2019 CFA level 3 qbank reading 12 estate planning in a global context answers

10/11/2018 Learning Management System Question #1 of 46 Concerning a married couple, which of the following statements is most accurate? When one of them dies: A) the value of the estate in excess of the estate tax exemption is transferred to the surviving spouse on a tax-free basis B) estate taxes are assessed to their half of the estate, and the net estate is transferred to the surviving spouse on a tax-free basis .in C) their half of the estate is transferred to the surviving spouse on a tax-free basis en tre Explanation When one of them dies, their half of the estate is transferred to the surviving spouse on a tax-free basis Related Material SchweserNotes - Book o m Question #2 of 46 bo ok c (Study Session 5, Module 12.4, LOS 12.f) Hans, 70, is considering gifting up to the tax-free limit of €200,000 to his son to help reduce the w w estate tax (25%) that would be payable when he passes away Hans' e ective tax rate is 20% and his son's e ective tax rate is 30% If Hans is expected to pass away in 10 years, what is the w relative value of making the gift? Assume both Hans and his son earn a 5% annual pretax rate of return on the funds A) 1.27 B) 1.57 C) 1.33 Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 1/29 10/11/2018 Learning Management System n [1+rg (1−t ig )] RV tax-free = n [1+re (1−t ie )] (1−Te ) [1+0.05(1−0.30)] = [1+0.05(1−0.20)] = 1.4106 1.1102 10 10 (1−0.25) = 1.27 (Study Session 5, Module 12.3, LOS 12.d) > Related Material en tre in SchweserNotes - Book Question #3 of 46 bo ok c With respect to the e ectiveness of life insurance for individual investors, it is: A) tax e cient, and the degree of control over the management of the assets is unlimited B) tax ine cient, and the degree of control over the management of the assets is m limited C) tax e cient, and accessibility of assets held inside the policy can be either good or w w Explanation o poor, depending upon the terms of the policy w With respect to the e ectiveness of life insurance for individual investors, it is tax e cient, accessibility of assets held inside the policy can be either good or poor depending upon the terms of the policy, and the degree of control over the management of the assets is limited Depending upon the type of policy some of the value of the policy may be withdrawn as a tax free loan Death bene ts paid to bene ciaries are generally tax free with no reporting required (Study Session 5, Module 12.4, LOS 12.h) Related Material SchweserNotes - Book Question #4 of 46 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 2/29 10/11/2018 Learning Management System A 40-year-old investor is considering setting up an account separate from her personal account for tax purposes In the following list of estate planning tools, which of the following categories of accounts would generally have the shortest term? A) Foundation B) Generation-skipping trust C) Revocable trust Explanation in In a revocable trust the settlor, person who transferred assets into the trust, has the right to regain control of the trust assets thus this category would generally have the shortest term Foundations have a potentially in nite term Generation-skipping trusts are very long-term en tre (Study Session 5, Module 12.4, LOS 12.g) Related Material Question #5 of 46 bo ok c SchweserNotes - Book When an investor makes a charitable gift of appreciated securities: m A) usually no gift transfer taxes are assessed .o B) the tax rate is based upon the gifting rate w w C) the recipient must pay the capital gains taxes Explanation w When an investor makes a gift of appreciated securities usually no gift transfer taxes are due, the investor donating the securities is allowed to take an income tax deduction in the amount of the fair market value of the securities, and no capital gains taxes are assessed so the investment continues to grow tax free at the charitable organization (Study Session 5, Module 12.4, LOS 12.f) Related Material SchweserNotes - Book Question #6 of 46 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 3/29 10/11/2018 Learning Management System When an investor makes a charitable gift of appreciated securities, in most instances the investor is: A) not able to take a deduction B) able to take a deduction in the amount of the current fair market value of the gift C) able to take a deduction in the amount of the capital gain Explanation When an investor makes a gift of appreciated securities to a charitable organization, in most countries the investor is able to take a deduction in the amount of the current fair market value of the gift .in (Study Session 5, Module 12.4, LOS 12.f) Related Material bo ok c Question #7 of 46 en tre SchweserNotes - Book Maddie, 77, is wondering whether it would be wise to help her granddaughter, Emily, reduce her mortgage with funds Maddie plans to leave to Emily in her will Maddie has $150,000 m available to gift today and has a life expectancy of two years If Maddie holds onto the funds she expects to earn 3.0% annually, subject to an e ective rate of tax of 18% The rate of return o that Emily will receive is