Trusts and Joint Accounts ( Series 65 and Series 66 Exam )

Trusts, Estates & Joint Accounts | Series 65 and Series 66 Exam Prep

Everything you need on trusts, estates, and joint accounts for the Series 65 (Uniform Investment Adviser Law Examination) and Series 66 (Uniform Combined State Law Examination). This topic isn't a huge percentage of the exam, but it's easy points if you know the patterns NASAA likes to test.

What this video covers:

Joint account types — JTWROS (Joint Tenants with Rights of Survivorship), Tenants in Common, Tenants by the Entirety, and community property. The survivor question and how the exam tests it.

The three players in every trust — grantor (settlor, trustor), trustee, and beneficiary.

Revocable vs irrevocable trusts — what changes, who pays the taxes, why the IRS doesn't care about your revocable trust, and what you actually get in return for giving up control.

Testamentary trusts — when they're funded and why probate still applies.

Why people set up trusts in the first place — probate avoidance, privacy, control after death, and estate tax reduction. The four real reasons, ranked.

The Prudent Investor Rule under the Uniform Prudent Investor Act — fiduciary duty, total portfolio approach, diversification, and the wrong answers the exam loves to throw at you.

Trustee duties with multiple beneficiaries — balancing income beneficiaries against remainder beneficiaries, what the trustee considers, and what the trustee absolutely does not care about.

Estate accounts — executor vs administrator, Letters Testamentary vs Letters of Administration, and how the account actually works.

Common Series 65 and 66 exam questions answered:

Who gets taxed on a revocable trust? The grantor. Who gets taxed on an irrevocable trust? The trust or the beneficiary. Does a revocable trust reduce estate taxes? No. Does a revocable trust avoid probate? Yes. When is a testamentary trust funded? At the grantor's death. Who can trade a trust account? The trustee. What standard does a trustee follow? Prudent investor rule.

Taught by Ken Boyd — former NYSE floor trader (1989–2009) and founder of Capital Advantage Tutoring. 35 years on Wall Street. Series 7, SIE, Series 63, 65, and 66 exam prep.

📚 Series 65 and Series 66 tutoring: https://series7exam.org 🎯 Subscribe for more exam prep: @Series7Exam 💬 Questions? Live Q&A every Tuesday and Thursday.

