judgement was obtained, the creditor could get
50% of the assets in the account - if the judgement was that large.

Question 8

Tenants in Common

Answer 8

Each party specifies a percentage interest in the account. If a person dies, his
percentage interest is included in his estate. It can then be passed by will to any
named person. This ownership option is most common for business partners

Question 9

Family Limited Partnership Account

Answer 9

Limited partnerships are business forms that allow for “flow-through” of gain and loss
to the partners - without the business itself being taxable. The family members are
the partners in the venture. These are used for estate tax planning purposes where
typically the parents are the general partners who contribute assets to a trust over
which they maintain control.The heirs (children) are the limited partners, who have no management role - they are
the passive investors. The parents use their “estate tax credit” so that no estate tax is
due when the assets are contributed to the trust; and the value of such assets
contributed to the trust is “discounted” since these assets are worth a lesser amount
when they are held via a limited partnership (partnership assets are “illiquid”). So the
parents might contribute a $700,000 house to the trust; but it goes into the trust at a
$600,000 value against the estate tax credit. This discount is one tax benefit; the next
benefit is that each parent then “gifts” $17,000 worth of their shares each year to
each child (up to $17,000 of gifts can be given in 2023 to a recipient without the donor
having to pay gift tax - note that this amount is adjusted for inflation annually). Thus,
over time, the asset in the trust becomes the property of the children without an
estate tax bill. To open such an account, a copy of the certificate of limited partnership (the
document filed with the State to create the legal partnership entity) must be obtained.

Question 10

Institutional customers

Answer 10

Are broken down into two broad categories. The oldest form of
institutional ownership is either a sole proprietorship or a general partnership. These
business forms pre-dated the invention of the corporation (which happened around
the year 1600). With these older business forms, you simply go into business. The
State can ask to be notified that you are doing business there, but there is no Statecreation of the business itself. Both sole proprietorships and general partnerships are
the easiest businesses to form, but the owners take on unlimited liability. In contrast,
State-created business entities limit liability, which is their major benefit.

Question 11

Sole Proprietorship Account “DBA” - Doing Business As

Answer 11

A sole proprietorship is a business owned by 1 individual. To establish such a
business does not require any filing in the State; the person simply starts
business operations. This is typical for small businesses, since no formal State
charter is required. If an individual sets up a business as a sole proprietor, the
legal name of the person’s business defaults to that individual’s name. If the sole
proprietor wishes to use a different business name, then the individual must file
a form in the State notifying the State of the legal name being used – the “DBA”
name - where DBA stands for “Doing Business As.”

Question 12

Form 1040 and Schedule C Are Filed

Answer 12

Sole proprietorships do not pay corporate income tax, but all earnings are
subject to personal income tax. A Form 1040 tax return is filed by the individual.
To report the income and loss from the business, a Schedule C (Profit or Loss
from a Business) form is attached to that individual’s Form 1040. Sole proprietors
have unlimited liability for all business debts, which makes this form of operation
not too attractive. No special paperwork is needed for this type of account.

Question 13

General Partnership Account

Answer 13

A general partnership is formed when two or more persons form a business
enterprise under the terms of a general partnership agreement. Some States ask
that the agreement be filed, others do not. The agreement names each general
partner and his or her percentage share of income and loss in the venture. The
partnership itself is not taxable - each partner’s share of income and loss is
included on that partner’s personal tax return. Thus, there is no “double taxation”
that is inherent in “C Corporations” (covered following). However, each general
partner bears unlimited liability for all business debts, making this form of
operation unattractive. A copy of the partnership agreement filed with the State
is needed to open this type of account.

Question 14

The corporation was invented how?

Answer 14

with the formation of the Dutch East India Company in
the early 1600s. The intent of this “new” business form was to limit liability of owners.
To get limited liability, the corporation is created in a State under that State’s
incorporation laws. Another State-created business form is a limited partnership,
which also limits liability of owners. Limited partnerships are State-created entities.
Finally, the newest type of State-created entity is an LLC (a Limited Liability Company)
that has characteristics of both corporations and partnerships.

