CFA 2017 level 3 flash card flash card estate planning

CFA Level Book - Estate Planning Study online at quizlet.com/_oh9jc Techniques for Managing Concentrated Positions Sell it Monetize it - Borrow Against it Hedge it 10 Cross Hedges Short Sales of Highly Correlated Companies Short Index that is correlated Buy Puts Exchange Funds Step Process to Manage a Concentrated Position Establish written objectives and constraints for clients - includes non financial issues (like retaining control) Identify Strategies/Techniques that can best meet objectives Consider Tax Consequences Consider any other advantages/disadvantages Document Decision Make 11 Deduction Method (Partial Resolution) Individual pays full tax in source country and deducts taxes paid from residence taxes Dom taxes are paid on all of it, but with a deduction for taxes paid to Source Country 12 Estate Tax Freeze A strategy to transfer future appreciation and tax liability to future generations Typically done by Partnership or Corporate Structure 13 Exemption Method Residence Country charges no tax on income generated abroad (If source Jurisdiction) Foreign income is taxed only by source country Each income is taxed separately 14 Exit Taxes If you leave you pay a % of gains 15 Financial Capital Mkt Value of an individuals portfolio 16 Goals based DM Process for Concentrated Positions Bucket Approach Personal Risk Bucket - Protect form Poverty of drastic decline in lifestyle - LOW RISK Assets Market Risk Bucket - Maintain Standard of Living - Stocks/Bonds Remaining $ would be allocated to aspirational risk goals - Concentrated positions are OK Here 17 HC and FC vs Risk Young w/ Secure Income - HC Low Risk so FC should be High Risk Young w/ Insecure or Correlated Income HC High so FC Low Risk Young Insecure /Non Correlated Income HC Lower so FC High ***FC UP = Life Insurance Down** 18 Hedge Tools Short Against the Box - Borrow Shares and Short them to create a riskless position Creates "Riskless" Position - Borrow Against that Equity Fwd Contract - Locks in future sales price Fwd Conversion w/ options - Collar w/ Stock Price = Strike Price Total Return Swap - Swap return of the stock for Libor protective Puts Prepaid variable fwds - Collar and Loan in transaction 19 Human Capital Discounted Present Value of Future Earnings Asset Location Determines Taxation Also if the owner has control over the asset other strategies need to be discussed Concentrated Positions Cognitive Biases Conservatism - Maintain Existing Beliefs Illusion of control Anchoring & Adjustment Availability - in making decisions Concentrated Positions Emotional Biases Overconfidence Familiarity Illusion of Knowledge - Overestimating favorable returns Naïve extrapolation of past results Endowment - Thinks it's worth more than it is Loyalty Concentrated Positions - Inst and Cap Mkt Contraints Tax Law - Subject to foreign tax? Asset Type from a legal perspective (is it an S corp? Partnership) Margin Lending Rules - Limit the amount that can be lent Insider restrictions, regs, reporting Employee Minimum Holding Period Capital Market Limitations (IPOs,No Derivatives, Etc.) Concentrated Real Estate - Mortgage Financing -Donor Advisor - Charitable trust -Sales and Leaseback Core Capital Assets Needed to meet individuals Liabilities + Reserve Credit Method Residence Country Gives a tax credit for taxes paid in a source country, The tax paid on foreign source is greater of domestic or source country rates If domestic is higher than foreign extra $ goes to Domestic 20 Monetization Hedge as much of the risk as possible w/o triggering taxes Borrow using hedged position as collateral Better the hedge, the higher the LTV 21 Privately Held Businesses Strategic Buyer - Best Price Financial Buyer - Private Equity Recapitalization - Used for Established but less mature companies - Owner can reduce his holdings and maintain some ownership Sales to Key Employees - Usually at a discount - Owner financed - Could damage relationship Divestiture - Sell non-essential businesses and buy out owner's shaes Gifts Personal Line of Credit secured by company IPO ESOP 22 Qualified Intermediaries Foreign Banks - Collect info on all clients, but only disclose the names of US Customers 23 Relative Value of a Tax Free & Taxable Gifts Paper Card 24 Tax Jurisdiction (Source Vs Residence) Def Source - Countries levy tax on all income w/in it borders Residence - Country taxes the income of it's residents 25 Total Wealth HC + FC ... Collect info on all clients, but only disclose the names of US Customers 23 Relative Value of a Tax Free & Taxable Gifts Paper Card 24 Tax Jurisdiction (Source Vs Residence) Def Source - Countries