Part 2: Chapter 8 - Investment Recommendations Flashcards by Ryan Lorei

What FIVE factors must an IA consider when advising a client on investments?

Hint: CRRIPT

Client type
Risk and Returns
Investment strategy
Portfolio management
Taxes

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What are the TWO types of Client accounts (one person / multiple people)?

Individual
Joint

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On Joint Accounts, what is required for the following (one joint owner or all):
- Signatures to open
- Number of joint owners requited to make trades
- Distributions are payable to
- Taxable events are reported under how many SSNs

All
One
All
One

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To whom or what are assets passed upon death under these different types of account ownership:
- JTWROS
- Tenants in Common
- Tenants by Entirety
- CPWROS

Which can ONLY be used by married couples?

Which is commonly used in business?

JTWROS: spouse
Tenants in Common: estate
Tenants by Entirety: estate
CPWROS: spouse

JTWROS, Tenants by Entirety, and CPWROS

Tenants in Common

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What’s a vital difference between JTWROS and CPWROS with respect to real estate?

With CPWROS, if property is sold after the death of a spouse, then there is no capital gains tax.

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Under these different Business Entity Types, how are
Taxes, Liability, and Existence managed:
- Sole Proprietorship
- General Partnership
- Limited Partnership
- C Corp
- S Corp
- LLC

What’s something that could prevent an organization from registering as an S Corp?

Having more than 100 shareholders

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What business entity type enjoys the following two advantages:
- Liability limited to what they have invested
- Losses can be carried forward for up to 5 years to offset losses

C Corp

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What characteristics do S Corps and LLC share and not share?

Share: Pass through taxation and limited liability

Don’t share: ONLY the S Corp has perpetual existence

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What is a Trust and who …
- Starts it
- Manages it
- Is it for

Can an individual be all three of the above?

A legal arrangement where an individual manages assets for another individual for the benefit of another.

Grantor
Trustee
Beneficiary(ies)

Yes

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On Trusts, what are the two types of Beneficiaries and the two names for each?

Should a Truste manage the Trust for both types of the above Beneficiaries, or just the Primary?

What about Beneficiary heirs?

First - aka Income Beneficiaries

Remaindermen - aka Second

Beneficiaries

Both
No

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What are FOUR types of Trusts and what do they mean?

Revocable - can be changed
Irrevocable - can’t be changed
Living - during the Grantor’s life
Testamentary - upon the Grantor’s passing via a will

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A Living Trust can be what TWO types?

Revocable
Irrevocable

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With respect to Trusts, what are Corpus and Perpetual?

Clauses within a Trust

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How is income taxed on the following:
- Revocable
- Irrevocable

Grantor’s rate

Trust’s rate

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How is the Estate of an individual calculated?

Who manages the Will of an Estate?

Assets - Liabilities = Net Worth (aka Estate)

Executor

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What tax form is filed for an Estate?

Within what timeframe must the above be filed?

IRS Form 706 - Federal Estate Tax Return

Within 9 months of the decedent’s death

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What are FOUR types of wills and their meaning?

What’s the term for the person who creates a will?

Simple - handles distribution of assets to named beneficiaries

Testamentary (aka Traditional) - establishes a trust used to transfer an estate to Beneficiaries

Pour-Over-Will - transfer an estate into an existing will of the creator

Living Will - dictates what’s to happen if the creator becomes incapacitated

Testator

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With respect to a Will, how do Per Stirpes and Per Capita differ?

Per Stirpes transfers a deceased beneficiary’s share of an estate to their heirs

Per Capita transfers the proceeds of an estate ONLY to those immediately in-line for the estate. So if there are two beneficiaries and one passes, the remaining beneficiary gets ALL of the estate, unlike the above where heirs of the deceased beneficiary are paid.

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What’s the difference between a General and Specific Bequest?

A Specific Bequest lists specific individuals to whom assets are passed. A General Bequest does not.