Question 15

Limited Partnership Account, Passive Investors, DPP - Direct Participation
Program

Answer 15

A limited partnership is formed when 2 or more persons form a business
enterprise where at least 1 person is a general partner and 1 person is a limited
partner (there must be at least 1 of each). The general partner is the manager of
the venture and bears unlimited liability. The limited partner(s) is (are) the
passive investors, whose loss is limited to their investment in the partnership.
The partnership itself is not taxable - each partner’s share of income and loss is
included on that partner’s personal tax return. Thus, there is no “double taxation”
that is inherent in “C Corporations” (covered following). Because these allow “direct participation” in income and loss, these are commonly referred to as
“DPPs” - Direct Participation Programs. A copy of the certificate of limited
partnership, which is the State-creation document, is needed to open such an
account

Question 16

C Corporation Account

Answer 16

A C corporation is a type of company that, under the IRS code, is a taxable
entity. The corporation computes net income (or net loss) and must pay
corporate income tax on any net income. If the corporation pays a cash dividend
to shareholders out of “after-tax” income, the shareholders must include the
dividend amount on their personal tax returns, and pay personal income tax on
the distribution. Thus, C corporation cash dividends are said to be “double
taxed.” Though the tax status of C corporations is less beneficial, in return,
shareholders have limited liability - the most that they can lose is their
investment.
To form a C Corporation, a certificate of incorporation must be filed in the State.
Under the terms of that State’s corporate charter, the corporation is bound to the
laws of that State. A copy of the corporate charter is needed to open such an
account

Question 17

S Corporation Account

Answer 17

A corporation that has 100 or less shareholders can elect “S” corporation status
for tax purposes. S corporations are not taxable entities - all items of income and
loss flow-through onto the shareholders’ personal tax returns (similar to
partnership taxation). Thus, smaller companies and family owned companies,
can take advantage of limited liability and avoid the “double taxation” inherent in
C Corporations. A copy of the corporate charter is needed to open such an
account.

Question 18

Limited Liability Company Account

Answer 18

A relatively new type of business form, “LLCs” are neither a corporation nor a
partnership. They are formed as business entities that give the “flow through
benefit” associated with S Corporations (or partnerships) without the
shareholder limitation imposed on S corporations (maximum of 100
shareholders). In addition, LLC “members” (the owners are neither shareholders
nor partners) can take a management role without being considered to be
general partners in a venture (who would assume unlimited liability).
Thus LLCs have the benefits of flow-through taxation and limited liability. To
form an LLC, a certificate of organization, which is the State-creation document,
must be filed in the State. A copy of this document is needed to open an LLC
account.

Question 19

Fiduciary customers are:

Answer 19

Trust Account, Settlor, Trustee, Beneficiary

Question 20

Trust Account

Answer 20

In a trust, a trustee is appointed to manage the assets for a beneficiary under the
terms set forth in the Trust Agreement. The terminology associated with trusts is
“legalistic,” but must be known for the exam:

Question 21

Settlor

Answer 21

The settlor is the individual who establishes the trust, donates the assets to the
trust, sets the objectives of the trust, names the beneficiary(ies) of the trust and
names the trustee.

Question 22

Trustee

Answer 22

A fiduciary that manages the assets of the trust in the best interests of the
beneficiary(ies).

Question 23

Beneficiary

Answer 23

The individual(s) named in the trust document for whom the assets are being
managed. The trust document may, or may not, bequeath the assets to the
beneficiary(ies) on the death of the settlor.

Question 24

Legal List

Answer 24

The trust is a legal entity formed in the State, with the trustee being a fiduciary over
the account. Fiduciaries are often limited by each State in the types of investments
that can be made. State law requires that fiduciaries either follow the “prudent man”
rule or restrict investments to a “legal list” provided by the State.

Question 25

Prudent Man Rule

Answer 25

Under the prudent man rule, only investments that would be made by a prudent
individual are permitted. If the State restricts investments to its legal list, then only the
securities on the list are available for investment. Generally, legal list investments
consist of debt rated in the top 4 ratings categories (BBB or better). A copy of the trust
agreement must be obtained to open the account. The agreement will specify the
types of transactions that the trustee is allowed to perform.

Question 26

Inter-Vivos Trust, Testamentary Trust

Answer 26

Trusts can be set up during one’s lifetime (called an “inter-vivos” trust - which is Latin
for “during one’s life”) or can be established in one’s will upon death (called a
“testamentary” trust - as in “last will and testament”). Inter-vivos trusts can be set up
either as revocable or non-revocable trusts, whereas testamentary trusts are nonrevocable.

