Unit 4 - Session 14 - Type of Client Flashcards
What is required when opening a new customer account?
- ) Legal Capacity
- ) employment information
- ) Customer Identification Program (CIP)
Individual Account
For a person, trust, or a decreased person through an estate and the account holder is the only person who can (unless given legal permission):
- ) control the investments in the account
- ) request distributions of cash or securities form the account
Tenants in Common (TIC)
Provides ownership that a deceased tenant’s fractional interest in the account is retained by that tenant’s estate and is not passed to the surviving tenant(s). Accounts do not have to be of equal ownership. Checks or distributions must be made payable to the account name and endorsed by all parties.
Joint Tenants with Right of Survivorship (JTWROS)
Ownership stipulates that a deceased tenant’s interest in the account passes to the surviving tenant. Regardless of contributions, each account owner has an equal and undivided interest in cash and securities in the account. Joint Tenants mean JTWROS. Checks or distributions must be made payable to the account name and endorsed by all parties.
Transfer-on-Death (TOD)
Simplest way to keep assets held in brokerage accounts from becoming subject to probate upon a client’s death. Upon the owner’s death, the property is immediately transferred to the named beneficiaries usually w/o any added costs (in whatever % they desire). The only types of accounts that can be opened with a TOD are individual accounts and JTWROS. Aka know as Payable-on-Death (POD) and Totten trust (bank accounts that transfer to beneficiaries)
Tenancy by the Entirety
Ownership by two or more persons. Created only by married persons. In this form of ownership, consent of the other tenant is required before the other tenant can sell or give away his interest in the property. In death, the deceased spouse’s interest passes to the surviving spouse. Used most commonly with real estate. Checks or distributions must be made payable to the account name and endorsed by all parties.
Suitability
Putting the clients interests first
General Partnership
Unincorporated association consisting of two individuals. Partners are responsible for the operations and debts of the business. Partnerships allow the business’ profits and losses to flow directly through to the investors for tax purposes, thus avoiding double taxation of profits at individual levels
Limited Partnership
Management is assigned to the general partner while the limited partner(s) are passive and have liability limited to the investment.
Limited Liability Company
A business structure that combines the benefits of incorporation with the tax advantages of a partnership. The owners are members (not shareholders) and are not personally liable for the debts of the LLC.
S-Corp
Taxed like a partnership, offers investors the limited liability associated with corporations in general. Profits and losses are passed through to shareholders in proportion to their ownership. S-Corps cannot have more than 100 shareholders or more than one class of common stock. Losses can only be claimed to the extent of an investors basis in the shares. Basis includes money contributed or lent to the corporation.
C-Corp
Business structure that distinguishes the company as a separate entity from its owners. Used when a business believes it will need significant capital. corporate income tax applies and double taxation occurs. Has limited liability but no flow through taxation.
Trust
a legal entity that offers flexibility to an individual who wishes to transfer property.
Settlor
Aka as Grantor, Trustor, or donor - the person who supplies the property for the trust (also referred to as principal or corpus).
Trustee
Individual or other party holding legal title to property held for the benefit of another person. Must administer the trust by following directions in a trust agreement or will. Acts in a fiduciary capacity and obliged to perform in the interest of the beneficiaries.
Remainderman
When a trust runs its course and all expenses and distributions have been made, the person who receives the remaining balance (usually happens when heirs inherits their parents home after the both of their deaths)
Simple Trust
An income trust where all income earned on assets place in the trust must be distributed in the year it was received. If the net income is not distributed annually it will be declared a complex trust
Complex Trust
May accumulate income. Permitted deductions for distributions of net income
Living Trust
Aka inter vivos trust, is established during the maker’s lifetime.
Testamentary Trust
Created according to the instructions of a will (not with the death of the maker) and the settlor retains control over assets until death, and at the death the settlor’s assets are to be placed into a will for one or more beneficiaries. This passage of assets does not pass probate and must be substantiated by the probate court
Revocable Trust
Terms of revocable trust may be changed during the maker’s lifetime, must be a living trust, b/c only the grantor has the power to change or revoke the trust. At the grantor’s death, the trust becomes irrevocable b/c the individual with the power to revoke the trust no longer lives. No estate tax benefit available for these trust.
