Unit 16: Types of Clients

Question 1

Individual Account

Answer 1

for a natural person, trust, or a deceased person through an estate. One beneficial owner.

Question 2

Investment Policy Statement (IPS)

Answer 2

Must establish a written statement of objectives and investment strategy through consulting with the client before making any recommendations.

Question 3

Joint account

Answer 3

Owned by two or more persons, with each allowed control over account.
-either TIC or JTWROS

Question 4

Tenants in common

Answer 4

if one party passes, their portion goes to their estate rather than to the other owner.
accounts can have unequal ownership.

Question 5

Suitability for joint accounts

Answer 5

Suitability info is required on all persons.
Usually go with lowest common denominator between the two owners

Question 6

Opening accounts

Answer 6

Must make reasonable effort to obtain:
-legal capacity
-employment info
-CIP (full name, DOB, physical address, ID)
-citizenship details
-financials

Question 7

Order for opening an Options account

Answer 7

obtain essential info about client, options disclosure document, manager approve account, enter initial order, customer signed options agreement within 15 days.

Question 8

Sole proprietorship account

Answer 8

simplest form of business account, operates like individual account. owner has unlimited personal liability

Question 9

Partnership account

Answer 9

General- profit/loss flow through
Limited- also flow through, but investor is passive. usually DPPs.

Question 10

S Corporation account

Answer 10

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.

Question 11

C Corporation account

Answer 11

Company is separate entity than owners.
Owners and Partners shielded from personal liability.
Subject to corporate tax
Suitability determined strictly by corporations financials

Question 12

LLC account

Answer 12

similar to S corp without 100 person limit

Question 13

Double taxation

Answer 13

C corp incurs double taxation from corporate tax, then personal tax from divs, etc.

Question 14

Surviving death

Answer 14

Corporations and LLC survive the death of owners.

Question 15

Dividend exclusion rule

Answer 15

when a corporation pays a dividend to another corporation, it is 50% exempt from taxation.

Question 16

Sole proprietor YE and forms

Answer 16

Dec 31, Schedule C

Question 17

LLC/S-Corp YE and forms

Answer 17

Dec 31, Schedule K-1

Question 18

C Corp YE and forms

Answer 18

YE is whatever they choose, Form 1120

Question 19

Fiduciary Account

Answer 19

An individual is legally appointed to manage the account on behalf of the owners best interests
Ex- Trustee, Executor, Administrator, Guardian, Custodian, Receiver

Question 20

Full power of attorney

Answer 20

deposit or withdraw money and make investment decisions

Question 21

limited power of attorney

Answer 21

some, but not total, control over account. document will specify level of access- typically can trade but not add/wd funds.

Question 22

Durable power of attorney

Answer 22

POA can continue control of account if owner is incapacitated

Question 23

Trust

Answer 23

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

Question 24

Simple VS Complex Trust

Answer 24

Simple trust must distribute its income earned every year

Question 25

Living Trust

Answer 25

Established during the maker's lifetime

Question 26

Testamentary Trust

Answer 26

Established by the grantor for their beneficiaries after death.

Question 27

Living will

Answer 27

end-of-life wishes. does not have anything to do with assets, or trusts, or an actual will.

Question 28

Donor advised funds

Answer 28

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

Question 29

Impact investing

Answer 29

if funds are ultimately meant to go to a cancer foundation, then the investment allocation should not include tobacco stocks

Question 30

Organization account opening

Answer 30

in addition to normal entity info, need detailed information on those in control position.

Question 31

Trust taxes

Answer 31

If trust or estate has income, must be reported on IRS Form 1041

Question 32

Revocable trust taxes

Answer 32

all income is taxed to the grantor

Question 33

TOD accounts

Answer 33

avoids probate, but not estate taxes. available for all paper asset accounts

Question 34

Three ways to avoid probate

Answer 34

-designate beneficiary -TOD account -JTWROS/TIC

Question 35

Grantor Retained Annuity Trusts (GRATs)

Answer 35

Any income is taxed to the grantor.

Question 36

Per Stirpes

Answer 36

distributed equally amongst children, and grandchildren if a child has already passed.

Question 37

Suitability with Trusts

Answer 37

-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

Question 38

Gifts

Answer 38

-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.

Question 39

inherited securities

Answer 39

-recipient will get FMV on date of death, basis steps up. -gains are automatically considered long term -does NOT apply when inheriting an annuity

Question 40

Estate tax

Answer 40

-no taxes for transferring to spouse, or charities. -for non-spousal recipients, tax free up to $11.7M

Question 41

Gross Estate VS Taxable Estate

Answer 41

Gross Estate- all interests in property held at time of death Taxable Estate- certain expenses and deductions removed

Question 42

Alternative Valuation Date

Answer 42

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.

Question 43

Payment of Estate taxes

Answer 43

Due 9 months after date of death. -Estate tax comp, Form 706 -Estate income tax comp, Form 1041

Question 44

Gifting and Estate tax deduction (Unified Tax Credit)

Answer 44

All come from the same bucket. Gifts through lifetime lower the $11.7M limit

Question 45

Distributable Net Income (DNI)

Answer 45

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.

Question 46

Irrevocable Life Insurance Trust (ILIT)

Answer 46

Purchasing life insurance so that the death benefit can pay estate taxes and prevent unnecessary liquidation of other assets.