expected to be 4.5% annually which is e ectively the rate of interest on w w the mortgage Emily's e ective tax rate on these funds will be 0% If the tax on gifts is 40% and the tax on estate bequests is 35%, should Maddie gift the funds now assuming Emily pays the w gift tax A) No, as the relative value of the taxable gift is less than B) No, as the estate tax is less than the gift tax C) Yes, as the relative value of the taxable gift is greater than Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 4/29 10/11/2018 Learning Management System n [1+rg (1−t ig )] (1−T g ) RV taxable = n [1+re (1−t ie )] (1−T e ) [1+0.045(1−0.0)] (1−0.40) = [1+0.03(1−0.18)] (1−0.35) = 0.6552 0.6824 = 0.96 Related Material Question #8 of 46 bo ok c SchweserNotes - Book en tre (Study Session 5, Module 12.3, LOS 12.e) in The relative value of the gift is less than 1.0, it would be more bene cial for the transfer to occur upon Maddie's death Note that the answer choices all focus on RV considerations only so not bring up other issues (e.g there is another bene t in that by waiting, Maddie retains the ability to change her mind) Also the assumption of 0% tax on the mortgage interest was explicitly given and also reasonable Interest is often tax deductible so $100 of interest costs $100 of pretax income and reduces after-tax disposable income by $100, an e ective tax on the deductible interest of 0% by applying a tax to the: m Deemed disposition is a taxation method in which a country can mitigate against lost revenue o A) estimate future income of citizens who move to another country w w B) unrealized gains on assets of citizens who move to another country C) total value of assets owned by citizens and the estimated future income of citizens w who move to another country Explanation Deemed disposition is a kind of exit tax and it is normally applied to any unrealized gain on the assets Exit taxes in the form of taxing income for some speci ed number of years after moving is a di erent kind of exit tax, but it is not deemed disposition and the taxes are based on actual future income as earned, not estimated future income (Study Session 5, Module 12.5, LOS 12.j) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 5/29 10/11/2018 Learning Management System Question #9 of 46 A wealth owner is most likely to make a trust the bene ciary on a life insurance policy in which of the following circumstances? A) The tax on gifts is high B) The wealth owner wishes to leave money to a charity C) The ultimate bene ciary is a minor Explanation (Study Session 5, Module 12.4, LOS 12.h) SchweserNotes - Book m Question #10 of 46 bo ok c Related Material en tre in The trust can be structured to allow the trustee to use the trust assets to provide for the bene ciary's needs, but delay transfer of the assets until the minor is old enough to take responsibility for the assets Given the case facts there is no particular reason not to make a direct distribution to the charity It might even be better to make an outright gift now and get a tax deduction now There is no information to assume gift tax rates would be treated di erently for a direct payout or payout to a trust .o Which of the following is most likely to be a factor in determining a tax payer's tax residency w w country? A) Location of the family home w B) Foreign language pro ciency C) Percentage of income earned within the country Explanation Residency refers to where you are treated as living for tax purposes Having a residence or how long you spend in the country are objective plausible indicators of residency Language skills are more subjective and not generally considered Percentage of income is not a factor because it is not unusual for income to be earned from multiple countries, hence the existence of tax treaties to deal with multiple income sources (Study Session 5, Module 12.5, LOS 12.i) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 6/29 10/11/2018 Learning Management System Question #11 of 46 Using the credit method and assuming an individual is taxed on foreign income at a rate of 50% and their domestic tax rate is 40% what percentage of taxes would they pay to their resident country on the foreign income? A) 10% B) 0% C) 40% .in Explanation en tre Under the credit method the residence country allows the individual to take a tax credit for taxes paid to a source country The tax rate paid by the resident on the foreign source income is the greater of the domestic and source tax rates bo ok c If the individual lives in a residence jurisdiction that charges 40% taxes on world-wide income, and they have income from a foreign country that enforces source jurisdiction and charges 50% income tax, the individual will end up paying 50% income tax to the foreign country If the tax rates were reversed (i.e., 50% domestic, 40% foreign) the individual would still pay tax on the foreign source income at 50%, but the taxes will be split between the resident and source countries: 10% to the residence country; 40% to the source country Related Material w w o SchweserNotes - Book m (Study Session 5, Module 12.5, LOS 12.k) w Question #12 of 46 Which of the following equations represents