Question 27

Revocable Trust Taxation, Non-Revocable Trust
Taxation

Answer 27

In a revocable trust, the grantor retains control over the property by reserving the right
to revoke the trust. The view of the IRS is that since the individual grantor retains
control, the income in the trust is the same as income to that individual, taxed at
personal income tax rates to that individual. On the other hand, income in a nonrevocable trust is taxed at “trust” rates to the trust itself (a separate trust tax return is
filed

Question 28

Trust for Married Couples – Bypass Trust

Answer 28

A bypass trust, also called an A/B trust, is only available to married couples. The
intention is to minimize estate taxes. When one spouse dies, the estate’s assets are
split into 2 separate trusts. The A trust contains the surviving spouse’s assets, which
he or she can do with as they wish. Estate tax is deferred on this until the death of the
surviving spouse. The B trust contains the decedent’s assets, in the amount of the
estate tax exemption; thus, there is no estate tax due on the B trust assets. The B trust
assets are typically used for the benefit of the surviving spouse, and when he or she
dies, the B trust assets are distributed to a named beneficiary or beneficiaries.

Question 29

Trust for Second Marriages

Answer 29

A QTIP trust is a Qualified Terminable Interest Property trust. It allows the grantor to
provide for the surviving spouse, and to also determine how the assets are distributed
after the surviving spouse dies. Commonly used in second marriages, this is an
irrevocable trust. The surviving spouse receives the income from the trust, and upon
his or her death, the remaining assets are distributed to the named beneficiaries of the
trust (which would be the children from both (now dead) parents).

Question 30

Charitable Trusts

Answer 30

If an individual wants to donate funds to charity and still maintain control over the
assets, he or she can establish a charitable trust. The grantor of a trust can be the
trustee - and the trustee gets to make all of the decisions regarding the actions of the
trust. The donor gets the tax benefit of a charitable deduction, with the amount
dependent of the type of charitable trust that is set up. The trust has a fixed life -
either a fixed number of years specified in the trust document, or, often, the trust ends
when the grantor dies and assets are distributed to the named beneficiaries.
There are 2 main types of charitable trusts - either a Charitable Lead Trust or a
Charitable Remainder Trust:

Question 31

2 main types of charitable trusts

Answer 31

Charitable Lead Trust, Charitable Remainder Trust

Question 32

Charitable Lead Trust

Answer 32

In a charitable lead trust, the donor retains control of the contributed assets and
gets a tax deduction for contributions made to a specified charity with any
income from those assets. These deductible contributions are made over a set
number of years or are made until the grantor dies. When the trust expires, the
remaining assets go to a party of the donor’s choosing - usually family members.

Question 33

Charitable Remainder Trust

Answer 33

A charitable remainder trust is often viewed as the opposite of a charitable lead
trust. In a charitable remainder trust, the annual income from the trust goes to a designated beneficiary(ies) such as children of the grantor (so there is no tax
deduction for these), and then upon death of the grantor, the “remainder” is
given to a charity. In such a trust, the tax deduction is lower, because it is based
on the expected “present value” of the remainder that will go to charity at the
termination of the trust.

Question 34

Donor Advised Fund

Answer 34

A donor advised fund (DAF) allows investors to donate directly to a charitable fund
but retain control over the assets. Donors get an immediate tax deduction for amounts
contributed, but contributions are irrevocable. The donor decides when and how much
to contribute from the fund to various charities. Any assets not donated grow tax-free,
and the donor decides how they should invest them.
DAF administrators qualify as public charities under Section 501(c)(3) of the tax code.
The community, foundations, or religious organizations can administer DAFs. Nonprofit organizations associated with financial institutions, such as Schwab, Fidelity,
and Vanguard, also administer them. Aside from the fees charged by the underlying
investments (e.g., operating expenses for mutual funds and ETFs), there is an
additional layer of administrative fees that the broker imposes. DAFs can be set up
with small dollar amounts - often as little as $5,000.

Question 35

Foundation

Answer 35

Very wealthy individuals and families, instead of setting up a trust, often set up a
charitable foundation. The amounts donated into the foundation qualify for a
charitable deduction. Unlike a trust, a foundation has an indefinite life - it goes on until
all of its assets are distributed - and this could be more than 100 years (think of the
Ford Foundation, or think about how long the Bill and Melinda Gates Foundation
might last with assets of over $50 billion). Unlike a trust, that can only accept a
donation from the settlor or grantor, a foundation can accept donations from multiple
sources, such as multiple family members. A board of trustees determines which
charitable organizations receive contributions from the foundation - and family
members can be on the board. So the family members can exert some influence, but
they do not have total control.

