Unit 9 - Basic Accounts

New Accounts

• must be accepted by a principal of the firm before the account is opened and a trade takes place

• only signature required is the principal

Individual Account

• one owner

• only person who can control the investments and request distributions of cash or securities

• the owner or the court can add other people who can enter trades

  • but there’s still only one owner

• when the owner dies, the account assets are distributed through the owner’s estate

Joint Account

• two or more adults are named as co-owners

• The account forms for joint accounts require the signatures of all owners.

• In a joint account, the owners are often called tenants.

• Joint account agreements provide that any tenant may transact business in the account.

• Checks must be made payable to the names in which the account is registered and endorsed for deposit by all tenants, although mail only needs to be sent to a single address.

• these designations determine how the account ownership will be handled if any account owner dies

  • Tenants in Common (TIC) → a deceased tenant’s interest is owned by the tenant’s estate

    • not passed automatically to the surviving tenant(s)

    • should have an agreement that divides the percentage of the account of each tenant

    • if there’s no agreement, its assumed the account is owned equally

    • tenant dies → their portion is distributed through the decedent’s estate

    • account will remain frozen until the required estate paperwork has been received and processed

  • Joint Tenants with Right of Survivorship (JTWROS)

    • a deceased tenant’s interest passes to the surviving tenant(s)

    • all tenants own the account equally

    • one dies → account remains the property of all the surviving tenants

    • common for married couples

Transfer-on-Death (TOD) feature

• owner can add to an account that allows the owner to pass all or portion of the account to a named beneficiary or beneficiaries at death

• flexibility to change beneficiaries as conditions dictate

• avoids probate (proving a will’s validity)

• transfers the property directly

• don’t avoid estate tax

• added to individual accounts and JTWROS accounts

• becomes effective after the death of the last surviving tenant

Sole Proprietor Accounts

• owned by one individual

• property of the business owner

• may have a business name (fictitious business name) associated with it and the owner’s name

  • additional form needed to add this name

  • d/b/a → “doing business as”

• checks deposited can be either in the person’s name or business name

Partnership Accounts

• association of two or more individuals

• open accounts for business purposes

• must have a written partnership agreement and an authorization form

  • state which partners can make transactions for the account

• if they want a margin account, their agreement can’t have language that prohibits it

• an amended partnership agreement has to be obtained if any changes have been made

Opening Corporate Accounts

• a firm must obtain a corporate charter

  • filed with the state that forms the corporation

• BD firm will need a corporate resolution

  • resolution of the board that authorizes who may open and control the account

• must contain

  • the business's legal right to open an investment account;

  • an indication of any limitations that the owners, stockholders, a court, or any other entity has placed on the securities in which the business can invest; and

  • the name of the individual who will represent the business in transactions involving the account.

• If the corporation wants to have a margin account, the corporation's charter must not prohibit this activity.

Trust Account

• a way to hold assets that allows for greater flexibility in assigning the different aspects of ownership

• aspects may be assigned to different people

  • Legal possession. The person who owns the asset, often called the grantor, has legal possession.

  • Management. The person who controls the asset, often called the trustee, manages the asset.

  • Benefit. The person who benefits from the asset is the beneficiary.

• the trustee has a fiduciary duty to manage the trust for the benefit of the beneficiary

• trust has to specifically allow for margin to open an account with margin

  • margin → borrowing money against a security

Living vs Decedent Trusts

• living trust→ trust that is created and funded by the grantor during the grantor’s lifetime

  • grantor may be able to make changes during their lifetime

• decedent trust → trust that is funded by a will or some other estate process where the assets are placed in the trust after the owner has died

  • grantor is no longer living so they can’t make changes to it

Revocable vs Irrevocable Trust

• Revocable trust → modified or completely revoked by the grantor

  • as long as the grantor is alive, the trust can be modified by them as they see fit

  • assets are still part of the grantor’s assets

  • grantor can also be the trustee and the beneficiary

• Irrevocable trust → can’t be modified

  • assets placed can be removed from the grantor’s estate

  • grantor gives up control of the assets

  • for the assets to be removed for estate tax purposes, the grantor can’t serve as the trustee or the beneficiary

  • irrevocable life insurance trust (ILIT) → estate planning tool to help pay estate taxes when an estate holds a large illiquid asset

Custodial Accounts

• set up for minors and require an adult to act as a custodian

• assets are managed by a custodian until the minor reaches the age of majority

• custodian has full control and can

  • buy or sell securities;

  • exercise rights or warrants; and

  • liquidate or hold securities.