the relative value of a tax free gift? A) [1 - Tg  + (Tg T e x g/e)][1 + r g (1 - t ig )] n n [1 + r e (1 - t ie )] (1 - Te ) B) (1−T g )[1+rg (1−tig )] n n [1+re (1−tie )] (1−T e ) C) [1 + r g (1 - t ig )] n n [1 + r e (1 - t ie )] (1 - Te ) Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 7/29 10/11/2018 Learning Management System Equation #1 below shows the relative value of a tax free gift if it is gifted today (numerator) compared to if it is gifted as part of an estate (denominator) [1 + rg (1 - tig )] FVtax-free gift RV tax-free gift  =  FVbequest  =  n n [1 + re (1 - tie )] (1 - Te ) Equation #2 below shows the relative value of a taxable gift (numerator) when the gift is subject to gift taxes compared to if it is gifted as part of an estate (denominator) n (1−T g )[1+rg (1−t ig )] FVtaxable gift RV taxable gift = FVbequest = n [1+re (1−t ie )] (1−T e ) [1 - Tg  + (T g T e x g/e)][1 + rg (1 - tig )] RV taxable gift  =  n [1 + re (1 - tie )] (1 - Te ) (Study Session 5, Module 12.3, LOS 12.d) Related Material m Question #13 of 46 bo ok c SchweserNotes - Book n en tre .in Equation #3 below shows the relative value of a taxable gift when the donor pays the gift taxes (numerator) compared to if it is gifted as part of an estate (denominator) The type of jurisdiction where a country taxes the income of its residents regardless of where o they live and where the income was generated is called: w w A) territorial tax jurisdiction B) residence jurisdiction w C) source jurisdiction Explanation Under residence jurisdiction, the most prevalent type of jurisdiction, a country taxes the income of its residents, whether generated inside or outside the country Citizens of residence jurisdiction countries pay taxes on their worldwide income, regardless of their current place of residence (i.e., whether currently living in the country or not) Under source jurisdiction (a.k.a territorial tax system) a country levies taxes on all income generated within its borders, whether by citizens or foreigners (Study Session 5, Module 12.5, LOS 12.i) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 8/29 10/11/2018 Learning Management System Question #14 of 46 In which of the following circumstances would an insurance policy most likely be bene cial for estate planning? A) There is not likely to be any legal challenge to the will B) The estate has a relatively large and illiquid asset C) The jurisdiction where the estate lies has no estate or inheritance taxes .in Explanation (Study Session 5, Module 12.4, LOS 12.h) SchweserNotes - Book m Question #15 of 46 bo ok c Related Material en tre Life insurance policy payouts can provide cash to meet obligations If the other assets are illiquid, this will be more useful With no estate or inheritance tax, liquidity needs will be lower, not higher Insurance payouts can also be structured to avoid probate and so would be more useful if legal challenges were expected .o The type of jurisdiction where a country taxes assets transferred from one person to another w w within a country regardless of whether or not they are citizens or foreigners is called: A) source jurisdiction transfer taxes w B) residence jurisdiction transfer taxes C) territorial tax jurisdiction transfer taxes Explanation Under source jurisdiction transfer taxes are levied on assets located within (e.g., real estate) or transferred within a country, whether by citizens or foreigners Under residence jurisdiction citizens and residents pay transfer taxes, regardless of the world-wide location of the assets (Study Session 5, Module 12.5, LOS 12.j) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 9/29 10/11/2018 Learning Management System Question #16 of 46 The primary motivation for estate planning is to: A) minimize taxes B) maximize returns C) match investment horizon objectives Explanation in The primary motivation for estate planning is to minimize taxes (Study Session 5, Module 12.4, LOS 12.f) en tre Related Material Question #17 of 46 bo ok c SchweserNotes - Book Investors use estate planning tools for all of the following reasons EXCEPT to: m A) maximize wealth for heirs or others .o B) maximize investment returns w w C) increase the e ciency of the transfer of assets to others Explanation w Investors often use estate planning tools such as trusts, foundations, and life insurance, to minimize taxes and increase the e ciency of the transfer of assets to others In so doing, they will maximize the value of wealth given to heirs or others but has little or no impact upon investment returns (Study Session 5, Module 12.4, LOS 12.f) Related Material SchweserNotes - Book Question #18 of 46 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 10/29 10/11/2018 Learning Management System Hiding income is normally illegal Depending on the tax situation he may owe taxes to C or D or both, but a blanket decision not to report the income is unwise without much more speci c tax law knowledge (which is not covered in the CFA material) Thus it cannot be called legal tax avoidance Tax avoidance refers to knowing the laws and selecting legal methods to lower the tax burden, such as extending the holding period to defer