Question 36

Estate Account

Answer 36

The goal of the executor of an estate account is to perform an orderly distribution of
estate assets to beneficiaries after paying all liabilities of the estate. During the time
period that this takes (which can be years), the executor must strive to earn a
reasonable return on the estate’s assets. The paperwork needed to open such as
account is a certified copy of the death certificate; copy of the last will and testament;
and inheritance tax waivers.

Question 37

Personal Customers

Answer 37

The relationship between an investment adviser and client begins with the adviser
gathering data about the client to construct a portfolio that meets the client’s
objectives

Question 38

Individuals; Joint Accounts; Family Limited Partnerships

Answer 38

For personal clients - individuals; joint accounts; and family limited partnerships; the
information that must be gathered includes:
Current financial status of the client;
Family composition;
Tax situation;
Employment information
Once this basic information is gathered, then the next information to be collected is
more subjective, including:
Financial goals;
Investment objectives;
Investment knowledge;
Investment time horizon;
Risk tolerance

Question 39

Current Financial Status

Answer 39

A listing of the customer’s assets and liabilities must be obtained. These include:
Assets
Cash and marketable securities
Not readily marketable investments (such as limited partnership
investments, business investments, and investment real estate)
Investments held in retirement plans
Market value of artwork, furnishings and other personal tangible assets
Market value of automobile(s) Market value of personal residence(s)
Liabilities
Credit card payables
Household bills payable
Personal notes payable
Secured loans (where marketable securities, tangible assets, automobile or
real estate is pledged as collateral). In addition, the customer’s current and anticipated levels of income and expenses
must be examined. First, the customer’s income must cover all anticipated expenses, plus leave a
reserve for unexpected expenses;
Second, the market value of assets pledged as collateral for secured loans must
at least equal (but preferably exceed by a comfortable margin) the value of the
loan;
Third, the market value of cash and marketable securities must comfortably
exceed all unsecured payables. Given that these 3 parameters are met, the net excess of cash and marketable
securities over all unsecured payables is the amount of funds that can be invested in a
portfolio (less a cash reserve).

Question 40

Family Composition

Answer 40

To determine the type of investment strategy that will be employed, consideration
must be given to the client’s family obligations. Items to be considered include:
Does the client have young children, for whom future college payments must be
provided?
Does the client have any dependents that need medical assistance that is not
covered by insurance?
Does the client have elderly dependent relatives, for whom living assistance
must be provided?

Question 41

Tax Situation

Answer 41

If the client is in a low tax bracket, then taxable investments may be appropriate.
However, if the customer is in a high federal tax bracket, a tax-sheltered investment
may be suitable; or a municipal bond investment may be appropriate.

Question 42

Tax Filing Status

Answer 42

Choosing the right tax filing status is also important to minimize tax liability for
customers. There are five possible filing statuses - three if the person is unmarried and
two if the person is married. These are:
Single;
Head of Household;
Qualifying Widow(er) with Dependent Child(ren);
Married Filing Jointly;
Married Filing Separately.
Marital status is based on whether that person was married as of the last day of the
tax year.

Question 43

If Unmarried, Then Head of Household or Qualifying
Widow(er) Status Will Lower Tax Bill

Answer 43

As a general rule, for single individuals, choosing either Head of Household or
Qualifying Widow(er) with Dependent Child(ren) status will result in a lower tax bill
(there is a larger standard deduction and lower tax rates - the government is helping
out single parents here). To choose either of these, the individual must have a
dependent child and must pay for at least ½ of household expenses. In addition, for
qualifying widow(er) status, that person’s spouse must have died within the past 2
years.

Question 44

Married Filing Jointly Gives Lower Tax Bill If 1 Works
If a couple is married and only 1 works

Answer 44

If a couple is married and only 1 works; or if 1 has a very high income and 1 has a
very low income; then choosing “Married - Filing Jointly” status typically results in a
lower tax bill. This is the case because the higher income gets “averaged down” when it is added to the lower income, where the joint amount is taxed at a lower joint tax
bracket

Question 45

Married Filing Separately Gives Lower Tax Bill If Both
Are High Earners and There Are Large Itemized
Deductions

Answer 45

However, if a couple is married, both are high earners, and 1 or both have large
itemized deductions, then choosing “Married - Filing Separately” status usually results
in lower taxes. This occurs because there are “add-backs” that reduce itemized
deductions based on reported adjusted gross income, and this “add-back” number is
lower when income is split and reported separately.

