Unit 9 - Basic Accounts

Individual account

a natural person/singular owner who controls the investments and requests distributions of cash or securities from the account, may add other people who may enter trades but there is only one owner – once they pass assets go through estate

Joint account

two or more adults (tenants) are named as co-owners, each having control over the account – checks must be made payable to the registered names and endorsed for deposit by all tenants but mail can be sent to a single address

Tenants in common

ownership does not have to be equal (agreement states % and if not specified it is split equally) - deceased tenant's share becomes part of that tenant's estate and account will be frozen until required paperwork is received and processed

Joint Tenants with Right of Survivorship (JTWROS)

all tenants own the account equally – deceased tenant’s share passes to the surviving tenant(s)

Transfer on death (TOD)

designation that an owner may add to an account that allows the owner to pass all or a portion of the account to a named beneficiary or beneficiaries at death avoiding probate but the does not avoid estate tax

Estate tax

tax imposed by a state of the federal gov. on the assets a person possesses at the time of death

Sole proprietor

business that is owned by one individual aka DBA accounts (doing business as), they may have a fictitious business name in addition to the owner’s name – TIN is not needed and there are few regulatory requirements but owner has unlimited liability

Partnership accounts

association of two or more individuals that must be supported by a written agreement stating which can make transactions and specify ownership

Corporation

legal entity run by a BOD organized for business purposes, in order to open > a corporate charter must be filed with the state that forms the corporation, corporate resolution provided to BD, and a new account form is required

Corporate resolution

resolution of the board that authorizes who may open and control the account containing business’s legal right to open investment account, and limitations on securities that the business can invest in, and name of individual who will represent the business in transactions

Trusts

legal arrangement in which the grantor transfers assets to the trustee to manage for the beneficiary, most common reason is for estate planning, allows for greater flexibility in assigning aspects of ownership

Aspects of ownership of a trust

legal possession (grantor), management (trustee), and benefit (beneficiary)

Grantor

person who creates/owns the trust and contributes the asset, legal possession

Trustee

person who controls/manages the asset, acts in a fiduciary capacity for the benefit of the beneficiary and must follow the terms of the trust

Beneficiary

person who benefits from the asset

Retirement trust account

employer acts as grantor/trust and employees are the beneficiary, employer has fiduciary responsibility to manage the assets in the retirement plan for the benefit of the participating employees

Living trust

trust that is created and funded by the grantor during the grantor's lifetime

Decedent trust

trust that is funded by a will or other estate process where the assets are placed in the trust after the owner has died, grantor is no longer living so no changes can be made to the trust

Revocable trust

living trusts that may be modified or revoked by grantor as they as they see fit, formed by individuals and families where grantor serves as trustee and beneficiary where trust names successor trustees and successor beneficiaries – assets are still considered part of grantor’s assets and are included in the estate

Irrevocable trust

when a grantor forms a trust that cannot be modified and thus giving up control of the assets, grantor cannot serve as trustee or beneficiary - assets may be removed from grantor’s estate for estate tax purposes

Irrevocable life insurance trust (ILIT)

trust used to help pay estate taxes when an estate holds a large illiquid asset, such as a family business, excluding life insurance from the insured’s taxable estate

Custodial accounts

established for a minor child and managed by an adult custodian until the child reaches the age of majority (or at 25), assets in the account belong irrevocably to the minor but the custodian manages and invests the assets on the minor's behalf under UGMA or UTMA

Coverdell Education Savings Accounts (Coverdell ESAs)

allow after-tax contributions of up to $2k per student per year for children until age 18 (aka Education IRAs), maximum contribution is reduced and eventually eliminated for higher income taxpayers – growth & income is tax deferred, no tax deductions for contributions, distributions are tax free

Fiduciary

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 (i.e. trustees, executors, custodians, guardian, conservator, receiver in bankruptcy), trades entered must meet the investment needs of the beneficiary

Prudent investment rule

requires fiduciaries to make wise and safe investments

Power of attorney (POA)

a person who is not an owner is given authority over an account, requires written authorization by the account holder to represent or act on another’s behalf - cancelled when either party passes

Full power of attorney (FPOA)

POA has the power to deposit or withdraw cash or securities and make investment decisions for the account, often having same powers as account holder

Limited power of attorney (LPOA)

limited trading authorization, POA allowed to enter buy and sell orders but not withdraw assets, document specifies the level of access the person may exercise (often granted to spouses for an individual’s IRA)

Durable power of attorney (DPOA)

document granting full or limited POA to remain in effect even if the owner becomes incapacitated, ensuring continuous management of account without interruption