capital gains taxation If there were a credit method treaty and D taxes the income at the source, he would likely still owe additional taxes to C as the credit method provides only partial tax relief (Study Session 5, Module 12.5, LOS 12.l) Related Material in SchweserNotes - Book en tre Question #26 of 46 Which of the following best describes estate planning? A) Transferring your assets during your lifetime or at death in the most e cient bo ok c manner to the individuals you intend to receive them B) Transferring your assets at death to the individuals you intend to receive them in the most e cient manner C) Delineating how your assets will be transferred so a court does not decide for you m Explanation w w o Estate planning is the planning process associated with transferring your estate to others during your lifetime or at death so the assets go to the individuals or entities you intend and in the most e cient way (Study Session 5, Module 12.1, LOS 12.a) w Related Material SchweserNotes - Book Question #27 of 46 Which of the following equations represents the relative value of a gift when it is subject to taxes? A) [1 + r g (1 - t ig )] n n [1 + r e (1 - t ie )] (1 - Te ) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 15/29 10/11/2018 Learning Management System B) (1 - Tg  + T g T e )[1 + r g (1 - t ig )] n n [1 + r e (1 - t ie )] (1 - Te ) C) [(1 - Tg )][1 + r g (1 - t ig )] n n [1 + r e (1 - t ie )] (1 - Te ) Explanation Equation #1 below shows the relative value of a taxable gift (numerator) when the gift is subject to gift taxes compared to if it is gifted as part of an estate (denominator) n RV tax-free gift  =  FVbequest [1 + rg (1 - tig )]  =  n [1 + re (1 - tie )] (1 - Te ) in FVtax-free gift [PV(1 - Tg )][1 + rg (1 - tig )] FVtaxable gift RV taxable gift  =  FVbequest en tre Equation #2 below shows the relative value of a tax free gift if it is gifted today (numerator) compared to if it is gifted as part of an estate (denominator)  =  n n PV[1 + re (1 - tie )] (1 - Te ) bo ok c Equation #3 below shows the relative value of a taxable gift when the donor pays the gift taxes (numerator) compared to if it is gifted as part of an estate (denominator) [1 - Tg  + (T g T e x g/e)][1 + rg (1 - tig )] RV taxable gift  =  n n [1 + re (1 - tie )] (1 - Te ) Related Material w w o SchweserNotes - Book m (Study Session 5, Module 12.3, LOS 12.d) w Question #28 of 46 Using legal tax reduction strategies with the intention of avoiding paying taxes altogether is: A) expected of any tax paying entity or individual and is legal B) considered tax evasion which is illegal C) anticipated by government taxing authorities which prosecute such individuals for not paying taxes Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 16/29 10/11/2018 Learning Management System Tax avoidance is legal Any tax-paying entity or individual would be expected to minimize the amount of taxes paid through various legal tax-reduction strategies Tax evasion, on the other hand, is hiding, misrepresenting, or otherwise not recognizing income so as to illegally avoid taxation (Study Session 5, Module 12.5, LOS 12.l) Related Material SchweserNotes - Book en tre In relation to trusts, which of the following is least correct? in Question #29 of 46 A) In a discretionary trust the trustee has complete discretion to distribute the assets and income earned in the trust B) In a revocable trust the settlor who funds the trust is likely to be responsible for the bo ok c trust’s tax liabilities C) An individual concerned with future legal liabilities should most likely consider an irrevocable trust Explanation w w o m The trustee of a discretionary trust has discretion to make decisions consistent with the directions in and intent of the trust document; not unlimited discretion Thus the statement of complete discretion is least correct The other statements are true Revocable trusts normally have no tax advantages and the grantor remains responsible for the tax liabilities of the trust An irrevocable trust may have legal advantages in sheltering the trust assets from claims on the grantor w (Study Session 5, Module 12.4, LOS 12.g) Related Material SchweserNotes - Book Question #30 of 46 Which of the following methods results in a partial resolution to the residence-source ict on foreign sourced income taxes? A) Exemption method https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 17/29 10/11/2018 Learning Management System B) Deduction method C) Credit method Explanation The Deduction Method provides only partial resolution of the residence-source ict Under the deduction method, the individual pays the full tax to the source country, and is only allowed to deduct the amount of taxes paid to the source country in calculating total world-wide income The Credit Method provides complete resolution of the residence-source ict Under the credit method the residence country allows the individual to take a tax credit for taxes paid to a source country The tax rate paid by the resident on the foreign source income is the greater of the domestic and source tax rates Related Material SchweserNotes - Book o m Question #31 of 46 bo ok c (Study Session 