• not normally used to pay expenses associated with raising a child

• Under the Uniform Transfers to Minors Act (UTMA)

  • An account may have only one custodian and one minor or beneficial owner.

  • Only an individual can be a custodian for a minor's account.

  • A minor can be the beneficiary of more than one custodial account, and a person may serve as custodian for more than one account, as long as each account benefits only one minor.

  • A donor of securities can act as custodian or can appoint someone else to do so.

  • Unless a parent is acting as a custodian, the parent has no legal control over a custodial account or the securities in it.

• account application contains the custodian’s name, the minor’s name and SSN, and the state the account is registered in

• no documentation of custodial rights or court certification is required

• securities bought must be registered in custodial name and managed for the benefit of the minor

• tax liability falls onto the minor but the custodian has to make sure they’re paid

• custodian charged with fiduciary responsibilities

• limitations

  • Custodial accounts are cash accounts only. Securities may not be purchased on margin or pledged as collateral for a loan.

  • A custodian must reinvest all cash, dividends, and interest within a reasonable time.

  • Investment decisions must consider a minor's age.

  • Commodities futures, naked options, and other high-risk securities are examples of inappropriate investments. Options may not be bought in a custodial account; however, covered call writing is normally allowed.

    • not uncovered called b/c of their unlimited risk

  • Stock subscription rights or warrants must be either exercised or sold.

  • A custodian cannot delegate away fiduciary responsibility but can grant trading authority and investment decisions to a qualified third party.

  • A custodian may loan money to an account but cannot borrow from it.

  • A custodian may be reimbursed for reasonable expenses incurred in managing the account and may also be compensated for managing the account. However, if the custodian is also the donor, only reimbursement of expenses is permitted, not compensation.

  • Custodial accounts are under the minor's Social Security number and are taxed at the minor's tax rate.

• if the beneficiary dies → securities pass to the minor’s estate

• if custodian dies → either a court of law or the donor of the securities must appoint a new custodian

Coverdell Education Savings Account (Coverdell ESA’s)

• also called Education IRAs

• allow after-tax contributions of up to $2,000 per student per year for children until age 18

  • less common than 529 plans b/c of the small contribution limit

• maximum contributions are reduced and eventually eliminated for higher income taxpayers

• growth and income are tax deferred

• no tax deduction for contributions

• Distributions are tax free as long as the funds are used for qualified education expenses.

• Qualified expenses include those for college, secondary, or elementary school.

• Nonqualified distributions are subject to income tax plus a 10% penalty for amounts that are in excess of principal (i.e., growth and income).

• If a student's account is not depleted by age 30, the funds must be distributed to the individual and are subject to income tax and a 10% penalty.

• Assets from an ESA may be rolled into an Education IRA for another beneficiary without tax or penalty.

Fiduciaries

• any person who is legally authorized to represent another person, act on their behalf, and make whatever decisions are necessary to the prudent management of the account

• include

  • a trustee designated to administer a trust,

  • an executor designated in a decedent's will to manage the affairs of the estate,

  • an administrator appointed by the courts to liquidate the estate of a person who died intestate (without a will),

  • a guardian designated by the courts to handle a minor's affairs until the minor reaches the age of majority or to handle an incompetent person's affairs,

  • a custodian for a minor (as explained in the section on custodial accounts),

  • a receiver in a bankruptcy, and

  • a conservator for an incompetent person.

• any trades they make must meet the investment needs of the beneficiary

• representative working with a fiduciary account must be aware of the following rules

  • Proper authorization must be given and verified by the BD.

  • Speculative transactions are generally not permitted.

  • Margin accounts are only permitted if authorized by the legal documents establishing the fiduciary accounts.

  • The prudent investor rule requires fiduciaries to make wise and safe investments.

  • Many states publish a legal list of securities approved for fiduciary accounts.

  • A fiduciary may not share in an account's profits but may charge a reasonable fee for services.

Power of Attorney (POA)

• if a person who is not an owner is given authority over an account, the customer (the owner) has to file written authorization w/ the BD

• trading authorization

• granted to a person

• cancelled upon the death of either party

• have fiduciary duty to the account’s owners

• Full Power of Attorney (FPOA)

  • power to deposit or withdraw cash or securities and make investment decisions for the account

  • much the same power as the owner

• Limited Power of Attorney (LPOA)

  • some but not total control

  • document specific the level of access

  • allows the attorney to enter buy or sell orders but not withdraw securities

  • more common than FPOAs

• Durable POA

  • a POA ends with the death of either the owner or the attorney

  • also ends w/ the incapacity of the grantor of the power

  • language that allows the power to continue if the owner is incapacitated → durable POA