Unit 6 - Other Investment Types

Municipal security

created by federal law, but are sponsored by an individual state and are all funds consisting of a portfolio of other securities

Section 529 plan

a type of state sponsored ESA account that allows saved money to be used for qualified expenses for K-12 and post-secondary (college) education (a tax-advantaged way to save)

Prepaid tuition plans

type of 529 plan for state residents and savings plans for residential and nonresidential residents, allows residents to lock in current tuition rates by paying now for future education costs (a hedge against tuition inflation)

Savings plan

type of 529 plan that allows donors to save money in a separate account to be used later for education expenses for tax-deferred growth

Annual gifting limit

amount of money gifted tax free each year limited by the IRS

Forward gifting

529 donors can avoid the gift tax by contributing up to 5x the annual gift limit at one time in a 529 plan, donor made gifts for future years up front

Local gov. investment pools (LGIPs)

a state-sponsored investment pool that allows local governments, school districts, counties, and other public entities to invest short-term funds, function similarly to money market funds, often maintaining a stable $1 NAV, but they are considered municipal securities and are not registered with the SEC

Achieve a better life experience (ABLE)

tax-advantaged savings account for individuals with disabilities and their families beneficiary is the account owner, contributions are made with after-tax dollars, earnings grow tax-deferred, and qualified withdrawals are tax-free

Partnership

a business owned by two or more partners who share in the management, profits, and losses of the business, do not pay taxes directly as profits and losses are passed through to the partners, who report them on their individual tax return

Limited partnership (LP)

have at least one GPs and one LPs, where the LP has no management responsibilities and are protected from liabilities of the partnership receive passive income (LPs also known as direct participation program – DPP)

• risks are liquidity and audit/recapture of tax benefit

Liquidation for LPs

date is specified in partnership agreement and GP must settle accounts in the following order: secured lenders > other creditors > limited partners > GPs

Exploratory programs (wildcatting programs)

those that look for resources near existing producing wells in the hopes of finding more deposits, the riskiest of the oil and gas programs

LP Public offerings

LPs are sold by a prospectus to a larger number of limited partners each making a small capital contributions

LP Private placements

investors receive a private placement memorandum for disclosure, involve a small group of limited partners, each contributing a large sum of money

Intangible costs

costs that are associated with items that have no resale or recoverable value when the program ends (i.e. wages and insurance premiums)

Tangible

costs associated with items like equipment that can be sold when the program ends, recoverable cost

Depreciation

deductions of the asset’s costs over its useful life, schedule is provided by the IRS and deductions are made over a timeframe

Depletion allowances

only associated with programs where natural resources might be depleted such as oil, gas, or even timber

Passive income

income produced by LPs, is part of a customer’s ordinary income

Real estate investment trust (REIT)

a company that manages a portfolio of real estate, mortgages, or both to earn profits for shareholders, pool capital like an investment company but are not (neither open nor closed end) with shareholders receiving dividends from capital gains distributions – taxed as a conduit/mutual fund and shares trade on exchange or OTC

Equity REIT

owns physical commercial property like a strip mall or warehouse and generates an income stream from such properties

Mortgage REIT

own mortgages on commercial property focusing on financing property mortgages, earning interest from mortgages which is paid to investors

Hybrid REIT

combination of equity and mortgage-backed REITs

Public REITs

REIT registered through SEC and must comply with SEC disclosure requirements

Listed REIT

public REIT registered with SEC and trade on exchange, high liquidity

Nonlisted REIT

public REIT registered with SEC but is not traded (low liquidity), difficult to price

Private REITs

REIT not registered with the SEC and not exchange traded with fewer disclosure requirements, carry a greater risk for investors and often focus on institutional investors (least liquid)

Exchange-traded fund (ETFs)

an equity security that typically invests in a basket of stocks designed to track an index (i.e. S&P 500), like a mutual fund it provides diversification, but unlike a mutual fund it trades on an exchange throughout the day like a stock

Exchange-traded product (ETP)

benchmarked to stocks, commodities or indices and are priced so that the value of the product is derived from other investment instruments, such as a commodity, a currency, a share price or an interest rate (marginable and may be sold short)

Exchange-traded notes (ETNs)

an unsecured debt security issued by a bank or financial institution designed to track the performance of a market index, but does represent ownership in a portfolio of securities (investors receive a payment at maturity based on the performance of the index, minus fees, no interest payments)