Unit 5 Other Investment Vehicles Flashcards
This is a specific type of education savings account available to investors. This allows money saved to be used for qualified expenses for K-12 and post secondary education.
529 plan
You can only contribution to a 529 plan up to _____ a year.
$10,000
A 529 plan is a ___ ____ security.
Municipal fund
Prepaid tuition plans are used for which type of residents?
State residents
Savings plans are used for which type of residents?
Residents and non residents
This type of plan allows resident donors to lock in current tuition rates by paying now for future education costs.
Prepaid plans
This type of plans allows donors to save money to be used later for education expenses.
Savings plan
Does he donor of a 529 plan need to be related to the student?
No
Can a donor contribute to her own 529 plan?
Yes
With a 529 plan, a donor can invest a ___ ___ or make ___ ____.
Lump sum or make periodic payments
What is included in qualified education expenses?
Tuition, room and board, books
Withdrawals for nonqualified expenses will be subject to ____ and a ___ ___ ____.
Taxes and a 10% penalty.
Contributions are considered to be what within 529 plans?
Gifts
Contributions are made with ___ ____ dollars, and earnings accumulate on a ___ ____ ____.
- After tax dollars
2. Tax deferred basis
Withdrawals from 529 plans are ____ _____ at the federal level.
Tax free
Most states permit tax free withdrawals as long as the donor has opened an ___ ___ plan.
In state plan
Is there tax consequences if a beneficiary does not need the funds and the donor changes the beneficiary?
No
True or False: If the donor changes the beneficiary of the plan, it must be to a family member of the original beneficiary.
True
Overall contribution levels within 529 plans can vary from ___ to ____.
State to state
Who’s control does the assets within a 529 plan belong to?
The donors
There are no ___ ____ on making contributions to a 529 plan.
Income limitations
A 529 plan allows for ____ payments if desired.
Monthly
Rollovers can occur for 529 plans how often?
Once every 12 months
List the following for a Savings Plan:
- Inflation Hedge
- Outpace Inflation
- School/System
- Maybe, depends on performance
- Maybe, depends on performance
- Any
List the following for a Prepaid Plan:
- Inflation Hedge
- Outpace Inflation
- School/System
- Yes
- No
- Specific
This provides other government entities, such as cities, counties, school districts, or other state agencies, with a short term investment vehicle to invest funds.
Local government investment pools (LGIP)
This is usually formed as a trust in which municipalities can purchase shares or units in the investment portfolio.
LGIP
LGIPs are not a ___ ___ fund.
Money Market
An LGIP may be permitted to maintain a fixed ____ ____.
$1 NAV
LGIPs are not required to registere with the ____
SEC
LGIPS fall within ____ ____.
Government exemption
Guidelines for LGIPs are vary from ___ to ____.
State to state
There is no ____ with LGIPs.
Prospectus
LGIPs do have ____ ____ which include statements, investment policy and operating procedures. Also, management fees.
Disclosure documents
These are tax deferred savings accounts for individuals with disabilities and their families.
ABLE accounts
Who is the account owner for an ABLE account?
The beneficiary
Income earned by an ABLE account is ___ ___.
Not taxed
The ABLE act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age __.
26
True or False: One does not need to be the age of 26 to be eligible to establish an ABLE account. One could be over the age of 26 as long as the onset occurred before the age of 26.
True.
If an individual meets the age requirement and is also receiving ___ or ____ they are automatically eligible for an ABLE account.
SSI or SSDI
True or False: A person can have 2 ABLE accounts.
False. One one ABLE account per person is allowed
Contributions to an ABLE account can be made by
Anyone
Contributions to ABLE accounts are made with ___ ___ dollars and is __ __ ___ for purposes of federal income taxes.
- After tax
2. Not tax deferred
Some states do allow ___ ___ ___ for ABLE accounts for contributions.
Income tax deductions
Contributions to ABLE accounts are ____ to a specific dollar amount per year, but can be adjusted.
Limited
This is an unincorporated association of two or more individuals.
Partnership
A partnership must complete a ___ ____ stating which of the partners can make transactions for the account.
Partnership agreement
An ___ ____ ___ must be obtained each year if any changes have been made.
Amended partnership agreement
In this partnership, all partners in the business have responsibility to manage the business. Ownership may be unequal, and specific responsibilities may be assigned to a specific partner.
General partnership
There is ___ ____ ____ in a partnership
No liability protection
A partnership is a __ ____ entity.
Tax reporting
A partnership is not a __ ___ entity.
Tax paying
Who pays taxes in partnerships?
