Investment Advisory Clients Flashcards
True or False: All corporate officers may effect transactions for the corporation.
False, only those named in the Corporate Resolution
A ___________________ is required to open an account for a partnership.
A Partnership Agreement is required to open an account for a partnership.
Municipal bond interest is exempt from __________ tax.
Municipal bond interest is exempt from federal tax.
The _____________________ has the authority to regulate margin requirements.
The Federal Reserve Board (FRB) has the authority to regulate margin requirements.
____________ governs the extension of credit by BDs.
Regulation T governs the extension of credit by BDs.
Does the payment date requirement of Regulation T apply to cash or margin accounts?
Payment is required within 5 business days for both (100% in a cash account, 50% in a margin account).
Who is eligible to contribute to a qualified annuity?
Public school employees [403(b)] and certain non-profit organization employees [501(c)3]
What is the penalty for making excess contributions to an IRA?
6% of the excess
True or False: Excess contributions made to an IRA will still be deductible and will grow tax-deferred.
False. Excess contributions are non-deductible and will not grow on a tax-deferred basis.
IRA contributions must be made in what form?
Cash
What are some of the investments that are not suitable for IRA contributions?
Collectibles, insurance, and metals (except U.S. gold and silver coins)
Anyone with __________ income may contribute to an IRA.
Anyone with earned income may contribute to an IRA.
True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.
True
How is a Roth IRA contribution different from a Traditional IRA contribution?
The Roth IRA contribution is always made on an after-tax basis.
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
ERISA gave the U.S. Government jurisdiction over private pension plans.
According to ERISA, are there any standards that must be followed regarding how money is invested?
Yes. The plan’s trustee must abide by the Uniform Prudent Investor Act.
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
Employees who are 21 years or older with one year of full-time service
What retirement plans are available to the self-employed?
Keogh Plans and SEPs
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
Yes, provided the Keogh contribution is solely based upon the employee’s self-employment income.
May an individual with a Keogh Plan also fund an IRA?
Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
529 Plans are college savings plans with high contribution limits set by the state sponsor.
Describe the tax treatment of contributions made to a 529 Plan.
They are after-tax contributions that may possibly grow tax-free.
A savings plan which funds both elementary and higher education is referred to as the ____________________________.
A savings plan which funds both elementary and higher education is referred to as the Coverdell Education Savings Plan.
If not needed for a child’s education, may the funds in a 529 Plan be transferred to a relative’s 529 Plan?
Yes
If an employer makes a Keogh contribution on its own behalf, what must be done for its employees?
A contribution at the same percentage must be made for the employee.
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
Non-Qualified
A limited partnership could be formed by a minimum of how many individuals?
Two (one general partner and one limited partner)
What document is filed with the state of legal domicile to create a partnership?
Certificate of Limited Partnership
What does the Partnership Agreement define?
The rights, liabilities, and obligations of each partner
True or False: Limited partnership units are illiquid and require permission of the general partner to sell.
True
What does it mean to say “a limited partnership is a pass-through investment?”
The results of the business venture (profits and losses) flow through directly to the investor.
Is income generated by a limited partnership taxed once or twice?
Only once, and it is at the partner’s level. The program itself is not a taxable entity.
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
How is basis determined for the recipient of gifted securities?
Basis will be the donor’s cost or market value, whichever is lower.
When securities are gifted, the recipient’s holding period will be _______________________.
When securities are gifted, the recipient’s holding period will be the same as the donor’s.
What business structure provides flow-through tax treatment and has a P&L reported on the owner’s personal tax return?
An S Corporation
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
If a client wins $1 million, what should an agent or an IAR do?
Update the client’s information that is on file
To open any account on behalf of a corporation, what document must agents and IARs examine?
Corporate Resolution
The maximum number of shareholders in an S Corporation is _____.
The maximum number of shareholders in an S Corporation is 100.
What is the primary purpose of forming a family limited partnership (FLP)?
To minimize estate tax and gift tax liabilities
What is required to receive the tax benefits of a family limited partnership?
A legitimate business purpose is required. (If created solely for tax benefits, the IRS may disallow the benefits.)
In a limited partnership, which partner has unlimited personal liability and which has limited liability?
General partners (GPs) have unlimited liability, while the limited partners (LPs) have limited liability.
The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity?
A Subchapter S Corporation
What are the contents of an estate?
The total assets and liabilities of a decedent
What are the different terms used to identify the individual who sets up a trust?
Creator, maker, grantor, donor, trustor, settlor
The __________ is the person who has fiduciary control over a trust.
The trustee is the person who has fiduciary control over a trust.
What are the differences between a simple and a complex trust?
A simple trust must distribute earnings, but not principal. Complex trusts may retain earnings or distribute principal.
What are the benefits of setting up an irrevocable trust?
It will reduce estate taxes and also avoid probate.
What is the benefit of establishing a revocable trust?
It avoids probate.
When investing for an estate, the most suitable investments are normally _______-term.
When investing for an estate, the most suitable investments are normally short-term.
Who establishes a testamentary trust?
The estate of the deceased
When is an inter vivos trust established?
During the donor’s lifetime
In a trust, all actions of the trustee must be for the benefit of the ______________.
In a trust, all actions of the trustee must be for the benefit of the beneficiary.
To whom will the earnings produced in an irrevocable trust normally be taxed?
The trust
The earnings generated in a revocable trust will be taxed to the __________.
The earnings generated in a revocable trust will be taxed to the grantor.
In which type of trust could the grantor not also be the trustee?
A testamentary trust, since it is established by the estate of the grantor
When selling inherited securities, how is the beneficiary’s cost basis calculated?
The cost basis is the asset’s market value at the time of death (a stepped-up basis)
When receiving securities as a gift, how is the recipient’s cost basis calculated?
The cost basis is the lower of the donor’s original basis or the market value at the time of the gift.
Will estate tax apply when assets are left to a spouse?
Generally there is no estate tax between spouses. However, if the spouse is a non-U.S. person, the exclusion is denied.
A revocable trust will eliminate __________, but will not reduce _________ tax.
A revocable trust will eliminate probate, but will not reduce estate tax.
An irrevocable trust will eliminate __________ and will reduce _________ tax liability.
An irrevocable trust will eliminate probate and will reduce estate tax liability.
True or False: When conducting a client’s financial analysis, liquid investments would be considered long-term assets.
False. Liquid investments would be considered current assets.
True or False: When formulating a financial plan, it is always important to consider the client’s liquidity needs.
True
Identify the acronym: AMT
Alternative Minimum Tax
Identify the acronym: RMD
Required Minimum Distribution (only required of Traditional IRAs)
Identify the acronym: IRA
Individual Retirement Account
What is ERISA?
Employment Retirement Income Security Act
Identify the acronym: ESA
Education Savings Account (Coverdell)
Identify the acronym: SEP
Simplified Employee Pension Plan
Identify the acronym: UGMA/UTMA
Uniform Gifts to Minors Act / Uniform Transfers to Minors Act (governs custodial / minor’s accounts)