Irrevocable Trust
Terms generally cannot be changed and the grantor must give up all ownership in property transferred into the trust. Property placed in an irrevocable trust is usually not includable in the trustor’s estate for federal estate tax purposes.
Exceptions to estate tax are as follows:
- ) Grantor retains life interest or life income
- ) Grantor retains reversionary interest in the trust that is considered more than incidental. This means that grantor may receive property back form the trust. Under tax law, the grantor is treated as the owner of any portion of a trust in which he has a revisionary interest in either the principal or the income if the value of the value of the interest exceeds 5%.
- ) Grantor retains power to direct to who trust property will pass
- ) Grantor transfers one or more life insurance policies into an irrevocable trust while retaining certain incidents of ownership, including the ability to make loans from the policy cash value and/or changes beneficiaries
Grantor Retained Annuity Trusts (GRATs)
Estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes
- ) The grantor transfers property into a trust that provides that grantor will receive a fixed annuity each year, usually for a term of years. At the end of the term, the remainder beneficiaries get whatever is left. The gift involved equals the theoretical value of the remainder, determined by using the discount rate specified in IRS tables
- ) If the assets in the trust earn more than the IRS rate (section 7520 rate is 1.8%) any earnings in excess of the rate goes to the beneficiary free of estate and gift taxes. If the grantor thinks the transferred property will earn more than 1.8% over the term of the trust there are major gift tax benefits.
- ) If the grantor dies during the term of the trust, the remaining assets are considered part of the deceased’s estate
- ) this is technically a irrevocable trust, b/c the grantor has retained interest, the tax liability on the trust’s income fall upon the grantor
Estate Account
Account that is directed by fiduciary on behalf of the beneficiary of an estate
Per Stirpes
Latin for meaning branch. When used, means that the deceased intended that a beneficiary’s share of the inheritance is to go to an heir.
Suitability
- ) Virtually all cases the trust documents declares the objective of the trust. Generally, these can only be changed by the grantor or once in receipts of the assets, the beneficiary. The trustee is obligated to invest the funds in accordance with those objectives.
- ) Unless stated, margin trading is usually no permitted
- ) In the case of the estate, the terms of the will must be followed
- ) If the IA is also the trustee and executor. there are Uniform Prudent Investors Act (UPIA) requirements that must be followed. Conflicts of interests must be disclosed to the client.
- ) unique tax considerations
- ) Trusts may have conflicts between grantor and beneficiaries and conflicts may arise in the case of beneficiaries
Fiduciary Account
Individuals granted fiduciary responsibility entering trade for the account, make investment, management, and distribution decisions and must managed the account in the owner’s best interest. Examples include: trustee, executor, Administrator, Guardian, Custodian, Receiver, conservator
Fiduciary
Anyone legally appointed and authorized to represent another person, act on that person’s behalf, and make decisions necessary to the prudent management of that person’s account. Cannot use account contents or personal benefit but may be reimbursed for reasonable expenses incurred in managing the account
Power of Attorney
If a person who is not named on an account is to have trading authority, the customer must file written authorization with the BD giving that person access to the account. W/o this power in writing, activity in the account cannot be created by anyone other than the account owner
Full Power of Attorney
Allows and individual who is not the owner of an account to: deposit or withdraw cash or securities; make investment decisions for the account owner
Limited Power of Attorney
Allows and individual to have some, but not total control over an account. The document specifies the level of access the person may exercise. Aka limited trading authorization - allows to buy and sell orders but not withdrawal of funds. Withdrawal of funds is allowed with full power of attorney
Durable Power of Attorney
Full or limited POA can be durable, allowing for the POA to maintain power over the account even upon the grantor’s incapacitation. The power is terminated upon death