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What’s the term used for an individual who dies without a will?

Intestate

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If a person is designated as a beneficiary in a legal document outside a will and there’s contradictory language within the will, what document supersedes?

The outside document language

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What do UGMA and UTMA do?

How do the following apply to UGMA and UTMA:
- The donor must be …
- Limit on gift size?
- How many custodians and minors can be involved?
- Can they be setup as Joint accounts?
- Who’s SSN is used?

Allow a securities account o be setup for a minor.

Adult
None
One each
No
Minor’s SSN

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How can an UGMA / UTMA effect a students ability to obtain financial aid?

Due to the above, what should be done instead?

Disqualify from financial aid ability

529

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What are the differences between UGMAs and UTMAs with respect to:
- Allowable assets
- Termination age

UGMA - limited money, investments and insurance
UTMA - virtually any kind of asset

UGMA - 18
UTMA - 25

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What are the allowable tax deductions for individuals donating to charitable organizations? - Private - Public

Private - 30% Public - 50% (60% if cash)

Are TOD and POD used interchangeably? Having one a TOD or POD on an account eliminates the need for what?

Yes Probate

Can a fiduciary grant trading authorization to a third party?

With respect to Discretionary Authorization and churning, does the quality of investments traded on behalf of a client impact if churning has occurred?

IF an RR is concerned a client has diminished mental capacity, what should they contact a family member to determine?

They should contact a family member to determine if the client has a Guardian Appointment

With respect to customer investment goals, what are the timeframes for short, mid, and long term goals?

Short = 0 - 3 years Mid = 3 - 10 years Long = 10+

How many months should an emergency fund cover?

3 - 6 months

Define "Investment Time Horizon." What is the Investment Time Horizon for a person's retirement investments?

The length of time until you need to liquidate an investment. Life expectancy

A client with a longer time horizon is generally more willing to invest in assets that have what two major characteristics?

Aggressive Less liquid

What is the Assets equation

Assets = Liabilities + Equity

What are the components of a Balance sheet?

Assets Liabilities Equity (Net Worth)

What dies an Income Statement display? What is it used to show?

Revenues and Expenses Profit or Loss

What does a Cash Flow statement show? What is it used to determine? How is it different from an income statement?

Cash inflows and outflows Whether or not a person is living within their means. It doesn't itemize assets, liabilities, etc.

Social Security - What taxes are used to fund it? - What's the earliest age you can claim it? - At what ages does full eligibility start and end? - What's the latest age to claim it? - After full eligibility, what is the annual increase each year it's delayed?

Payroll taxes 62 65, 66, 67 70 8%

What is COLA with respect to Social Security?

Cost of Living Adjustment

If a couple divorces and one of them claims social security against their ex-spouse, does that claim lower the Social Security payout for the other ex-spouse?

What are the two types of pensions?

Defined Benefit Plan: these benefits are defined by the plan. Defined Contribution: these benefits are based on the contributions made to the pension and the earnings on those contributions.

What is Behavioral Finance?

Behavior based on Life events and stock market changes that effect decision making.

What is Anchoring in investing?

A bias based on a specific piece of information a client uses as a primary consideration when making investment decisions.

For investors who wish to minimize risk and protect principal while receiving some return on investments, what are some investments that fir this strategy?

T-Bills, Notes and Bonds CDs Money Market Funds

What are CDs also known as?

Time Deposits

What are some good investments for customers who require a certain amount of money each month?

Corporate bonds Preferred and Blue Chip stock

What Options would a person buy to protect the following positions: - Long stock position - Short stock position

Put Call

What are the THREE types of bankruptcy?

Chapter 7 - person files bankruptcy Chapter 11 - business files bankruptcy Chapter 13 - person files bankruptcy, but plans to pay back

What is AGI and how do you calculate it?

Adjusted Gross Income AGI = Gross Income - Deductions

Who are taxes managed on Alimony payments?