5, Module 12.5, LOS 12.k) en tre in The Exemption Method also provides complete resolution of the residence-source ict Under the exemption method, the country of residence charges no income tax on income generated in a foreign country that enforces source jurisdiction (i.e., that income is exempt from domestic taxation) This e ectively eliminates the residence-source ict, because foreign-generated income is taxed by the source country, only w w Which of the following statements regarding life expectancy and life span is CORRECT? A) Life expectancy is unknown, and life span is unknown w B) Life expectancy is unknown, but life span is known C) Life expectancy is known, but life span is unknown Explanation Life expectancy is known, but the actual life span for an individual is unknown (Study Session 5, Module 12.2, LOS 12.c) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 18/29 10/11/2018 Learning Management System Question #32 of 46 Joint ownership with rights of survivorship, living trusts, retirement plans, and life insurance are all means of: A) avoiding probate and transferring assets without the use of a will B) transferring assets through probate without the use of a will C) avoiding probate with the use of a will Explanation (Study Session 5, Module 12.1, LOS 12.a) SchweserNotes - Book m Question #33 of 46 bo ok c Related Material en tre in Probate is a legal process that takes place at death, during which a court determines the validity of the decedent's will, inventories the decedent's property, resolves any claims against the decedent, and distributes remaining property according to the will Since probate can be expensive, time consuming, and open to the public, individuals can avoid going through probate without a will by using joint ownership with rights of survivorship, living trusts, retirement plans, and life insurance .o Once an individual reaches the retirement age a main concern is: w w A) safety of principal, with investment income being secondary B) establishing a spending rate that will not result in their outliving their assets w C) reallocating nancial assets to adopt a more conservative pro le Explanation When an individual reaches retirement age the primary issue is to establish a spending rate (i.e., an income distribution plan) that will not result in their outliving their assets (Study Session 5, Module 12.2, LOS 12.c) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 19/29 10/11/2018 Learning Management System Question #34 of 46 When foreign sourced income is taxed by the foreign country and not the resident country this is called the: A) Exemption method B) Credit method C) Deduction method Explanation en tre in The Exemption Method provides complete resolution of the residence-source ict Under the exemption method, the country of residence charges no income tax on income generated in a foreign country that enforces source jurisdiction (i.e., that income is exempt from domestic taxation) This e ectively eliminates the residence-source ict, because foreigngenerated income is taxed by the source country, only bo ok c The Deduction Method provides only partial resolution of the residence-source ict Under the deduction method, the individual pays the full tax to the source country, and is only allowed to deduct the amount of taxes paid to the source country in calculating total world-wide income The Credit Method provides complete resolution of the residence-source ict Under the credit method the residence country allows the individual to take a tax credit for taxes paid to a source country The tax rate paid by the resident on the foreign source income is the greater of the domestic and source tax rates Related Material w w o SchweserNotes - Book m (Study Session 5, Module 12.5, LOS 12.k) Christine Davis is single, 31 years old, and is the chief nancial o cer of a small aerospace w parts rm located in the Midwest U.S., Oshkosh Aerospace Davis has approached William Weinke, her nancial planner, for help in preparing an investment policy statement and accompanying asset allocation Tom Johnson is Weinke's assistant Davis would like to retire when she is 63 years old She has stated that, relative to her mortgage and college loans, she does not have assets of signi cant size and does not expect to receive an inheritance She has had di culty accumulating signi cant savings because she only recently was promoted to CFO and before that did not receive a signi cant salary Despite her new job and title, Davis does not expect to have much exibility in her retirement contributions as she has just adopted her sister's four children due to some unfortunate circumstances She expects to keep working at Oshkosh Aerospace until retirement because she enjoys the quality of life in https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 20/29 10/11/2018 Learning Management System her job Weinke states that given Davis's age, he believes that Davis's investment policy should emphasize mostly equities Given her level of comfort with the service and advice Weinke has provided, Davis has recommended Weinke's services to the former president of her company, Frank Brooks Franks is 69 years