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Transcript

SPEAKER_00 0:07

Look, this topic may be worth a handful of questions, right? But it's literally what I tell everyone to read right before they take their serious 65 or 66. These are easy questions. If you miss them, that's on you. So let's get into it. First of all, joint accounts. So let's talk about the main three. You gotta know these code. JTWROS, joint tenants with rights of survivorship, equal ownership. If one person dies, the other gets everything. No probate, no will, no nothing, done. It goes right to the other person. Tenants in common. Ownership can be unequal. 60-40, 90-10, 70-30, whatever. Somebody dies, their share goes to their estate, their beneficiaries, theirs, not the other owner. That's a big difference. Tenants buy the entirety. That's from married couples only. That gives you creditor protection. That's like the whole point of it. Is that neither spouse can sell with the other signing off, okay? The other one is that if I sue one of the spouses, I can't touch the property in that account unless both people are creditors. So now, John and Mary, JCW R O S, John dies, Mary gets it all. Same setup, but tenants in common. John dies, John half goes to whoever's in his will, his estate, his heirs. Boom. Okay. One more. We have community property. That's a certain state setup. That's not a type of account. But anything earned during the marriage in a community property state is 50-50. You don't need all, you don't need to know the states. But also, here's what happens. If you die in a community property state, everything in that account gets stepped up. You know what step up a cost basis? When you die, they jack the cost basis up. Well, in a community property state, in a community property state, all of the assets get stepped up. If you're in a non-community property state, only the dead person stuff gets stepped up. That helps. Okay. Now let's talk about the trust a little bit. Okay. So let's talk about the first thing. The grantor. That's that's who creates it. That's who funds it. They're also called the settler or the truster, okay? Same person, three different names, okay? Most of the time they use grantor, but I guess they could use the other two. Now, once the grantor sets it up, kind of not really involved anymore. Well, it can be, but we'll get to that. Now, the second person, it's our trustee. They run it, they have a fiduciary responsibility to make sure that all of the trust is following the trust documents. They make the investment decisions, distributions, all that stuff. Now, the third one is the beneficiary. They get the money, they benefit from the trust. Now, in reality, you could be all three. So, again, in reality, you could be all you could be the grantier, the settler, and the grancer of the trustee, and the beneficiary. That's kind of cool. Now, let's talk about a couple different types of trust. First of all, we have irrevocable. Okay, revocable means you set it up, you can change it tomorrow, add beneficiaries, remove them, pull the assets back, tear the whole thing up, you're in control. The irrevocable means you put set it up and you can always turn it off, okay? Now the problem is that sounds awesome, but the IRS will go, oh, you since you can pull it back, it's still your money, still in your estate, you still pay taxes on the income. So on a revocable, the grantor still pays taxes on the income while they're alive. When you die, the whole thing counts towards your estate tax. That works. So the reason we do that is for probate. That's the only reason, really reason. Assets in a revocable trust, skip probate. That's the only benefit. Privacy, speed, no court. But taxes, you don't get a break. Your estate pays the taxes, but in reality, you're fucking dead, so who cares? Now, irrevocable, you set it up, it's gone. It's not, well, it's no longer your money. You can't change it, you can't pull it back, you can't fire the trustee. I mean, maybe you can, but you can't fire the trustee just because you had a bad day. Basically, once you put it in there, it's no longer, it's like almost like taking all your money and giving it to your friend named Fred. It's no longer your money. But here's what you get in return of that. First of all, the assets are out of your estate. The trust pays its own taxes, or the beneficiaries do when they get to just distribution, not you. So when you die, that money isn't counted toward the estate. So there's no estate tax on it. Irrevocable trust pays the taxes. And part of the problem is they go, the tr any any trust goes very high to the high tax break. You know we have progressive taxes, right? The more you make, the more they take. Well, in a trust, I think it's very low, like maybe 10 or 15 grand. Once it makes that kind of money, not put in there, but earns it, it's automatically in the highest tax bracket. So now again, unrevocable, the grantor pays the taxes always while they're alive. The grantor reports the income. At death, it's in the estate. Irrevocable, the trust or the beneficiary pays the taxes. If the income stays in the trust, the trust pays. If the and the trust, again, has tax brackets that are brutal, they hit the top rate very fast. That's why the trustees usually distribute the income. Because once it's distributed, the beneficiary pays at their own rate. Now, again, the grantor doesn't pay on the irrevocable trust. That's the whole point. Now, the third one is a testamentary trust created by the will. It doesn't exist until you die, it goes through probate, then the trust funds. And if the exam asked you and the testamentary trust funded, it's at death, not before. So again, we have revocable, irrevocable, and then we have testamentary. So the ones you set up while you're live are also called intervivos while live. It's Latin for some in vivo or something like that. Okay. Now, why do I do a trust at all? So there's really four reasons. Not everyone works for it, but this is what kind of do it. One, you avoid probate. Probate is slow, months, sometimes years. It's public, everyone can see it. Anyone can walk into a courthouse and read your will. It costs money. Attorney's fees, court fees, executive fees. A trust skips all of that. Assets transfer the day you die. Second, like I just said, privacy. A will is public record, a trust isn't. Nobody knows what's in it, who got what, how much. So if you have a lot of money, or if you have a complicated family, if you just don't want neighbors reading your fucking business, do a trust. Control after death. A will distributes, okay? Remember that. A will distributes, a trust manages. So you can say, hey, my kid gets income at 25, she gets principal when she's 35, and nothing if she drops out of college. Okay? You can't do that with a will. The will just dumps the money in the kid and it's gone. A trust can keep running for decades. Now the other thing is estate tax deduction. If you have an irrevocable, you get you don't your estate doesn't pay taxes. Revocable, it irrevocable, your estate doesn't pay taxes. Revocable, it does nothing for it. The only thing you get out of is the privacy and you decide where it goes. So again, irrevocable, it stays in the trust. Revocable, the