1.2 Entity, Trust and Custodial Accounts

Corporate and Partnership Accounts

When opening accounts for legal business entities, operations personnel must examine organizational documents to confirm legal existence, identify authorized agents, and verify investment permissions.

Corporate Accounts

A corporation is an independent legal entity created under state law. To open a corporate brokerage account, the firm's operations department must obtain and verify:

1. Corporate Charter (Articles of Incorporation): Proves the legal existence of the corporation in its state of domicile.
2. Corporate Resolution: A formal document passed by the corporate Board of Directors and certified under corporate seal by the Corporate Secretary. The resolution explicitly designates which corporate officers or employees are authorized to open accounts, execute trades, deposit funds, and withdraw capital.
3. Investment and Borrowing Authority: Obtain the organizational records, resolutions and authorized-signature evidence required by firm procedures. Margin and options require appropriate powers and separate approvals; an officer’s title is insufficient.

Partnership Accounts

A partnership is an association of two or more persons carrying on as co-owners of a business for profit:

• General Partnership (GP): All general partners share management responsibility and retain unlimited personal liability for the debts and liabilities of the firm. Any general partner can bind the partnership in trading transactions unless specifically restricted.
• Limited Partnership (LP): Consists of at least one general partner (who manages operations and retains unlimited personal liability) and one or more limited partners (passive investors whose liability is strictly limited to their invested capital). Do not infer a limited partner’s authority from their investment; inspect the agreement and applicable law.
• Operational Documentation: The operations department must collect the Partnership Agreement, which outlines business objectives, names the designated general partners authorized to transact, and details borrowing authority. Any amendment to the partnership agreement or change in partner composition requires updated documentation.

Trust Accounts

A trust is a fiduciary arrangement whereby a grantor transfers legal title of assets to a trustee for the benefit of one or more beneficiaries.

• Grantor (Settlor/Trustor): The individual who creates and funds the trust.
• Trustee: The designated fiduciary who holds legal title and manages the trust assets according to the instructions in the trust agreement. The trustee must follow the instrument and applicable fiduciary law, exercising the required care for beneficiaries.
• Beneficiary: The individual or entity entitled to receive trust income, principal, or both.

Revocable vs. Irrevocable Trusts

• Revocable Trust (Living Trust): The grantor retains the right to alter, amend, or terminate the trust at any time. Trust assets remain part of the grantor's gross taxable estate, and investment income is taxed directly to the grantor. Because the grantor maintains control, creditors may reach revocable trust assets.
• Irrevocable Trust: The grantor irrevocably relinquishes legal ownership and control over the transferred assets. Modification powers and tax treatment depend on the instrument and law. Irrevocability alone does not establish exclusion from the grantor’s taxable estate.

Operational Verification of Trust Powers

The operations department must inspect the Trust Agreement (or a certified Certificate of Trust) to verify:

• The identity and legal authority of the named trustee(s) and successor trustees.
• Permissible investments under the trust terms.
• Borrowing and Margin Powers: Standard trust accounts are opened as cash accounts. Margin borrowing, pledging assets for collateral, and short selling are strictly prohibited unless the trust agreement explicitly grants the trustee borrowing and margin authority.

Custodial Accounts (UGMA & UTMA)

Custodial accounts established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) allow adults to transfer property to minors without creating a formal trust:

• One Custodian, One Minor: An account can name only one custodian and one minor beneficiary. Joint custodians (such as both parents together) or multiple minor beneficiaries in a single account are strictly prohibited.
• Irrevocable Gift: Any transfer of cash or securities into the account represents an irrevocable, indefeasible gift. Once deposited, the assets become the unconditional property of the minor and can never be reclaimed by the donor.
• Taxation: The minor's Social Security Number (SSN) is used for tax reporting. Unearned investment income above statutory thresholds is subject to the IRS "kiddie tax" rules, taxing excess income at the parents' marginal rate.
• Trading and Margin Restrictions: Custodial accounts must be established strictly as cash accounts. Margin borrowing, pledging custodial assets, short sales, and speculative uncovered options are strictly prohibited. Covered call writing is generally permitted if authorized by firm supervisory procedures.
• Age of Majority / Custody Transfer:
  • UGMA: Assets must be turned over to the minor upon reaching the statutory age of majority (typically 18 in most states). UGMA accounts are generally limited to bank deposits, cash, and publicly traded securities.
  • UTMA: Allows broader asset types, including real estate and partnership interests. Furthermore, the donor may specify that custodial authority continues until the minor reaches age 21 (or age 25 in certain jurisdictions).

Sources checked 2026-10-20: FINRA Series 99 outline, FINRA customer accounts, FinCEN CDD FAQs.