old and retired two years ago from his position as the CEO and chairman of the board of Oshkosh Aerospace He is very wealthy with a portfolio of $14 million and very little debt The income from his portfolio and pension income is $600,000 annually after tax His living expenses consist of necessities, vacations, discretionary spending on luxuries, and gifts to family and charities His expenses total $400,000 annually Weinke states that given his age and retired status, he believes that the investment policy for Brooks should emphasize mostly in investment grade bonds en tre Given that Johnson has only been working in portfolio management for less than a year, Weinke likes to test his knowledge of investment principles before letting Johnson consult with clients on his own He asks Johnson, between Davis and Brooks, who is at the most risk for outliving their assets, and what is the most e ective method of controlling for it Johnson states bo ok c that Davis is at the most risk and that the most e ective method of controlling for it would be to recommend a life annuity for her when she retires In a later discussion the next week, Weinke and Johnson discuss the assets available to investors in general Weinke states that tax e ciency is an important consideration and that m the tax e ciency of assets varies considerably Weinke states that high net worth individuals minimize taxes by transferring assets to their heirs which contain a valuation discount like o partnerships and family businesses Johnson states that valuation discounts are additive, for w w example, a 10% liquidity discount can be added to a 10% minority discount to equal a total valuation discount of 20% w Weinke and Johnson often receive sales calls from investment bankers who are attempting to sell an issue of securities A recent call focused on an issue of investment grade bonds Discussing their attractiveness for their clients in general, Johnson states that wealthy investors should be concerned about the tax implications from holding bonds as part of their taxable investment portfolio Speci cally, he states that because the coupon income from bonds cannot be deferred, bonds are often unattractive investments from a tax standpoint for wealthy individuals Weinke states that if investors want to minimize the tax implications of their investments in the taxable portion of the their portfolio they should buy equities because they allow the investor to defer the capital gains over extended periods of time Brooks is considering selling some of his equity holdings because he would like to make a major donation to his alma mater and have a building named after him One of the stocks he https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 21/29 10/11/2018 Learning Management System would like to liquidate is Dumas Environmental, his former father-in-law's company He accumulated the shares over time and has asked Weinke to help him decide which shares to sell Weinke states that instead of liquidating the stock himself, Brooks may want to gift the shares to his alma mater If the stock is gifted, capital gains taxes would be avoided entirely In this way, Weinke states that Brooks would not have to liquidate as much stock to provide the university with the same e ective gift Johnson adds that the gift can also provide a deduction against ordinary income for Brooks The advantage here, Johnson states, is that instead of in incurring taxes by liquidating the stock, Brooks could actually save on taxes en tre Question #35 of 46 Are Weinke's statements concerning the investment policy for Davis and Brooks CORRECT? Davis Brooks Incorrect B) Incorrect Incorrect C) Correct Correct m Explanation bo ok c A) Correct w w w o Weinke is incorrect regarding Davis's investment policy Although she is young, the investment policy for her should be more conservative than his recommended equity allocation She is not wealthy, does not expect an inheritance, has scant retirement savings, and does not have the exibility to increase her retirement savings These factors outweigh her age and thus her investment policy should be conservative Weinke is incorrect regarding Brooks's investment policy Although he is older and retired, the investment policy for him should be more aggressive than his recommended investment grade bond allocation Brooks is wealthy, has income that exceeds his expenses, and much of his spending consists of nonnecessities These factors outweigh his age and retired status, and his investment policy should be aggressive (Study Session 5, Module 12.4, LOS 12.f) Related Material SchweserNotes - Book Question #36 of 46 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 22/29 10/11/2018 Learning Management System Are Johnson's statements concerning outliving their assets CORRECT? Identifying the party most at risk Indentifying the solution to it A) Correct Incorrect B) Correct Correct C) Incorrect Correct Explanation bo ok c (Study Session 5, Module 12.4, LOS 12.f) en tre in Outliving one's assets is a valid concern since 50% of all individuals will live longer than their projected life expectancy based on actuarial tables Given Davis's nancial