Key Takeaways
- Individual clients vary by goals, time horizon, risk tolerance, and tax situation.
- The GRANTOR creates and funds a trust; the TRUSTEE manages it; BENEFICIARIES receive the benefits.
- Revocable trusts can be modified by the grantor but do NOT avoid estate taxes.
- Irrevocable trusts CANNOT be changed but DO avoid estate taxes on transferred assets.
- Estates are temporary entities to settle a deceased person's affairs.
- Private foundations must distribute at least 5% of assets annually for charitable purposes.
- 2024 estate tax exemption is $13.61 million; gift tax annual exclusion is $18,000.
- Different client types have different liquidity needs, time horizons, and tax considerations.
Last updated: December 2025
Types of Clients
Investment advisers work with various client types, each with unique needs, legal requirements, and investment considerations. Understanding these differences is essential for making suitable recommendations.
Individual Clients
Individual clients are the most common type and have the widest variety of needs.
Key Factors to Consider
| Factor | Considerations | Questions to Ask |
|---|---|---|
| Goals | Retirement, education, home purchase, wealth transfer | What are you saving for? |
| Time Horizon | Short (<3 years), medium (3-10), long (10+) | When will you need the money? |
| Risk Tolerance | Conservative to aggressive | How would you react to a 20% loss? |
| Tax Situation | Tax bracket, state taxes, tax-advantaged accounts | What is your marginal tax rate? |
| Liquidity Needs | Emergency funds, anticipated expenses | How much cash do you need access to? |
| Net Worth | Assets minus liabilities | What are your assets and debts? |
Life Stage Considerations
| Life Stage | Typical Characteristics | Investment Focus |
|---|---|---|
| Young Professional | Long time horizon, high risk capacity | Growth, aggressive allocation |
| Mid-Career | Building wealth, family obligations | Balanced, diversification |
| Pre-Retirement | Shorter horizon, preservation focus | Income, moderate risk |
| Retirement | Income needs, legacy planning | Income, capital preservation |
Trusts
A trust is a legal arrangement where one party holds assets for the benefit of another.
Key Trust Parties
| Party | Role | Responsibilities |
|---|---|---|
| Grantor (Settlor/Trustor) | Creates and funds the trust | Determines trust terms, beneficiaries |
| Trustee | Manages the trust | Fiduciary duty to beneficiaries |
| Beneficiaries | Receive trust benefits | Current (income) or remainder (principal) |
Types of Trusts
| Type | Characteristics | Tax Treatment |
|---|---|---|
| Revocable Living Trust | Grantor can modify or revoke; avoids probate | Income taxed to grantor; included in estate |
| Irrevocable Trust | Cannot be changed once established | Removes assets from grantor's estate |
| Testamentary Trust | Created by will; takes effect at death | Subject to probate; taxed as estate asset |
| Charitable Remainder Trust | Provides income to donor, remainder to charity | Immediate tax deduction; income taxable |
| Charitable Lead Trust | Charity receives income, remainder to heirs | Reduces gift/estate taxes |
Revocable vs. Irrevocable Trusts
| Feature | Revocable | Irrevocable |
|---|---|---|
| Can be modified | Yes | No |
| Avoids probate | Yes | Yes |
| Avoids estate taxes | No | Yes |
| Asset protection | No (still grantor's property) | Yes |
| Income taxation | Taxed to grantor | Taxed to trust or beneficiary |
| Gift tax at creation | No (no completed gift) | Yes (completed gift) |
Trust Investment Considerations
| Consideration | Description |
|---|---|
| Prudent Investor Rule | Must invest with care, skill, and caution |
| Diversification | Generally required unless imprudent |
| Income vs. Growth | Balance needs of income and remainder beneficiaries |
| Fiduciary Duty | Trustee must act solely in beneficiaries' interests |
| Trust Terms | Follow specific instructions in trust document |
Exam Tip: Revocable trusts do NOT avoid ESTATE taxes (assets still in grantor's estate). Irrevocable trusts DO avoid estate taxes because the grantor gave up ownership.
Estates
An estate is a temporary legal entity created to settle a deceased person's affairs.
Estate Administration
| Aspect | Details |
|---|---|
| Time Horizon | Short-term (typically 6 months to 2 years) |
| Goals | Preserve value, pay debts/taxes, distribute assets |
| Investment Approach | Conservative, preserve capital |
| Executor/Administrator | Personal representative managing the estate |
| Probate | Court process to validate will and distribute assets |
Testate vs. Intestate
| Term | Definition | Process |
|---|---|---|
| Testate | Died WITH a valid will | Will directs distribution |
| Intestate | Died WITHOUT a valid will | State law determines distribution |
Estate Tax Thresholds (2024)
| Tax | Threshold |
|---|---|
| Federal Estate Tax Exemption | $13.61 million |
| Federal Gift Tax Annual Exclusion | $18,000 per recipient |
| Federal Gift Tax Lifetime Exemption | $13.61 million |
| Top Estate Tax Rate | 40% |
Exam Tip: Estate investments should be CONSERVATIVE and LIQUID because the estate needs to pay taxes, debts, and distribute assets quickly.
Business Entities
Different business types have different investment needs.
Corporate Clients
| Need | Investment Approach |
|---|---|
| Operating Cash | Short-term, liquid investments |
| Pension Obligations | Long-term, liability-matching |
| Excess Cash | Based on corporate objectives |
| Restricted Accounts | As required by agreements |
Other Business Types
| Type | Key Considerations |
|---|---|
| Partnership | Partner capital accounts, operating needs |
| LLC | Flexibility in structure and taxation |
| Sole Proprietorship | Owner's personal situation intertwined |
| Non-Profit | Mission-driven, spending requirements |
Foundations and Charities
Private Foundations
| Requirement | Details |
|---|---|
| 5% Distribution Rule | Must distribute at least 5% of investment assets annually |
| Tax Status | Tax-exempt (501(c)(3)) |
| Time Horizon | Usually perpetual |
| Investment Restrictions | May have socially responsible mandates |
| Jeopardizing Investments | Excess business holdings and certain investments prohibited |
Public Charities
| Characteristic | Description |
|---|---|
| Funding Source | Broad public support |
| Distribution | No minimum requirement |
| Tax Advantages | Generally more favorable than private foundations |
| Oversight | Less restrictive than private foundations |
Endowments
| Feature | Details |
|---|---|
| Purpose | Permanent fund to support organization |
| Spending Policy | Typically 4-5% of average assets |
| Investment Goal | Growth to maintain purchasing power after spending |
| Time Horizon | Perpetual |
Exam Tip: Private foundations must distribute at least 5% of investment assets annually for charitable purposes. This is a key testable point.
Loading diagram...
Test Your Knowledge
A private foundation must distribute what minimum percentage of its investment assets annually?
A
B
C
D
Test Your Knowledge
Which type of trust avoids BOTH probate AND estate taxes?
A
B
C
D
Test Your Knowledge
The person who creates and funds a trust is called the:
A
B
C
D
Test Your Knowledge
For 2024, the federal estate tax exemption is:
A
B
C
D
Up Next
7.2 Building Client Profiles
Continue learning
Get free exam tips·