Question 46

Marriage Penalty

Answer 46

When a couple gets married, they may encounter a rather unpleasant aspect of the
tax code known as the “marriage penalty.” Because tax rates are progressive, 2
individuals that marry may find that when they report their joint income, it is taxed at
a higher rate (because tax rates are progressive) and the amount of tax paid is more
than the total of the 2 separate amounts paid previously. The tax code attempts to
deal with this by increasing the marital exemption amount, but it doesn’t always work.
The “marriage penalty” tends to hit couples that earn similar amounts; it is not as
much of an issue where 1 spouse earns considerably more than the other.

Question 47

Employment Information

Answer 47

How long has the customer been employed by the same firm? How is the job going?
How is the firm doing? Does the customer expect to remain in this job for a long time
or for a shorter time frame?
If the customer has been in the same job for an extended period of time; and if
the firm is doing well; then the customer can reasonably expect to remain in that
position. Thus, reserves of cash needed for a period of unemployment can be
reduced. On the other hand, if the customer’s job situation is more tenuous, then
extra reserves of cash may be necessary.
If the customer’s income is fairly static, and is not expected to change over time,
then this calls for a less speculative investment program. On the other hand, if
the customer’s income is expected to grow, given that the customer is still many
years from retirement, then a more speculative investment program may be
appropriate.

Question 48

Financial Goals

Answer 48

The customer is asked what his or her financial goals are. The problem with the
response is that it is often much too general. For example, a response of: “My goal is to
make money” doesn’t tell you very much. Common goals are:
To fund college education for children;
To fund retirement or early retirement;
To fund for the care of aging dependents;
To pay off a primary residence mortgage early;
To fund for major lifestyle purchases such as a vacation home; boat; or expensive
car.
However, more information is needed about the goal in order to select appropriate
investments.
To fund college education for children - How many children does the customer
have? What are their ages (how many years until they will go to college)? Do
they have any assets currently, such as custodial accounts, which can be used in the future to pay tuition? Are they likely to go to public college or private college?
How quickly are college tuitions rising? Are they likely to go on to graduate
school? Are they likely to get scholarships? Are they likely to live at home or
away? Will they work while in school? All of these questions are necessary to
determine how much money will be needed; and by when; to meet this goal.
To fund retirement or early retirement - How many years will it be till the
customer will retire? If the customer is married, will the spouse be retiring at the
same time? What amount of pension benefit will be received at retirement?
What type of lifestyle does the customer wish to support in retirement?
To fund for the care of aging dependents - Does the customer need to pay for
support currently, or how many years in the future is it anticipated that this will
occur? How long is the time frame during which it is anticipated that support will
be provided? Will there be any insurance to help pay for the support? Does the
dependent have any income or assets that can be used towards the support?
To pay off the mortgage on a primary residence early - In how many years does
the customer wish to pay off the mortgage? Does the customer wish to pay off
the mortgage in stages or in one lump sum? Will there be any other conflicting
needs that require large payments of cash due at the same time that the
mortgage will be repaid?
To fund for a major lifestyle purchase such as the purchase of a vacation home -
In how many years does the customer wish to purchase the home? Does the
customer wish to pay in full or in part? How will the carrying expenses of the
home affect the customer’s overall expenses? Will the home be rented out to
generate income to cover carrying costs when the customer is not using it?

Question 49

Capital Needs

Answer 49

A more formal name for the determination of a customer’s financial goals is a “capital
needs analysis.” This term is most often used when determining the amount of life
insurance that a person should purchase based on the “capital needs” of the surviving
family members, but is also used in financial planning. So funding college education
for children is a capital need at a fixed date in the future; funding retirement is a
capital need at a fixed date in the future, etc.
As you can see, there are a lot of questions that need to be asked about any specific
goal that a customer has in order to determine the appropriate investment strategy to
meet that goal

Question 50

Investment Strategy should include?