situation, she is at the most risk for it The most e ective method of controlling for it would be to recommend a life annuity for Davis when she retires A life annuity is essentially a life insurance policy in reverse The investor pays a lump sum and receives a series of payments over his or her lifespan The investor cannot outlive the annuity unless the insurance company fails and is unable to make the promised payments Related Material m SchweserNotes - Book o Question #37 of 46 w w Are Weinke's and Johnson's statements regarding transferring assets with valuation discounts CORRECT? w Weinke Johnson A) Incorrect Correct B) Correct Incorrect C) Correct Correct Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 23/29 10/11/2018 Learning Management System Weinke is correct because certain assets such as partnerships and closely held family businesses will trade at a discount due to their illiquidity and di culty in being able to accurately value the business which reduces transfer taxes such as estate, gift, and inheritance taxes Johnson is incorrect because valuation discounts are not additive but are subject to court approval and are inversely related to the size of the business being transferred (Study Session 5, Module 12.4, LOS 12.f) Related Material in SchweserNotes - Book en tre Question #38 of 46 Are Weinke's and Johnson's statements concerning the relative merits of stocks and bonds from a tax basis perspective CORRECT? Weinke bo ok c Johnson Correct B) Correct Incorrect C) Correct Correct m A) Incorrect o Explanation w w w Johnson is correct because wealthy investors are in high marginal tax brackets and because the coupon income from bonds cannot be deferred, bonds are often unattractive investments for wealthy individuals from a tax standpoint for the taxable portion of their investment portfolio Weinke is correct because the capital gains on the stock would only be taxed when the stock is sold and if the stock had been held for a long enough time period qualifying the gain as long term the gain would be taxed at a lower rate than short term capital gains or interest income (Study Session 5, Module 12.4, LOS 12.f) Related Material SchweserNotes - Book Question #39 of 46 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 24/29 10/11/2018 Learning Management System In comparing tax deferred accounts versus tax free accounts which of the following statements is most accurate? A) Assuming equivalent rates of return between the tax free and tax deferred investments, the tax free investment will always result in a greater accumulated f l B) If the investment returns and tax rates are equal for both the tax deferred and tax free accounts the future accumulated value will be the same C) If the current tax rate is less than future tax rate then you are better o investing in a tax deferred account .in Explanation bo ok c en tre When comparing taxable, tax deferred, and tax free investment accounts the taxable account which is taxed every year will result in the smallest accumulated value in the future To invest in a tax free investment one must pay income taxes rst and then invest in the tax free investment using after tax dollars If the current and future tax rates are the same the future accumulated value of the tax deferred and tax free investments will be the same If the current tax rate is projected to be greater than the future tax rate then the investor is better o investing in the tax deferred investment now and paying taxes at the lower tax rate in the future The opposite would be true if taxes were projected to be lower now then one would be better o paying the lower taxes now and investing in a tax free investment thereby avoiding the higher taxes in the future (Study Session 5, Module 12.4, LOS 12.f) w w o SchweserNotes - Book m Related Material w Question #40 of 46 Are Weinke's and Johnson's statements concerning the gifting of Brooks' stock to his alma mater CORRECT? Weinke Johnson A) Correct Incorrect B) Correct Correct C) Incorrect Correct Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 25/29 10/11/2018 Learning Management System Weinke is correct If the stock is gifted, capital gains taxes would be avoided entirely Johnson is correct The gift can provide a tax deduction against ordinary income for Brooks (Study Session 5, Module 12.4, LOS 12.f) Related Material SchweserNotes - Book Question #41 of 46 in Which of the following statements most accurately describes a discretionary trust? A) The settlor has discretion as to how to disseminate the assets of the trust en tre B) The assets are protected against claims made against the bene ciary C) The settlor has discretion to retain ownership control of the assets within the trust Explanation m bo ok c In a discretionary trust the trustee decides who to and how the assets are distributed based on the settlor's wishes thus the bene ciaries have no legal right to the income generated by the trust or assets of the trust Because the bene ciaries have no legal right to the trust assets or income the bene ciaries' creditors cannot make a claim on those assets In a revocable trust the settlor has the option to rescind the trust and retain