The Recipient doesn't pay taxes The Payer doesn't deduct

What is Average tax rate? What's another name for it? How do you calculate it?

The average tax paid over a period of time Effective tax rate Tax Paid / Taxable Income

How do you define Marginal Tax Rate?

The tax paid on the last dollar you make.

How long can a person file tax as a Qualifying Widower? What else must a person have to file taxes in this manner?

Two years from the death of a spouse -- this is for the two years after the year of the spouse's death. Dependent children

What kind of income is Ordinary Income?

Wages, interest, and some dividends

What timeframe stipulates: - Long term capital gains - Short term How are each taxed? What about the LT for people at a higher tax bracket (what tax bracket and what percentage)?

12 months + 1 day 12 months or less Long Term: 15% Short Term: ordinary income rate 37% 20%

What's the max deduction per year for Net Losses? Deducted against what?

$3,000 Ordinary income

What are the two types of Dividends and how are they taxed?

Qualified: 15% Non-Qualified: ordinary income

What's the maximum Annual Gift Tax Exclusion dollar limit: - Per person - Per married couple - Lifetime max for each

$19,000 $38,000 $95,000 $190,000

On gifted stock, assuming the recipient sells it a period of time after receiving it, how is it taxed when sold if it: - Increases in value - Decreases in value How is this different than stock that is inherited?

Increases Original Purchase Price - Final Sale Price Decreases Inherited Price - Final Sale Price The stock price is stepped up to the value on the date of the decedents passing.

What is the Alternative Minimum tax?

A tax rate for high income individuals who enjoy certain tax breaks. These individuals will pay the higher of the tax on their AGI or the AMT?

What is the tax deduction on the sale of a primary residence for: - Individual - Married couple

$250,000 $500,000

What is the Tax Form and Filing Deadline for: - Corporations - S-Corps - Partnerships

Form 1120 - April 15 Form 1120s - March 15 Form 1065 - March 15

What is the difference between the Bid and Ask price called?

Spread

Define Market Order

An order to Buy or Sell at the best available price.

What is a Limit Order?

To Buy or Sell at a specific price or better

Why are Stop Orders used? When are these Stop Orders used: - Stop Loss - Buy Stop - Sell Stop When does a Stop Order become a Market Order?

To protect a profit or limit losses on an existing position. Stop Loss - "unwind" a position of the price moves against you. Buy Stop - protect profit on a short position Sell Stop - protect profit on a long position When exercised

What Regulation applies to Margin trading? What does this regulation stipulate for the down payment? What's the minimum to open a margin account?

Reg T 50% $2,000

In what type of account (Cash or Margin) can Short Selling ONLY be done? What does a Short Seller expect the stock price to do?

Margin Decrease

How do the following make money: - Broker - Dealer

Commission Mark Up / Down

What are custodians?

Banks or other financial institutions that keep records of stocks.

Regarding Listed and Unlisted securities, how are they different with respect to: - Market traded in - Who Trades them

Listed - Exchange Market - Designated Market Maker (DMM) Unlisted - OTC Market - Dealers

What is Payment for Order Flow?

Payment to a broker for routing customer orders through exchanges

What are Dark Pools?

The trading of large blocks of securities anonymously for institutional clients

What is the Income Tax rate?

A progressive tax rate based on how much you make in a year.

Under the Head of Houshold Tax filing status, how do the following apply: - Unmarried as of when? - Paid how much towards housing? - Had a ________-person living with them.

As of the last day of the year 50% or more Qualifying - an unmarried child or elderly parent that can be claimed as a dependent

How do you calculate After Tax Gain?

Total Gain - Taxes / Original Investment

What are the quantities for each regarding stocks: - round lot - block What does the below stock Bid mean: - XYZ $10.15 - Size 25

Round Lot = 100 shares Block = 10,000 XYZ is willing to Buy (bid) 2500 XYZ shares at $10.15/share

Part 2: Chapter 8 - Investment Recommendations Flashcards

(77 cards)