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Reading 10 Estate Planning in a Global Context FinQuiz.com FinQuiz.com CFA Level III Item-set - Solution Study Session June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com FinQuiz Level III 2018 – Item-sets Solution Reading 10: Estate Planning in a Global Context Question ID: 11232 Correct Answer: B Maher is correct in agreeing with Hegwen’s first statement Probate is the legal process to confirm the validity of the will so that executors, heirs, and other interested parties can rely on its authenticity Maher is incorrect in agreeing with Hegwen’s second statement Under community property regimes, each spouse has an indivisible one-half interest in income earned during marriage Maher is correct in disagreeing with Hegwen’s third statement The taxation of testamentary transfers may depend upon the residency or domicile of the donor, the residency or domicile of the recipient, the tax status of the recipient, the type of asset and the location of the asset Question ID: 11233 Correct Answer: A Since the inheritance tax rate is applied on the excess value above the threshold level, we will first calculate the value of estate subject to inheritance tax Value of estate subject to inheritance tax = Inheritance tax/ tax rate = 222,000/0.30 = $740,000 Now we can calculate the threshold value as: = Total value of estate – Value of estate subject to inheritance tax = $1,090,000 – $740,000 = $350,000 Question ID: 11234 Correct Answer: C Denilson’s first statement is incorrect Premiums paid by policy holders are typically neither part of the policy holder’s taxable estate at the time of his or her death, nor subject to a gratuitous transfer tax However, in some jurisdictions the value of the policy may attract gratuitous transfer tax exposure to the policy holder, insured, or beneficiaries; it is important in the individual case to determine the tax consequences of life insurance to the parties Denilson’s second statement is also incorrect A controlled foreign company is a company located outside a taxpayer’s home country and in which the taxpayer has a controlling interest as defined by the home country law FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com Question ID: 11235 Correct Answer: B Probability that either James or Anie will survive for three years: = 0.979 + 0.9987 – 0.979×0.9987 = 0.9999 Probability that either Arun or Sinhya will survive for two years: = 0.9793 + 0.993 – 0.9793×0.993 = 0.9998 Probability that either Lionel or Mariah will survive for one year: = 0.998 + 0.9991 – 0.998 ×0.9991 = 0.9999 Question ID: 11236 Correct Answer: C First we will calculate their joint probability of survival for the next three years: Year = 0.998 + 0.9991 – 0.998×0.9991 Year = 0.981 + 0.9989 – 0.981 ×0.9989 Year = 0.979 +0.9987 – 0.979 ×0.9987 = 0.99999 = 0.999979 = 0.999972 We can solve for this question using a hit & trial approach Using an expected inflation rate of 3.5% we can calculate the real-risk free rate as: = (1+nominal risk free rate)/(1+inflation rate) – = (1.055)/(1.035) – = 1.932% The capitalized value of the core spending needs is the sum of the product of the joint probability of survival and the real spending need discounted at the real risk free rate Year Spending Joint Probability of survival Expected Spending $500,000 0.99999 $499,995 0.9810 $490,495 $500,000 0.999979 $499,989.5 0.96245 $481,214 $500,000 0.999972 $499,986 0.9442 $472,091 Discount factor Discounted Value Total Capitalized value of core spending needs: = $490,495 + $481,214 + $472,091 = $1,443,800 FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com Question ID: 11237 Correct Answer: C ிಸ Relative value (taxable gift) = ி ಳೠೞ = ఴ ሾଵା.ଵଶሺଵି.ଷሻሿ [ଵା.ଵଶሺଵି.ସሻ]ఴ = 1.0931 Question ID: 12486 Correct Answer: B The formula to calculate the future value of a tax-free gift is: FVGIFT = [1 + rg (1 – tig)]n = £312,000[1 + 0.05(1 – 0.22)]7 = £407,815.22 ≈ £407,815 Question ID: 12487 Correct Answer: A The taxable value of the gift is currently worth £388,000 [(£2,000,000 × 0.35) – £312,000] The formula to calculate the future value of the taxable transfer/gift is: FVGIFT = [1 + rg(1 – tig)]n(1 – Tg) = £388,000 × [1 + 0.05(1 – 0.22)]7(1 – 0.25) = £380,366 ≈ £380,000 Question ID: 12488 Correct Answer: A The formula to calculate relative after-tax value of a gift where the donor pays the transfer tax is as follows: 1+ rg (1− tig ) (1− Tg + TgTe ) = n 1+ re (1− tie ) (1− Te ) n RVTaxableGift = RV TaxableGift = FVGift FVBequest [1 + 0.05(1 − 0.22)]7 [1 − 0.25 + (0.25 × 0.40)] = 1.11103505 = 1.45543917 ≈ 1.455 0.76336756 [1 + 0.05(1 − 0.30)]7 (1 − 0.40) 10 Question ID: 12489 Correct Answer: C The probability of survival is calculated is as follows: p (Survival) = p (Husband survives) + p (Wife survives) – p (Husband survives) × p (Wife survives) p (Survival2nd Year) = 0.7035 + 0.8455 – (0.7035 × 0.8455) = 0.95419075 ≈ 0.9542 FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com 11 Question ID: 12490 Correct Answer: B The capitalized value of the couple’s core spending needs is calculating by multiplying each year’s annual spending amount by the corresponding joint survival probability This yields the couple’s expected spending amount for each year The annual expected spending amount is in turn discounted at the real risk-free rate, 4.5% (8.0% − 3.5%) Year Annual Spending Joint Survival Probability Expected Spending Discounted Value 65,000 0.9695 63,014.42 60,300.88 65,000 0.9542 62,022.40 56,795.77 65,000 0.9182 59,682.02 52,299.15 65,000 0.8437 54,840.65 45,987.25 N PV (Spending need) = ∑ j =1 p(Survival j )× Spending j (1 + r ) j The capitalized value of their core spending needs is thus the sum of the discounted values, i.e £215,383.04 or £215,383 12 Question ID: 12491 Correct Answer: B The applicable tax rate under the deduction method is calculated as follows: TDeductionMethod = TResidence + T Source − TResidenceTSource = 30% + 40% − (30% × 40%) = 58% Thus the applicable investment tax rate is 58% out of which 40% will be remitted to Kenya and the remainder 18% (58% − 40%) to U.K FinQuiz.com © 2018 - All rights reserved .. .Reading 10 Estate Planning in a Global Context FinQuiz. com FinQuiz Level III 20 18 – Item- sets Solution Reading 10: Estate Planning in a Global Context Question ID: 11 23 2 Correct Answer:... (8.0% − 3. 5%) Year Annual Spending Joint Survival Probability Expected Spending Discounted Value 65,000 0.9695 63, 014. 42 60 ,30 0.88 65,000 0.95 42 62, 022 .40 56,795.77 65,000 0.91 82 59,6 82. 02 52, 299.15... FVGift FVBequest [1 + 0.05(1 − 0 .22 )]7 [1 − 0 .25 + (0 .25 × 0.40)] = 1.111 035 05 = 1.455 439 17 ≈ 1.455 0.7 633 6756 [1 + 0.05(1 − 0 .30 )]7 (1 − 0.40) 10 Question ID: 124 89 Correct Answer: C The probability
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