ownership of the assets In an irrevocable trust the settlor gives up ownership and control of the trust assets Related Material o (Study Session 5, Module 12.4, LOS 12.g) w w w SchweserNotes - Book Question #42 of 46 Which of the following statements best describes an irrevocable trust? A) The settlor relinquishes ownership and control, the trustee is considered the owner of the assets for tax purposes, and assets are protected from claims against the l B) The settlor can rescind the trust, is considered the legal owner of the assets for tax purposes, and claims can be made against the trust assets C) The trust cannot be revoked, the settlor is considered the owner of the assets for tax purposes, and the assets are protected from claims against the trust https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 26/29 10/11/2018 Learning Management System Explanation In a revocable trust, the settlor can rescind (i.e., revoke) the trust and resume ownership of the assets The settlor is considered the legal owner of the assets for tax and reporting purposes, and creditors, divorcing spouses, et cetera can make claims against the trust assets In an irrevocable trust, the settlor relinquishes ownership and control The trustee is considered the owner of the assets for tax purposes, and is responsible for reporting and paying taxes on income generated by the trust The irrevocable trust protects the trust assets from claims against the settlor (Study Session 5, Module 12.4, LOS 12.g) Related Material en tre in SchweserNotes - Book Question #43 of 46 bo ok c In an e ort to maximize world-wide taxation on its residents and citizens, the United States demands a list of U.S security owners from: A) global banks B) international companies .o Explanation m C) international governmental agencies w w The U.S requires that global banks disclose the names of U S security owners in order to make sure that those individuals' incomes are fully taxed w (Study Session 5, Module 12.5, LOS 12.l) Related Material SchweserNotes - Book Question #44 of 46 If the donor of a gift pays the gift taxes instead of the recipient, then the relative value of the gift: A) experiences no change https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 27/29 10/11/2018 Learning Management System B) increases C) decreases Explanation The relative value of the gift increases when the donor pays the gift taxes because of a reduction in the estate and the accompanying estate taxes (Study Session 5, Module 12.3, LOS 12.e) Related Material in SchweserNotes - Book en tre Question #45 of 46 Which of the following equations represents the relative value of a gift when the donor pays the gift taxes? bo ok c A) B) w w Explanation o m C) w Equation #1 below shows the relative value of a taxable gift when the donor pays the gift taxes (numerator) compared to if it is gifted as part of an estate (denominator) Equation #2 below shows the relative value of a taxable gift (numerator) when the gift is subject to gift taxes compared to if it is gifted as part of an estate (denominator) Equation #3 below shows the relative value of a tax free gift if it is gifted today (numerator) compared to if it is gifted as part of an estate (denominator) (Study Session 5, Module 12.3, LOS 12.e) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 28/29 10/11/2018 Learning Management System Question #46 of 46 Kate is a resident of Banovia and Banovia taxes the income she earns from her job as a local bus driver in Banovia but does not tax the rent she receives from a property she owns in the neighboring country of Taxmania Taxmania only taxes her on her rental income Which of the following statements is most likely correct? A) There is an exemption method tax treaty between the countries B) There is a credit method tax treaty between the countries .in C) There is no tax treaty between the countries en tre Explanation bo ok c The scenario describes a situation where Banovia is residence and Taxmania is source taxation With no tax treaty, double taxation of the rental income is likely Under the credit method she may or may not owe taxes on the rental income to Banovia, it depends on relative tax rates (If tax rates in Banovia are higher, she will owe some taxes in both countries.) Under the exemption method she pays only to the source country and it provides full and best relief to the tax payer from double taxation (Study Session 5, Module 12.5, LOS 12.j) Related Material w w w o m SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83415992/print 29/29 ... 46 Estate taxes are an example of a tax on: A) capital gains on assets transferred B) a percentage of assets gifted Explanation en tre in C) the value of assets owned Estate taxes are a tax based... not paying taxes Explanation https://www.kaplanlearn.com/education/dashboard/index/6 6a9 ea0d62bb71ab49592561502 9a3 fd/practice /qbank/ 24 038 518/quiz/ 834 15992/print 16/29 10/11/2018 Learning Management... https://www.kaplanlearn.com/education/dashboard/index/6 6a9 ea0d62bb71ab49592561502 9a3 fd/practice /qbank/ 24 038 518/quiz/ 834 15992/print 12/ 29 10/11/2018 Learning Management System Related Material SchweserNotes