AWMA Test Review 1
- ANS-The intent of Dodd-Frank was to "harmonize" and blend fiduciary rules that would
pertain to both broker-dealers and investment advisers. Investment advisers are held to
a fiduciary standard and broker-dealers to a suitability standard under the current rules
3 federal transfer taxes - ANS-the gift tax on lifetime transfers, the estate tax on
transfers of wealth at death, and the generation-skipping transfer tax (GSTT) that is an
additional tax on both lifetime transfers and transfers at death to persons who are two or
more generations younger than the transferor
According to John Brown in his book Exit Planning: The Definitive Guide, when ranking
the four most commonly used exit planning strategies from most utilized to least utilized,
the order is - ANS-Insider transfer = 41% of the time, third-party transfer = 29% of the
time, transfer to children = 24% of the time, and ESOP transfers = 1.2% of the time
According to State Street Global Advisors, there are three levels of trust that should be
covered in order for clients to trust advisors: - ANS-technical competence and
know-how, ethical conduct and character, and empathic skills and maturity.
Activist funds (market directional) - ANS-This is a corporate governance approach
where the fund tends to have highly concentrated positions (5 to 15 stocks, for
example), and takes a very active role in working with the board of directors and CEO of
the company. The goal is to have influence in looking out for the shareholders' interests,
and to make sure that the company has an effective business plan in place. If
necessary, the fund will work for the removal of the CEO. This approach has become
more
popular and is used by such entities as the California State Teachers Retirement
System.
Administration of ERISA is divided among: - ANS-Administration of ERISA is divided
among the Department of Labor, the Internal Revenue Service of the Department of
Treasury, and the Pension Benefit Guaranty Corporation.
Appeal of nonqualified plans to employers: - ANS-Use of nonqualified plans is generally
appealing to companies that want to provide compensatory benefits for the business
owners or other highly valued key executives in excess of qualified plan limitations. In
addition to providing retirement benefits, a nonqualified plan also can be used to provide
valuable employees with insurance coverage, incentive pay, and severance benefits on
a discriminatory basis. Deferred compensation is especially attractive for employers that
,are in a low or zero income tax bracket and do not need the immediate tax deduction
associated with a qualified plan
Appeal of nonqualified plans to executive employees: - ANS-Nonqualified plans are
typically designed to benefit a select group of employees (typically management or
highly compensated) whole qualified plan benefits are limited by contribution limits
imposed by IRC section 415. These plans can also benefit outside directors and other
non-employee independent contractors who provide services to the employer.
Bypass Trust - ANS-when the grantor wants to include persons other than their spouse
as income beneficiaries All trusts that qualify for the marital deduction must name the
grantor's spouse as the sole income beneficiary. Because the grantor of a bypass trust
wants to control who will receive the trust assets at the spouse's death, the spouse
should not be given a general power of appointment. A bypass trust cannot qualify for
the marital deduction automatically or by election.
Changes that have occurred since investment firms changed from private partnerships
to publicly traded companies include all of the following except:
A. risk taking has increased.
B. profits can be privatized (bonuses) and losses socialized (bailouts).
C. there is greater individual accountability.
D. partners no longer share in both the profits and losses of the firm. - ANS-C. The
repeal of Glass-Steagall accelerated the conversion of investment firms that had been
structured as partnerships into publicly traded companies that took on more risk. This
transferred much of the risk and accountability from general partners to public
shareholders
Charitable Bargain sale - ANS-When an individual has an asset, typically of
appreciating property, that would benefit a charity, but the individual cant bear to part
with the asset without some compensation, the individual may partake in this. This is a
part gift, part sale transaction to a charity. (an asset is sold to a charity for less than fair
market vale.). the donor is entitled to a gift tax charitable deduction for the difference
between the sale price and the assets fair market value less the annual exclusion
Charitable gift annuity - ANS-technique to transfer property of relatively low value
($5k-$50k) while receiving an annuity interest in return. In a charitable gift annuity
transaction, the donor transfers cash or other property to a charity in exchange for a
promise to pay the donor (or some other person, such as the donor's spouse) a
, specified annuity amount. The term of the annuity payment is generally for the life of the
donor, or the life of any other person who is receiving the annuity payment.
Charitable Lead Trust - ANS-A person may want to give assets to a charity during their
lifetime, but may also want those assets to be transferred back to them or to other
beneficiaries after a period of time. A charitable lead trust is ideal for this situation. Once
created, the trust is irrevocable and can last either for a specified term of years or for
the life or lives of a person or persons who must be living at the time the trust is
established. A charitable lead trust that lasts for a specified term of years must comply
with applicable state rules against perpetuities, if any.
Charitable Remainder Trusts - ANS-If a person wants to give an asset to charity but
would like a non-charitable beneficiary to benefit from the asset first, a charitable
remainder trust (CRT) is an effective planning tool. The trust is
irrevocable and can last either for a specified term of years (but not more than 20 years)
or for the life or lives of the non-charitable beneficiary or beneficiaries
Charitable stock bailout - ANS-In a charitable stock bailout, the individual will donate the
stock shares to the charity to receive a charitable income tax deduction, rather than
paying the capital gains and ordinary income tax. the stock is then redeemed by the
closely held business for cash. To be successful with the method, the closely held
business must have a sufficient cash asset to accomplish the redemption. and there can
be no formal or informal agreement that the business will redeem the stock.
COLI is attractive to employers because it - ANS-1. Provides psychological assurance
to deferred comp plan participants that their benefit are secure.
2. reduces strain on the companys cash flow when plan distributions are due
3. provides tax-deferred, and possibly tax free buildup of cash value; and
4. enables the employer to recover some/all of the plan costs.
Constructive receipt - ANS-money will be considered taxable income to an executive
who has access to it, whether he actually receives it or not, so long as there is no
substantial risk of forfeiture
Convertible bond arbitrage (convergence Trading) - ANS-Convertible bonds are
essentially a bond and an
equity call option, enabling the bond owner to buy the company stock at a certain price
(this is referred to as an "embedded option"). Hedge fund managers who do convertible
bond arbitrage typically buy the convertible bonds, and then hedge by selling the
underlying stock or selling options on the stock. Managers make their
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