Unit 16: Types of Clients Flashcards
Individual Account
for a natural person, trust, or a deceased person through an estate. One beneficial owner.
Investment Policy Statement (IPS)
Must establish a written statement of objectives and investment strategy through consulting with the client before making any recommendations.
Joint account
Owned by two or more persons, with each allowed control over account.
-either TIC or JTWROS
Tenants in common
if one party passes, their portion goes to their estate rather than to the other owner.
accounts can have unequal ownership.
Suitability for joint accounts
Suitability info is required on all persons.
Usually go with lowest common denominator between the two owners
Opening accounts
Must make reasonable effort to obtain:
-legal capacity
-employment info
-CIP (full name, DOB, physical address, ID)
-citizenship details
-financials
Order for opening an Options account
obtain essential info about client, options disclosure document, manager approve account, enter initial order, customer signed options agreement within 15 days.
Sole proprietorship account
simplest form of business account, operates like individual account. owner has unlimited personal liability
Partnership account
General- profit/loss flow through
Limited- also flow through, but investor is passive. usually DPPs.
S Corporation account
profit/loss flow like sole prop, but no personal liability.
-no more than 100 shareholders (cannot be nonresident alien), one class of stock, losses up to holders basis.
C Corporation account
Company is separate entity than owners.
Owners and Partners shielded from personal liability.
Subject to corporate tax
Suitability determined strictly by corporations financials
LLC account
similar to S corp without 100 person limit
Double taxation
C corp incurs double taxation from corporate tax, then personal tax from divs, etc.
Surviving death
Corporations and LLC survive the death of owners.
Dividend exclusion rule
when a corporation pays a dividend to another corporation, it is 50% exempt from taxation.
Sole proprietor YE and forms
Dec 31, Schedule C
LLC/S-Corp YE and forms
Dec 31, Schedule K-1
C Corp YE and forms
YE is whatever they choose, Form 1120
Fiduciary Account
An individual is legally appointed to manage the account on behalf of the owners best interests
Ex- Trustee, Executor, Administrator, Guardian, Custodian, Receiver
Full power of attorney
deposit or withdraw money and make investment decisions
limited power of attorney
some, but not total, control over account. document will specify level of access- typically can trade but not add/wd funds.
Durable power of attorney
POA can continue control of account if owner is incapacitated
Trust
must have:
-settlor/grantor; provides property to the trust
-trustee; holds the title to the property, has fiduciary responsibility
-beneficiary; one who is designated to receive benefit
Simple VS Complex Trust
Simple trust must distribute its income earned every year
Living Trust
Established during the maker’s lifetime
Testamentary Trust
Established by the grantor for their beneficiaries after death.
Living will
end-of-life wishes. does not have anything to do with assets, or trusts, or an actual will.
Donor advised funds
funds can be contributed in a certain year for tax deduction, and then invested and deployed when ready to a charity.
-operated and maintained by a 501c3
-cannot just give all money to one charity
-IRS may disallow certain deductions
Impact investing
if funds are ultimately meant to go to a cancer foundation, then the investment allocation should not include tobacco stocks
Organization account opening
in addition to normal entity info, need detailed information on those in control position.
Trust taxes
If trust or estate has income, must be reported on IRS Form 1041
Revocable trust taxes
all income is taxed to the grantor
TOD accounts
avoids probate, but not estate taxes. available for all paper asset accounts
Three ways to avoid probate
-designate beneficiary
-TOD account
-JTWROS/TIC
Grantor Retained Annuity Trusts (GRATs)
Any income is taxed to the grantor.
Per Stirpes
distributed equally amongst children, and grandchildren if a child has already passed.
Suitability with Trusts
-trust doc declares investment objective
-margin not permitted unless specified
-if IA is also trustee/executor, they are wearing two hats, not common and must be disclosed
Gifts
-gifting securities carries over the original cost basis
-but are valued as of date of gift
-if donated to qualifying 501c3, basis is stepped up. donor receives tax deduction and avoids capital gains taxes.
inherited securities
-recipient will get FMV on date of death, basis steps up.
-gains are automatically considered long term
-does NOT apply when inheriting an annuity
Estate tax
-no taxes for transferring to spouse, or charities.
-for non-spousal recipients, tax free up to $11.7M
Gross Estate VS Taxable Estate
Gross Estate- all interests in property held at time of death
Taxable Estate- certain expenses and deductions removed
Alternative Valuation Date
Option to value the estate as of 6 months after death in case values have dropped significantly. Selling an asset away from market price does not count.
Payment of Estate taxes
Due 9 months after date of death.
-Estate tax comp, Form 706
-Estate income tax comp, Form 1041
Gifting and Estate tax deduction (Unified Tax Credit)
All come from the same bucket. Gifts through lifetime lower the $11.7M limit
Distributable Net Income (DNI)
All investment income is considered DNI. The source or reinvestment does not matter. cap gains do not matter.
DNI=/=taxable income amount. DNI-funds distributed=taxable amount.
Irrevocable Life Insurance Trust (ILIT)
Purchasing life insurance so that the death benefit can pay estate taxes and prevent unnecessary liquidation of other assets.