The owners
These are unique forms of business that raise money to invest in real estate, oil and gas, equipment leasing, and other similar business ventures.
Direct participation programs (DPP)
DPPS are ___ ____ directly as a corporation.
Not taxed
____ are taxed from DPPS.
Owners/investors
There is ___ ____ ____ for an investor to divest interest in a DPP which makes DPPs highly illiquid.
No secondary market
The most common type of DPP is
Limited partnerships (LP)
This is an investment opportunity that permits the economic consequences of a business to flow or pass through to investors.
LP
LP are ___ ___ ___ entities.
Not tax paying
For LPs, the ____ would have the responsibility to report to IRS.
Investors
LPs have a ___ ___ ___.
Lack of liquidity
The ___ ____ for LP interests is extremely limited.
Secondary market
Interest in LP is not ___ ____.
Freely transferrable
An LP has which two types of partners?
General and limited
Property in LPs are usually held in the form of a ___ ___ ____, which provides limited liability and no management responsibilities to the limited partners.
Tenants in common (TIC)
These type of partners have unlimited liability. They can be held personally responsible for business losses and debts. Their role is to manage all aspects of the partnership and have a fiduciary responsibility to use the invested capital in the best interest of the investors.
General partners (GP)
GPs make decisions that ___ ___ the _____.
Legally bind the partnership
GPs ___ and ____ property for the partnership
Buy and sell
GP are not allowed to ____ ____ with the business, ____ money from the partnership or ____ the partnership funds.
- Compete personally
- Borrow
- Comingle
These types of partners have limited liability. They cant lose more than they invested. They have no business management responsibilities and they should participate in any day-to-day management of the business. They can lose their limited liability status and be considered a GP.
Limited partners
Limited partners have the ___ ___ ____ on overall business objectives, receive cash distributions, capital gains and tax deductions generated by the business. Can inspect all books and record and can sue the GP.
Right to vote
What are the advantages of Limited partners?
- An investment managed by others (GPs)
- Limited liability (can only lose invested amount)
- Flow through of income and certain expenses
LPs may be sold through ____ ____ or ____ ____.
Private placement or public offerings
If an LP is sold ____, investors receive a ___ ___ memorandum for disclosure.
- Privately
2. Private placement
Private placements involve a ___ ___ of limited partners, each contributing a ____ ____ of money.
- Small group
2. Large sum
In private placement, investors must be
Accredited with substantial investment experience
In a ____ ____, LPs are sold by prospectus for disclosure.
Public offering
In a public offering distribution, a _____ number of limited partner each make a relatively ___ capital contributions.
- Larger
2. Small
___ ____ for LPs do not require the investors to be accredited.
Public offerings
LPs are liquidated on a _____ date specified in the partnership agreement.
Predetermined
Early shutdown of an LP may occur if the partnership ____ or ____ of its assets or if a decision is ____ on.
- Sells or disposes
2. Voted
What is the order a GP must settle accounts when a dissolution occurs?
- Secured lenders
- Other creditors
- LPs
- GPs
Real estate programs can invest in
Raw land, new construction or existing properties
What are the benefit opportunities for real estate programs?
- Capital growth
- Cash flow (income)
- Tax deductions
- Tax credits
Raw land programs would offer a chance for
Capital appreciation but would not provide current income
Existing property would be suitable for an investor who desires
Current cash flow, but it likely offers less capital appreciation
This program includes speculative or exploratory (wildcatting) programs to locate new oil deposits (Very high risk) and income programs that invest in producing wells (less risk)
Oil and gas programs
What are the tax advantages of Oil and Gas programs?
- Intangible drilling costs (IDC) - Costs associated with drilling such as wages, supplies, fuel and insurance that have no salvage value when the program ends.
- Depletion allowances - tax deductions that compensate the program for the decreasing supply of oil or gas after it is taken out of the ground and sold
____ ____ ___ are associated with items that have some salvage value at the end of the program, such as drilling equipment.
Tangible drilling costs
Oil and gas programs would be suitable for an investor who desires
Capital appreciation but would not provide current income
An income program would be suitable for an investor who desires
Current income and not capital appreciation
These are created when DPPs purchase equipment leased to other businesses.
Equipment leasing program
Investors receive ____ from lease payments, as well as a _____ ____ of write offs from operating expenses, interest expense and depreciation of the actual equipment owned by the program.
- Income
2. Proportional share
What is the primary objective of an equipment leasing program?
Tax sheltered income
What were LPs called previously?
Tax shelters
The structure of an LP allows for
The investor to receive income that is sheltered from taxes
DPPs use ____ ____ to reduce taxable income.