estate pays in taxes. I like it. Okay. Now, here's the thing the federal state tax exemption, the estate tax exemption is like$15 million. So the first$15 million you make in your lifetime that you pass on, you're not paying taxes on. So most of us, like 99.9% of us, don't need the trust to avoid the taxes, but over 15 you do. Okay? So really the only reason normal people like us would do it is for the probe to avoid probate and the privacy for that. Now, trustees have a fiduciary duty under the UPIA. Their job is to handle all the beneficiaries, okay? They have to diversify. They have to, that's one of their duties to diversify. Looking at total portfolio approach. They look at the whole shebang, not each position, they look at everything. And they also can consider the needs of all the beneficiaries, not just one. They can delegate, like say you're a young person or even just not investment related, right? You're the trustee, but you don't know, kind of like um, you don't know enough about investing. So you can actually delegate the investments out to someone else. You can hire an IA or something like that to manage the account. But the trustee cannot delegate distribution. So the money that goes to the beneficiaries has to be done by the trustee. Now, also remember something. The trustee runs it, they don't take orders from the grave. If the grantor dies, they drive, they they there's no like extra instruction, they can leave, it doesn't matter. The trustee follows the trust documents. Now, let's say we have multiple beneficiaries. This is where the new trustees have to figure it out. They kind of pick a side, they feel bad, whatever it is. Don't do that. They have they owe a duty to all the beneficiaries impartially. So now there's two types of in there's two types of beneficiaries: an income beneficiary, like a spouse or an elderly parent, who's going to get income on a need basis. We'll talk about that in a minute. Then we have the remainder beneficiary who gets the principal after 5, 10, 15, 20 years. Usually that's like kids. Here's the thing the trustee has to manage, balance all of it, the current and the future. A duty of impartiality. So now what the trustee looks at, so they look at when they make decisions, they look at the trust document. What does the trust document say? And you have to be impartial. Okay? What did the grantor say? Don't care. Grow the prints. So if the grantor sets it up and says, I want to grow the principal, generate income, treat everyone equally, that document says everything. It's the entire rule book. If the income beneficiary needs income, they need cash flow now. Usually a spouse, elderly parent. So you need to make sure you have to handle that. The remainder beneficiary needs the principal to be there in 20, 30 years. Usually the kids and stuff like that. So they have different needs, and you have to balance that. If the time horizon is very short, it's more conservative, it's long, you can take some risk. We have to worry about the taxes. You have to always think about the taxes of the trust and of the beneficiaries. A trustee has a busy job, right? They also have to have liquidity needs, right? So if you know you have a distribution coming up, a tuition, a house, a distribution, you have to make sure some of your stuff is liquid so you don't get killed. You have to handle inflation because you want the principal to grow so that the remainder vision, the remainder beneficiary doesn't get killed. Okay. Last, diversification. Always diversify. Diversify, diversify, diversify. They always have to do that total portfolio approach, kind of like modern portfolio theory. They have to balance between them. So if the trustee loads up on bonds, income beneficiary is happy, remainder gets wiped out by inflation. If the trustee loads up on gross stocks, the remainder beneficiary is thrilled, but the income beneficiary can't pay rent, so he's always going to be fine down the middle path. Now let's talk about what the trustee doesn't care about. Once you set up the trust, the grantor is not part of it. Irrevocable maybe, but still the trustee manages it, okay? The trust document governs all the time. If a beneficiary preferences conflict with the document, go with the document. Beneficiary is whining, they want aggressive growth or they want income, doesn't matter. Whatever the trust document says, they follow. So again, the trustee's opinions about the beneficiary. You think one's a little shithead? Doesn't matter. You have to do fiduciary duty, you have to manage it for that beneficiary. If one's more deserving, no, it doesn't matter. It's always up to the trust stocks. So now let's go through this a little bit, okay? Everything's based on the prudent investor standard. Estate accounts. Someone dies, the estate account holds the assets till they're distributed. They name an executor in the will, they name an executor. Or an administrator appointed by the court. So if you die with the will, they name an executor, they handle it. If you die without a will called interstate, the court does it. They name an administrator, and that's not free. Okay? To open the account, you need letters testamentary. That's literally saying if there's a will, letters testamentary. If there's no will, it's letters of administration from the court. That document grants authority. So you can't change anything. If you have an account and somebody dies without a will without a trust or a will, whatever, if they don't have a trust and it's just a will or not a will, you have to wait for these test letters testamentary or letters of administration to make decisions. But once you find that the person dies, you cancel all open orders and you freeze the account. And then once and then once they set up an estate account, you need the stuff, and it sits there until the executor or the administrator tells you what to do. So let's go through it. If someone dies in a joint account, you have to know is it JTWROS where it goes to the other person, or tenants in common, where it goes to their family, the beneficiary of the estate. Revocable or irrevocable, who gets the assets in the estate? Revocable, the money goes back to the estate. Irrevocable, the money stays in the trust. Who pays taxes? Who doesn't? Who can trade the trust account? The trustee, not the grandorp, not the beneficiaries, the trustee. If it's a complex, I didn't talk about that yet, right? Complex means a complex trust means that the money can grow over time and you can distribute money at a later time based on the trust. A simple trust has to distribute money every single year. Okay. When is the testamentary trust funded? At death. Now another account that I should have mentioned is TOD, transfer on death. That means I set up an account, I name a person to get the money on my death. That supersedes the will, that supersedes everything. If the money's in the account and it says TOD going to Larry, even if my will says this goes to Barry, everything in that account goes to Larry because that's what the TOD says. Okay. Now, again, don't lose points here. This isn't options, this isn't regs, this isn't investment vehicles, this is easy stuff. Let's get it right, move on, and let's pass this fucking test.