Reading 10 Estate Planning in a Global Context FinQuiz.com FinQuiz.com CFA Level III Item-set - Question 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 Item-set ID: 11231 Questions 1(11232) through 6(11237) relate to Reading 10 Renold Hegwen Case Scenario Renold Hegwen, CFA, works as an investment advisor at Brooks Associates, an investment advisory firm established in Florida Hegwen provides estate planning advice to private clients and has a team of four members working for him Hegwen’s team includes Jim Maher, a legal advisor who is an expert in tax and inheritance laws in different jurisdictions Hegwen has a keen interest in tax laws and holds regular discussions with Maher regarding different tax issues involved in estate planning During a meeting with Maher, Hegwen made the following statements Statement 1: “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.” Statement 2: “Under community property regimes, each spouse has a divisible one-half interest in income earned during marriage.” Statement 3: “The taxation of testamentary transfers may depend upon the residency or domicile of the donor but not on the residency or domicile of the recipient.” Maher agreed with Hegwen’s first two statements but disagreed with his third statement One of Hegwen’s clients, Susan Watson, passed away recently She was an unmarried individual and at the time of her death, she had a total estate value of $1,090,000 Her children are the beneficiaries of the estate Watson’s state imposes a tax rate of 30% payable by the trustees of the estate and any amounts above the inheritance tax threshold level are taxed at 30% Based on his calculations, Hegwen has estimated that the inheritance tax payable by Watson’s estate is $222,000 During a weekly meeting of the Estate Planning Department at Brooks Associates, one of Hegwen’s associates, Christopher Denilson, made the following statements: Statement 1: “Premiums paid by the policy holder are neither part of the policy holder’s taxable estate at the time of his or her death, nor subject to a gratuitous transfer tax.” Statement 2: “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 law of the foreign country.” Hegwen agreed with Denilson’s first statement but disagreed with his second statement FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com Hegwen is analyzing the accounts of recently retired clients He has gathered the following data relating to three different married couples: Exhibit Year Age 63 64 65 James Smith P(Survival) 0.998 0.981 0.979 Anie Smith Age 61 62 63 P(Survival) 0.9991 0.9989 0.9987 Exhibit Arun Sharma Year Age P(Survival) 66 0.9891 67 0.9793 68 0.9978 Sinhya Sharma Age 64 65 66 P(Survival) 0.991 0.993 0.0.996 Exhibit Year Age 81 82 83 Lionel Ronaldo P(Survival) 0.998 0.989 0.979 Mariah Ronaldo Age 77 78 79 P(Survival) 0.9991 0.9981 0.0.987 James and Anie Smith live in the U.S and would like to maintain an annual spending of $500,000 The nominal risk free rate is 5.5% and the capitalized value of their core capital spending needs over the next three years is $1,443,800 One of Hegwen’s clients, Albie Steyn, is considering transferring his investment portfolio of $3 million directly to his grandson, who is subject to a marginal tax rate of 30% The portfolio earns an average annual pretax rate of return of 12% and Steyn pays a marginal tax rate of 40% Local jurisdiction allows a tax-free transfer of $2.0 million, whereas the remaining amount will be taxable at a tax rate of 40%, which will be the responsibility of the donee Steyn has consulted Hegwen as he is uncertain whether it would be more beneficial if the gift to his grandson is delayed and transferred as a bequest years from now Hegwen has determined that the transfer will be subject to a tax rate of 40% whether it is transferred as a gift or is delayed and transferred at the end of 8th year FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com FinQuiz Question ID: 11232 With respect to his response to Hegwen’s statements, Maher is least likely correct with respect to: A statement only B statement only C statement only FinQuiz Question ID: 11233 Which of the following is closest to the inheritance tax threshold value for Watson’s estate? A $350,000 B $408,000 C $450,000 FinQuiz Question ID: 11234 Denilson is most likely correct with respect to: A statement only B statement only C none of the statements FinQuiz Question ID: 11235 Which of the following is least likely to