Chapter 14- (5Q) Type of Client

Question 1

New Account Agreements

Answer 1

Explains rights and obligations of both parties

Must Obtain the following information:

1. Legal Capacity- Full legal age, ability to enter
2. Employment information
3. Customer Identification Program (CIP) notice (Part of Patriots Act, need name, DOB, address, ID Number (SS number), Citizenship, Financial info

Question 2

Individual Accounts

Answer 2

Person, Trust or Deceased through an estate account

Sole Proprietorships also considered individual account

Should establish objectives and an investment strategy before making recommendations through an Investment Policy Statement (IPS)

Account holder is the only one who can (unless legal doc):

• Control investments in the account or
• Request distributions of cash or securities

Question 3

Joint Accounts Rules

Answer 3

Suitability is required for both individuals in the account

• Account forms require both signatures of owners
• Only takes one to transact business in the account
• Checks must be payable to all and endorsed by all
• Mail only need be sent to single owner
• Shares must be signed by all parties in event of a sale

Question 4

Joint Account Types

Answer 4

1. TIC- Deceased tenant is retained by tenants estate
   - All outstanding orders must be cancelled at time of incompetence or death
   - Proportionate ownership not required
   - Can be used for more than 2 individuals
2. Joint Tenants (With Rights of Survivorship) JTWROS
   - Ownership of deceased passes to survivor
   - Equal and undivided share of the account regardless of amount put in by each client

Question 5

Transfer on Death Accounts (TOD)

Answer 5

• Does not avoid estate taxes
• The owner while alive is the only owners of the account
• May be used in conjunction with TOD and JTWROS accounts

Question 6

Totten Trust

Answer 6

Allows for transfer of a bank account to a beneficiary upon the owners death

Early form of TOD

Question 7

Tenancy by the Entirety

Answer 7

• Only created for married persons

- biggest difference is that consent must be secured by both owners

Question 8

Joint Accounts Suitability

Answer 8

Must be suitable to both clients

PE would not be advisable for a joint account if only one is qualified

Question 9

Accounts for business entities

Answer 9

Sole Proprietorship- Single account, subject to company liabilities and errors

General Partnership- 2+ individuals, direct flow through of tax, must consider all partners in investment decisions

Limited Partnership- Suitability considerations are discussed with GP also in mind

LLC- Flow through tax expenses, owners are member and not personally liable, unlimited members

S-corp- Taxed as a partnership, 100 shareholders or less, must be resident of US, investors can only claim losses on basis of shares

C-Corp- Company is a separate entity, officers and directors are shielded from loss, corporate tax applies, only look at corporation financial needs

C-Corp is only one that allows retention of earnings and allows for larger amount of capital raising

Question 10

Trust and Estate Accounts

Answer 10

Trustee and executor alike have fiduciary responsibility

Trust- Legal entity your a corporate retirement plan, transfers property

3 Parties:
Settlor- Supplier of trust property
Trustee- Holds legal title for benefit of the beneficiaries, invests the assets
Beneficiary- Receiver

Remainderman- The final trust beneficiary

Question 11

Simple vs Complex Trusts

Answer 11

Simple Trusts distribute the income earned on assets at year end

Complex Trust- May accumulate income, and distributions include capital gains

Question 12

Living vs Testamentary Trusts

Answer 12

Living- Made while grantor is still living

Testamentary- Does not avoide probate, settlor retains control until death

Upon death, trust is established

Question 13

Revocable vs irrevocable trusts

Answer 13

Revocable- Grantor is the only one able to change the trust. Value of the trust assets is included in Gross estate at death

Irrevocable- Settlor gives up all rights to the property. Usually not included in estate at death

May include a re visionary interest (ability to take back), value over 5% would eliminate tax benefit

Question 14

Grantor Retained Annuity Trusts

Answer 14

Granto Puts assets into an annuity that will be paid out to themselves. Remaining assets are moved to beneficiary

If assets earn a rate of return over IRS rate, beneficiary is paid excess

Tax liability is grantors and assets are included in estate at death

Question 15

Estate Accounts

Answer 15

Will= Executor No will= Administraror

Distributed per stirps or the clients wishes

Question 16

Qualified Domestic Relations orders

Answer 16

Exempt of a 10% penalty

Only applies to a qualified employer plan

For couple getting a divorce

Question 17

Fiduciary

Answer 17

Trustee
Executor
Administrator
Guardian
Custodians UGMA
Receiver (Bankruptcy)
Conservator (incompetent

Must be dcoumented at account opening but not for UGMas or UTMAs

Limited POA allows trades submission and other

Durable POA survives physical and mental incompetence

Question 18

Donor-advised funds

Answer 18

Individual donates to an account which is used to invest and give to charities without taxation

C
D
B
A
D
A