Answer 50

Risk Tolerance, current cash flow, current investments and strategies, time horizon, investment knowledge, customer demographics, customer values, insurance approach

Question 51

Life Insurance Owned by an Irrevocable Trust or by
Another Person Is Excluded from Decedent’s Gross
Estate

Answer 51

Consideration should be given to buying enough life insurance to cover the funding of
the plan, if the customer should die prematurely. Also note that life insurance proceeds
are excluded from the deceased’s gross estate if the insurance is held by an
irrevocable trust or is held by another person (e.g., - a wife owns the insurance policy
of her husband) and are not subject to estate tax - so the amount of coverage to be
purchased simply has to equal (not exceed) the unfunded amount.
On the other hand, if the insurance policy is owned by the decedent, then it would be
included in the decedent’s gross estate - so it is critical to make sure that the
insurance policy is owned by someone other than the decedent! Also, do not confuse a
policy owned by someone else with a policy where someone else is named as the
beneficiary. If a brother buys a life insurance policy and names his sister as
beneficiary, it is included in the brother’s estate. If the sister buys a life insurance
policy on her brother and she is the beneficiary, it is included in the sister’s estate.

Question 52

Disability Insurance

Answer 52

Another consideration is whether the customer should purchase disability insurance,
which replaces lost wages during a period of disability. This is more of an issue for
self-employed individuals who do not have deep financial resources. Individuals who
work for employers usually have employer-provided disability insurance. In order to
obtain it, the insurance company has an individual complete a questionnaire to assess
the risk that he or she may become disabled. The questionnaire covers that
individual’s age, medical history, medical history of blood relatives, occupational risk
and whether that individual has risky hobbies (racing and skydiving are examples). Of
course, the higher the risk of being disabled, the higher the insurance premium, or if
the risk is extreme, the individual might not be able to get insurance.
It does not cover medical expenses or long term health care costs. Most disability
policies, since they are replacing earned income, do not cover an individual in
retirement. Finally, most disability policies cover a fixed number of years (5, 10, 20
years of payments - the longer, the more expensive the policy).

Question 53

Capital Needs Analysis

Answer 53

Capital Needs Analysis
A “capital needs analysis” is performed to determine the amount of insurance
that should be purchased. It is based on the cash needs upon the insured’s death
- how much will the funeral cost, how much money is needed to meet the needs
of the dependents, how much money is needed to pay estate taxes, etc. From
this amount is deducted the amount of existing assets available to pay these
expenses, including existing insurance coverage. This calculation is unique to
each individual. There is no “standardized computer program” to do this, but
each insurance company typically has its own “capital needs” calculator on its
website for potential clients to use.

Question 54

Define Institutional Customers

Answer 54

Institutional Customers (corporations and partnerships) such as sole proprietorships, general partnerships, limited partnerships and corporations, typically asset management means managing current assets to provide a reasonable return on investment; without tying up those assets in investments that are hard to liquidate if the enterprise’s cash needs so dictate.

Question 55

How do you determine available assets for investment?

Answer 55

current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are accounts payable , wages payable , taxes payable and notes payable (all due within 1 year). The excess of “cash assets” (cash and markeable securities) over current liabilities is the liquid net worth of the company. Thus the amount that is available for investment (less a cash reserve)

Question 56

What is time horizon

Answer 56

will the company need access to these monies for future planned expansion? does the company need to fund upcoming pension liabilities with part or all of the funds?

Question 57

How does Expected investment return come into play with managing a client?

Answer 57

A company might be better off using the funds to buy back its own stock (if the company is generating higher rate of return) than investing these funds in a portfolio of other securities.

Question 58

How is tax situation a factor for companies

Answer 58

C corporations that invest in the quities of other companies can take advantage of corporate dividend exclusion - 50% of dividends received are excluded from taxation. This can make equity investments by C corporations more attractive than higher yielding (before tax) bond investments.

Question 59

What are fudiciary customers

Answer 59

pension plans or endowment funds

Question 60

What types of information should be gathered for fiduciary clients?

Answer 60

current investment positions, anticipated future contributions to the portfolio, anticipated future distributions from the portfolio, regulatory constraints on portfolio (restrictions on types of investments).

Question 61

What is ERISA

Answer 61

Employees Retirement Income Security Act

Question 62

What is the overriding concern for retirement funds and endowment funds

Answer 62

Safety of principle - portfolio should be constructed to minimize capital loss potential

Question 63

How does taxes effect fiduciary clients?