be the highest number? A Probability that either James or Anie will survive for three years B Probability that either Arun or Sinhya will survive for two years C Probability that either Lionel or Mariah will survive for one year FinQuiz Question ID: 11236 Based on the data relating to Smiths’ portfolio, which of the following is closest to the expected inflation rate in the U.S.? A 2.5% B 3.0% C 3.5% FinQuiz Question ID: 11237 Which of the following is closest to the relative after-tax value of the $1 million gift to Steyn’s grandson? A 0.9148 B 1.0671 C 1.0931 FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com FinQuiz Item-set ID: 12485 Questions 7(12486) through 12(12491) relate to Reading 10 Dawyne and Joan Conley Case Scenario Dwayne and Joan Conley are a retired couple aged 84 and 80, respectively They live in London after relocating from Kenya, where they had lived for 25 years The couple’s estate is worth £2 million and earns an average annual pre-tax return of 5% They would like to gift 35% of their estate to their son, Ethan The remainder of the estate will be donated to charity upon their deaths, which is approximately in seven years time Ethan pays a marginal tax rate of 22% while the couple pays a tax rate of 30% on investment returns Current U.K laws permit the couple to make a tax-free transfer worth £312,000 from their estate Any amount exceeding this statutory limit will be subject to a 25% gratuitous transfer tax or a 40% testamentary transfer tax The couple plans to utilize this statutory allowance to reduce the value of the taxable base of the gift The couple’s current annual spending needs amount to £65,000 in real terms They would like to maintain this spending level Their survival probabilities for the next four years, based on their current ages, are illustrated below Inflation is expected at 3.5% while the nominal risk-free rate is 8% Exhibit The Conley’s Survival Probabilities Dwayne Year Joan Age p (Survival) Age p (Survival) 85 0.7564 81 0.8746 86 0.7035 82 0.8455 87 0.6784 83 0.7456 88 0.5747 84 0.6325 The couple still retains a portion of their investments in Kenya Consequentially, these investments are being taxed at local investment tax rates of 40% In contrast, U.K investment tax rates stand at 30% FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com FinQuiz Question ID: 12486 Given the annual exclusion amount, the future value (in seven years time) of the tax-free transfer, made to Ethan, will be closest to: A £312,945 B £407,815 C £706,148 FinQuiz Question ID: 12487 Assuming that Ethan pays transfer taxes, the future after-tax value of his gift (in excess of the statutory allowance) will be closest to: A £380,000 B £507,000 C £686,000 FinQuiz Question ID: 12488 If the Conley’s paid the transfer taxes on the gift made to Ethan, the relative after-tax value would be closest to: A 1.455 B 1.541 C 1.802 FinQuiz Question ID: 12489 10 The Conley’s probability of survival for year two is closest to: A 0.7745 B 0.9182 C 0.9542 FinQuiz Question ID: 12490 11 The capitalized value of the couple’s core spending needs over the next four years approximates to (using an additive technique to calculate real/nominal rate): A £199,208 B £215,383 C £231,956 FinQuiz.com © 2018 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz.com FinQuiz Question ID: 12491 12 Kenya has a source jurisdiction on income whereas U.K has a residence-based tax system Based on this fact, which of the following statements accurately outlines the applicable tax rate and remittance amounts under the deduction method? A The applicable tax rate is 40% of which 40% is remitted to Kenya and 0% to U.K B The applicable tax rate is 58% of which 40% is remitted to Kenya and 18% to U.K C The applicable tax rate is 58% of which 58% is remitted to Kenya and 0% to U.K FinQuiz.com © 2018 - All rights reserved .. .Reading 10 Estate Planning in a Global Context FinQuiz. com FinQuiz Item- set ID: 11 23 1 Questions 1(11 23 2 ) through 6(11 23 7 ) relate to Reading 10 Renold Hegwen Case Scenario Renold Hegwen, CFA, ... real/nominal rate): A £199 ,20 8 B ? ?21 5 ,38 3 C £ 23 1 ,956 FinQuiz. com © 20 18 - All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz. com FinQuiz Question ID: 124 91 12 Kenya has a source... All rights reserved Reading 10 Estate Planning in a Global Context FinQuiz. com FinQuiz Item- set ID: 124 85 Questions 7( 124 86) through 12( 124 91) relate to Reading 10 Dawyne and Joan Conley Case