Depreciation and depletion
Deductions from LPs are not ___ ___ ___. They reduce taxable income without affecting cash flow.
Actual cash costs
Income from an LP is called ____ ____ and is added to ordinary income for tax purposes.
Passive income
Losses from an LP are called _____ _____. They offset passive income only.
Passive losses
____ ____ are not a type of income.
Tax credits
____ ____ may be used to offset income taxes directly.
Tax credits
What are the risks to limited partners?
- Liquidity - No secondary market. Needs permission to transfer from the GP.
- Audit/recapture of tax benefit - If IRS disallows a prior tax benefit, the consequences will fall to the limited partners.
This is a company that manages a portfolio of real estate, mortgages or both to earn profits for shareholders.
REIT
REITS are not ____ ____.
Investment companies, neither open nor closed end
Shareholders of REITS receive ____
Dividends
REITs normally
- Own commercial property (equity REITS)
- Own mortgages on commercial property (mortgage REITs)
- do both (hybrid REITs)
REITS are organized as ____ in which investors buy shares or certificates of beneficial interest, either on stock exchanges or in the OTC market.
Trusts
A REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders under what guidelines?
Subchapter M of the IRC
Many REITs are registered with the ____ and are therefore subject to all disclosure requirements.
SEC
These type of REITS are registered with the SEC.
Public REITs
These type of REITs are not registered with the SEC.
Private REITs
Many REITs are traded on a ___ ____.
Stock exchange
REITs traded on a stock exchange are known as
Exchange traded or listed REITs
Many unlisted REITS are ____ ___ ____ and have far less ____ versus a listed product.
- Difficult to price
2. Liquidity
What are the 5 most important things to remember about REITs?
- Owner holds an undivided interest in a pool of real estate
- May or may not be registered
- May or may not be listed
- Not investment companies
- Offer dividends and gains to investors but do not pass through losses like LPs (Not considered DPPs)
These are organized as LPs and are sold as private placements
Hedge funds
Hedge funds are similar to mutual funds but differ in that the hedge fund has more ____ in the investment strategies employed.
Flexability
What is hedging?
The practice of attempting to limit risk
Most hedge funds specify
Generating high returns as their primary investment objective
Hedge funds are ____ managed.
Aggessively
Hedge funds construct portfolios of
High-risk investments
What are the common strategies of Hedge Funds?
- Highly leverage portfolios
- The use of short positions
- The utilization of derivative products (options, futures)
- Currency speculation
- Commodity speculation
- The investment in politically unstable international markets
Most hedge funds are organized as
Private investment partnerships which limits the number of investors or requires large initial or minimum investments.
Some hedge funds require that investors maintain the investment for a _____ ___ of ____ and to that extent they can be considered ____.
- Minimum length of time
2. Illiquid
Minimum holding requirements for hedge funds are called
Lockup Provisions
This is considered an equity security that invests in a specific group of stocks and generally does so to mimic a particular index.
Exchange traded fund (ETF)
ETFs ___ an ____.
Tracks an index
ETFs are similar to a ___ ___ investment company.
Closed end
ETFs are ____.
Registered
ETFs use ____ pricing
Intraday pricing
ETFs can be purchases on ___ and ___ ____.
- Margin
2. Sold short
Expenses of ETFs tend to be ____ when compared to mutual funds.
Lower
Management fees for ETFs are ____.
Low
There is ___ ___ ___ required to keep a ETFs aligned with those in the index it is intended to track.
Little trading activity
With an ETF, there is ___ ____ ___ for the investor.
Greater tax efficiency
With ETFs, every time there is a trade, there is
Commission
ETFs are often compared to
Mutual funds
These are senior, unsecured debt securities issued by a bank or financial institution.
Exchange traded notes (ETN)
ETNs are backed by
Only the good faith and credit of the issuer
This tracks the performance of a particular market index, but does not represent ownership in a pool of securities the way share ownership of a fund does.
ETNs
What are the advantages of ETFs?
- Intraday pricing
- Can be bought and sold short on margin
- Operating costs and expenses are lower
- Can sometimes distribute capital gains to shareholders, but its rare. Not taxed until shares are sold
What are the disadvantages of ETFs?
- Commissions
- Overtrading
- Market fluctuation on price
What are the risks of ETNs?
- Does not represent ownership
- Do not pay interest and offer no principal protection
- Market risk
- Limit to the size of an ETN
- Investors can be subject to losses depending on the value of the note at maturity.
What is the primary risk associated with ETNs?
Default risk and liquidity risk is also common.