Answer 63

Return on the portfolio of retirement & endowments are not taxable ( for tax qualified entities, which encompass most retirement and endowment funds)

Investments in higher yielding fixed income securities (treasury bonds instead of municipal bonds may be more appropriate since the investment return is not taxed during hits holding period in the trust.

Income from private and estate trusts is taxable so these portfolios may be better off invested in higher yielding equities or tax-free municipal bonds.

Question 64

Name 3 tax revenue code categories

Answer 64

earned income, passive income and porfolio income

Question 65

Earned Income definition

Answer 65

Defined as salary and wages earned in occupation including bonuses paid for work, royalties etc. Taxed at 37% in 2023

Question 66

How are other forms of payment taxed?

Answer 66

Other forms of income are taxed at 37% include transfer payments, such as pension payments and social security payments received by retired individuals.

Question 67

How is porfolio income divided?

Answer 67

Portfolio income is divided into investment income and loss and capital gain and loss.

Question 68

How did the 2003 tax law change how cash dividends received from stock investments held by individuals are taxed?

Answer 68

Maximum tax rate for cash dividends received by individuals is 15% or 20% for individuals in the highest tax bracket.

Instead of being taxed at ordinary income tax rates of up to 37%. If individual is in highest tax bracket, than the tax rate is increased to 20%.

Question 68

What does investment income consist of?

Answer 68

Investment income consists of dividends received from stock and interest received from debt investments. The expenses associated with earning investment income, such as the safe deposit box rental to hold the securities or interest expenses on loan taken to buy the securities are generally deductible only to the extent of investment income.

Question 69

Are dividends taxable if reinvested?

Answer 69

Yes, dividends received are still taxable- this is the case for mutual fund distributions that are automatically invested in DRIPS (Corporate dividend reinvestment plans)

Question 70

What is Short term vs long term capital gains (or loss)

Answer 70

12 months or less 37% , over 12 months 15-20%

Question 70

What is capital gain?

Answer 70

Captial gain consists of gains realized from the sale of assets. Capital gains on the sale of assets such as stocks, options, bonds, mutual funds, artwork, coins, real estate, etc are included.

Question 71

How is passive income defined?

Answer 71

Passive income is defined as income received from real estate investments and limited partnership interests. Limited partnerships are the structure for any tax sheltered investments. Expenses associated with managing real estate or the limited partnership are deductible only against passive income.

By breaking income and loss into 3 categories, and limiting loss deductions only agains the income category, the tax law effectively neutralized the previous attractiveness of “Tax sheltered” investments. Since passive losses can only be offset against passive (tax shelter) income and cannot be used to offset other portfolio income or earned income, the losses generated by tax shelters will go unused unless the investor has other passive income.

Question 72

What is excluded from Capital Gain for personal sale of residence

Answer 72

The tax code allows the first 250,000 of gain or 500k for married couple to be excluded from cg tax.

Question 73

What is Section 1031 exchange?

Answer 73

Where any capital gains tax due can be deferred by taking the proceeds of the sale and buying another investment property of the same or higher value. This is not permitted for personal use real estate that is sold such as vacation home, nor can it be used when tangible assets are sold.

Question 74

What is the 3.8 medicare tax?

Answer 74

There is a 3.8% medicare contribution tax on unearned income- part of the health-care reform package. Thus, dividend income, interest income, and capital gains will have extra tax imposed.

Question 75

Define Progressive Tax

Answer 75

The tax rate increases progressively as one’s income increases.

Question 76

Define Regressive Tax

Answer 76

When the same percentage is taken on all purchases (sales tax, alchohol, tobacco)

Question 77

Explain Tax Treatment of Stocks

Answer 77

Any expenses associated with holding stocks are deductible to the extent of income received from all portfolio investments. Received under the tax code means when the issuer cut the check not when received. When an investor buys stock for tax purposes he is considered owner as of trade date (not settlement date). If he sells the position, the liquidation date is the trade date ( not settlement date).

Question 78

Assume that a customer owns 100 shares of ABS with a cost basis of 119 per share. ABC pays a 10% stock divident. The shareholder will now have 10% more shares. what is the adjusted cost bases?

Answer 78

($119 cost basis)/1.10 number of shares) = adjusted cost basis