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27 Cards in this Set

  • Front
  • Back
nonqualified plans
- fixed and variable annuities
- deferred compensation plans - risk of company going under or employee quitting before retirement
- payroll deduction plans-
- plans can discriminate
- plan does not need IRS approval
- only taxed on income
- plan is not a trust
qualified plans
IRA - max of 100% of income up to 4000 per year
- if dont make distributions by april 1st of the year following the year after 70 1/2 they will be taxed 50%
- excess contributions over 4k are taxed at 6%
- last day to make contributions is last legal filing date for the year
- roth iras
- education iras - coverdell education account - max 2k per year per child - for secondary and college expenses
- 529 - state sponsored - exempt from federal tax and state (only if participating in resident state account)
- TSA - 403B - for teachers, preachers and red cross
- keogh (HR-10) -for self-employed unincorporated individuals - max contribution is 100% or earnings up to 47k - must contribute same percentage for employees
- corporate plans - defined benefit (pension) - defined contribution (profit sharing or 401k)
- if 21 and work 20 hours per week you are eligible for a plan
- funding requirements
- vesting requirements
- communication rquirements - plan must be in writing and given annual statements
- nondiscrimination requirements
- benefiaiaries must be named to receive employees benefits at death
- with a qualified plan rollovers more from one trustee to another through the client - the client has 60 days to move the money over per year
- direct transers move from trustee to trustee without client
Variable annuity pricing
- same as MF - NAV + sales charge = POP
- no max sales charge
- redeption fees
- must reinvest dividends and gains
Direct participation programs
- form of business that is not taxed
- business not taxed as entity - everything flows to owners and owners are taxed
- tax consequences flow to owners - income, expenses, credits, deductions, and losses
types of income
- active income
- passive income - rental income or another DPP income
- portfolio income - dividends
- passive losses only hselter passive income, not ordinary
types of DPPs
- general partnerships - everything flows through - unlimited liability
- joint ventures - 2 or more owners - unlimited liability - formed for specific purpose and disolving venture
- limited partnerships - 2 types of partners - general partners and limited partners - at least 1 of each
- s corporation - max # of owners 100 - limited liability
- sole proprietorship - unlimited liability
Business characteristics of DPP
- must have more than one associate to be DPP
- there must be a profit motive - not a hobby - economic viability is most important consideration - if not a profit motive ther will be back taxes, penalties, and maybe prosecution or fraud
- centralized management
- limited liability
- to be DPP must avoid freely transferable interests and continuity of life
limited partnerships
- limited partners - become limited partners only when GP signs off on subscriptions agreement - liability liability - no management responsibility - if they want responsibility they can switch to GP and have unlimited liability - vote for partnership and can vote for liquidation - may monitor or copy books - can sue GP
- general partner - individual, individuals, or a corporation - unlimited liability - management responsibility - fiduciary responsibility to the limited partners - no conflicts of interest allowed - files certificate of limited partnership (filed in state of domicile)
- conflicts of interest - cannot borrow from partnership (can lend money up to a reasonable amount) - cannot compete with another partnership (geing GP of more than one partnership) - cannot comingle funds
liquidation priority for GPs in a DPP
- secured creditors
- other creditors
- limited partners
- general partner
distribution of limited partnership interests
- private placement - regulation D offering - limited to the # of nonaccredited (35) - full and fair disclosure document for private placements is offering memorandum
- public offering - sold by prospectus - synication fees limited to 10%
- types of portfolios - specified program (at least 75% of assets identified in advance), and blind pool (less than 75% identified; example, drilling for oil)
tax considerations of DPPs
- expenses - deductible in current year
- cost recovery systems - depreciation (real estate and equipment) - depletion (natural resources)
- oil drilling - intangible drilling costs can be written off but it has to be profit motive and it not considered if it is capital equipment
- tax credits - dollar for dollar - created for low income housing and historic renovations costs
- cash flow - money in vs. money out - revenues minus expenses minus interest payments (not principal) minus depreciation payments
Types of DDP program
- real estate
- equipment leasing - airplanes, railroad cars, computers - lots of write offs - risk of obsolescence
- oil and gas programs
real estate programs and benefits
- benefits are capital growth potential through appreciateion of property
- cash flow - income collected from rents
- tax deductions - from mortgage interest and improvements
- tax credits - for government assisted housinga nd historic rehabilitatio
- 5 programs are:

1) raw land - most speculative - appreciation is only objective
2) new construction - no immediate cash flow - maintenance low - appreciation major objective - medium risk
3) existing properties - maintenance expenses high - immediate cash flow potential - low risk
4) governement assisted housing - tax credits - maintenance high and appreciation low
5) historic rehabilitation - tax credits; difficult to find permanent financing; potential cost overruns; similar to risk of new constrution
oil and gas programs
- 4 kinds of drilling - Exploratory (high risk and reward), developmental (oil or gas found in the area), income (buy existing production - safest), or balanced (combination of the three)
Investment considerations of Dpps
- Economic viability - make sure there is cash flow, capital gains, and government will be concerned with internal rate of return and present value - needs to be profit motive not tax shelter
- sharing arrangements - disproportionate sharing
- tax considerations - benefits are cost recorvery, tax credits, and losses flow through - risks are recapture (IRS takes back write offs that weren't allowed), IRS audits, recourse debt
- safety
- lack of liquidity
Real estate investment trusts
- Not DPP or investment company
- way to invest in real estate without buying property
- invest in a portfolio of operating real estate - equity trusts
- invest 75% in real estate
- not taxed if it pays out 90% of earnings
- mortgage trusts - invest in portfolio of real estate mortages
- investors do not own securities, they own parts of real estate or mortgages
- trade on exthance or OTC
- taxed as ordinary income
subscription agreement
- investors intersted in becomming limited partners must complete a subscription agreement - must include:
- investors net worth
- investors annual income
- statement attesting that investor understands the risk
- a power of attorney appointing the GP as the agent of the partnership
tangible vs intangible drilling costs
- intangible - write offs are 100 deductive in the first year of operation
- tangible - costs incurred that have salvage value - not immediately deductible - they are deducted over a seven year period
Benefits and features of DPP's
- tax reporting entity - entity does not pay taxes
- investors receive a share of all income and losses of the business reported on form k-1
- no double taxation on distributions
- only investment opportunity that offers a pass through of losses to the investor
required documentation to form a Limited partnership
- certificate of limited partnership
- partnership agreement
- subscription agreement
- oversees the selling and promotion of th epartnership
- responsible for the preparation of any paperwork necessary for hte registration of the partnership
- syndication fees are limited to 10% of the gross dollar amount of securities sold
accredited investors
- investors in a limited partnership must have substantial investment experience - they must be accredited
partnership agreement
- describes the roles of the general and limited partners and guidelines for the partnership operation
- the rights of the GP include the right to charge a management fee, the authority to bind the partnership into contracts, right to determine which partners should be included in the partnership, and the right to determine whether cash distributionsn will be made
certificate of limited partnership
- must be filed in the home state of the partnership
- includes: partnership name, business, place of business, time expected to be in business, size of investments, share of profits to each LP
- if any material information has changed, and update must be made within 30 days of the event
Limited partnership's Tax basis
- consists of:
- cash contributions to the partnership
- property contributions to the partnership
- recourse debt of th epartnership
- nonrecourse debt of real estate partnerships only
- may only deduct from income a maximum of whatever the tax basis is - whatever amt is over tax basis may be carried over to the next year