Type of Client

D is correct. This individual does NOT qualify as an accredited investor under either test. The income test requires $200,000 for individuals (or $300,000 joint) for the past two years with reasonable expectation of the same. The net worth test requires $1,000,000 excluding the primary residence. This person has $950,000 minus $600,000 home equals $350,000 net worth (excluding primary residence), which falls short of the requirement.

A (income test) is incorrect because $180,000 is below the $200,000 individual threshold. B (net worth test) is incorrect because when you exclude the primary residence ($950,000 minus $600,000), the investor only has $350,000, which is well below the $1,000,000 requirement. C is incorrect because the individual fails both tests.

B is correct. A qualified purchaser must have at least $5,000,000 in investments. This is a higher standard than accredited investor status and allows access to Section 3(c)(7) private funds, which can have up to 2,000 qualified purchasers.

A ($1,000,000 net worth) is incorrect because this is the accredited investor threshold, not qualified purchaser. Note also that accredited investor net worth excludes the primary residence. C ($10,000,000) and D ($25,000,000) are incorrect because they overstate the qualified purchaser requirement, though entities may need higher thresholds depending on their structure.

C is correct. An S Corporation provides limited liability protection to all shareholders while allowing pass-through taxation, meaning the corporation itself doesn't pay federal income tax. Instead, income and losses pass through to shareholders' personal tax returns. S Corps are limited to 100 or fewer shareholders.

A (General partnership) is incorrect because general partners have unlimited personal liability for partnership debts. B (C Corporation) is incorrect because while it provides limited liability, it faces double taxation (corporate level and shareholder dividend level). D (Sole proprietorship) is incorrect because the owner has unlimited personal liability and the business isn't a separate legal entity.

A is correct. JTWROS (Joint Tenants with Rights of Survivorship) includes automatic transfer to the surviving owner(s) upon death. The deceased's share bypasses probate entirely and immediately becomes the property of the surviving joint tenant, regardless of what the deceased's will may say.

B (passes through estate/will) is incorrect because this describes Tenants in Common (TIC), not JTWROS. With TIC, there is no survivorship right, and the deceased's share goes through their estate. C (divided among heirs) is incorrect because JTWROS overrides will provisions. D (court approval) is incorrect because one key advantage of JTWROS is avoiding probate and court involvement.

A is correct. A revocable trust (also called a living trust) allows assets to avoid the probate process, saving time and maintaining privacy. However, because the grantor retains control and can revoke or modify the trust at any time, the assets remain part of the grantor's taxable estate for estate tax purposes.

B (excluded from estate) is incorrect. This describes an irrevocable trust, where the grantor gives up control and the assets may be removed from the taxable estate. C (grantor gives up control) is incorrect because the grantor retains full control with a revocable trust. D (creditor protection) is incorrect because revocable trusts generally provide no protection from the grantor's creditors since the grantor still controls the assets.

B is correct. Private foundations are required to distribute at least 5% of their net investment assets annually for charitable purposes. This requirement ensures that foundations actively serve their charitable mission rather than simply accumulating wealth.

A (3%) understates the requirement. C (7%) and D (10%) overstate the requirement. The 5% rule is a cornerstone of private foundation law and affects how advisers construct portfolios for these clients. The portfolio must generate sufficient returns and liquidity to meet this annual distribution requirement while preserving long-term purchasing power.

A is correct. Large institutional clients like pension funds with substantial assets and professional investment committees are generally subject to less stringent suitability standards. These sophisticated institutional investors are presumed to have the knowledge, experience, and resources to evaluate investments independently. Regulators focus more on retail investor protection.

B (retiree with life savings) is incorrect because retail clients, especially retirees with limited resources and income needs, receive strong suitability protections. C (young professional) is incorrect because even younger clients are entitled to full suitability analysis, particularly when they're inexperienced. D (trust for minors) is incorrect because trusts for beneficiaries, especially minors, require careful suitability analysis considering the beneficiaries' needs and the trustee's fiduciary duties.

C is correct. In a general partnership, all partners have unlimited personal liability for the debts and obligations of the partnership. This means creditors can pursue partners' personal assets to satisfy partnership debts. General partnerships are simple to form but carry significant personal risk.

A (LLC) is incorrect because Limited Liability Companies specifically provide limited liability protection to all members. B (S Corporation) is incorrect because, like all corporations, S Corps provide limited liability to shareholders. D (C Corporation) is incorrect because corporations provide limited liability protection, meaning shareholders can only lose their investment in the corporation and are not personally liable for corporate debts.

D is correct. A trustee has a fiduciary duty to act impartially and balance the interests of all beneficiaries, both current income beneficiaries and remainder beneficiaries who will receive assets later. The prudent investor rule requires diversification and a total return approach that considers the trust's purposes and all beneficiaries' circumstances.

A (maximize for current beneficiaries) is incorrect because this would violate the duty of impartiality by favoring one class of beneficiaries over another. B (preserve for remainder beneficiaries) is incorrect for the same reason, favoring future beneficiaries over current ones. C (follow grantor's preferences) is incorrect because once an irrevocable trust is established, the trustee must follow the trust document and act in beneficiaries' interests, not the grantor's wishes (the grantor has relinquished control).

B is correct. Since 2020, holders of Series 7, Series 65, or Series 82 licenses in good standing automatically qualify as accredited investors based on knowledge and expertise, without needing to meet income or net worth requirements. However, this qualification is only valid while the license remains active and in good standing.

A is incorrect because it fails to mention the "in good standing" requirement. If the license lapses or is suspended, the accredited investor status is lost. C is incorrect because Series 65 does qualify, it's not limited to only Series 7 or Series 82. D is incorrect because it ignores the knowledge-based qualification pathway added in 2020. Before this change, D would have been correct, but the SEC now recognizes that certain financial professionals have sufficient knowledge to evaluate private placements.