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

10/11/2018 Learning Management System Question #1 of 46 Which of the following equations represents the relative value of a gift when the donor pays the gift taxes? A) B) bo ok c Question #2 of 46 en tre in C) Arthur and Doris are married with adult children and $2,400,000 in marital assets Doris is just about to receive an inheritance of $600,000 in separate property from her late Uncle's estate and is wondering how to structure her will They live under a community property m regime, where the surviving spouse has a right to half the marital estate The forced heirship o rule also entitles a surviving spouse to one-third of the total estate and entitles the children to split another one-third of the total estate Can Doris legally bequest $1,000,000 to the local w w animal shelter? A) No, only $500,000 w B) Yes C) No, only $800,000 Question #3 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 wealth owner wishes to leave money to a charity https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 1/17 10/11/2018 Learning Management System B) The tax on gifts is high C) The ultimate bene ciary is a minor Question #4 of 46 Which of the following statements best describes an irrevocable trust? A) The settlor can rescind the trust, is considered the legal owner of the assets for tax in purposes, and claims can be made against the trust assets B) The trust cannot be revoked, the settlor is considered the owner of the assets for tax en tre purposes, and the assets are protected from claims against the trust C) The settlor relinquishes ownership and control, the trustee is considered the owner of Question #5 of 46 bo ok c the assets for tax purposes, and assets are protected from claims against the settlor Kate is a resident of Banovia and Banovia taxes the income she earns from her job as a local m bus driver in Banovia but does not tax the rent she receives from a property she owns in the o neighboring country of Taxmania Taxmania only taxes her on her rental income Which of the w w following statements is most likely correct? A) There is a credit method tax treaty between the countries w B) There is an exemption method tax treaty between the countries C) There is no tax treaty between the countries Question #6 of 46 Which of the following methods results in a partial resolution to the residence-source ict on foreign sourced income taxes? A) Credit method B) Exemption method https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 2/17 10/11/2018 Learning Management System C) Deduction method Christine Davis is single, 31 years old, and is the chief nancial o cer of a small aerospace 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 in was promoted to CFO and before that did not receive a signi cant salary Despite her new job en tre 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 her job Weinke states that given Davis's age, he believes that Davis's investment policy should bo ok c 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 m debt The income from his portfolio and pension income is $600,000 annually after tax His o living expenses consist of necessities, vacations, discretionary spending on luxuries, and gifts to w w 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 w investment grade bonds 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 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 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 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 3/17 10/11/2018 Learning Management System partnerships and family businesses Johnson states that valuation discounts are additive, for example, a 10% liquidity discount can be added to a 10% minority discount to equal a total valuation discount of 20% 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 in their investments in the taxable portion of the their portfolio they should buy equities because en tre 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 would like to liquidate is Dumas Environmental, his former father-in-law's company He bo ok c 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 m 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 o against ordinary income for Brooks The advantage here, Johnson states, is that instead of w w incurring taxes by liquidating the stock, Brooks could actually save on taxes w Question #7 of 46 Are Weinke's statements concerning the investment policy for Davis and Brooks CORRECT? Davis Brooks A) Correct Incorrect B) Correct Correct C) Incorrect Incorrect https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 4/17 10/11/2018 Learning Management System Question #8 of 46 Are Johnson's statements concerning outliving their assets CORRECT? Identifying the party most at risk Indentifying the solution to it Correct B) Incorrect Correct C) Correct Incorrect en tre in A) Correct Question #9 of 46 Are Weinke's and Johnson's statements regarding transferring assets with valuation discounts Weinke bo ok c CORRECT? Johnson Correct B) Correct Incorrect C) Correct Correct w w o m A) Incorrect w Question #10 of 46 Are Weinke's and Johnson's statements concerning the relative merits of stocks and bonds from a tax basis perspective CORRECT? Weinke Johnson A) Correct Correct B) Incorrect Correct C) Correct Incorrect https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 5/17 10/11/2018 Learning Management System Question #11 of 46 In comparing tax deferred accounts versus tax free accounts which of the following statements is most accurate? A) If the current tax rate is less than future tax rate then you are better o investing in a tax deferred account 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 .in C) Assuming equivalent rates of return between the tax free and tax deferred investments, en tre the tax free investment will always result in a greater accumulated future value bo ok c Question #12 of 46 Are Weinke's and Johnson's statements concerning the gifting of Brooks' stock to his alma mater CORRECT? Johnson m Weinke A) Incorrect o Correct w w B) Correct Correct Incorrect w C) Correct Question #13 of 46 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) Generation-skipping trust B) Revocable trust C) Foundation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 6/17 10/11/2018 Learning Management System Question #14 of 46 Hans, 70, is considering gifting up to the tax-free limit of €200,000 to his son to help reduce the 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 relative value of making the gift? Assume both Hans and his son earn a 5% annual pretax rate of return on the funds A) 1.33 in B) 1.57 en tre C) 1.27 bo ok c Question #15 of 46 The primary motivation for estate planning is to: A) minimize taxes m B) maximize returns w w o C) match investment horizon objectives w Question #16 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 B) increases C) decreases Question #17 of 46 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 7/17 10/11/2018 Learning Management System Investors use estate planning tools for all of the following reasons EXCEPT to: A) increase the e ciency of the transfer of assets to others B) maximize wealth for heirs or others C) maximize investment returns Question #18 of 46 in When one spouse dies, the tax-free transfer of assets between spouses means that the A) but half of the principal is placed in a trust en tre surviving spouse will continue to receive dividends and interest from the entire estate: B) with the exception of that which would have been lost to estate taxes Question #19 of 46 bo ok c C) including that which would have been lost to estate taxes m Which of the following statements most accurately describes a discretionary trust? o A) The settlor has discretion as to how to disseminate the assets of the trust w w B) The assets are protected against claims made against the bene ciary w C) The settlor has discretion to retain ownership control of the assets within the trust Question #20 of 46 Of the principal targets of taxation, which is ordinarily least relevant to the investment professional? A) Expenditures B) Assets owned C) Assets transferred https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 8/17 10/11/2018 Learning Management System Question #21 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) 40% en tre in C) 0% Question #22 of 46 bo ok c The legal process that takes place at death in which a court is involved is known as: A) probate in which among other things the validity of the decedent's will is determined, and their remaining property is distributed B) the intestate process in which the decedent’s property is inventoried and claims against m the decedent are resolved w w their will .o C) the testamentary process in which the decedent’s assets are transferred according to w Question #23 of 46 Deemed disposition is a taxation method in which a country can mitigate against lost revenue by applying a tax to the: A) estimate future income of citizens who move to another country 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 who move to another country https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 9/17 10/11/2018 Learning Management System Question #24 of 46 Estate taxes are an example of a tax on: A) a percentage of assets gifted B) the value of assets owned C) capital gains on assets transferred .in Question #25 of 46 en tre When foreign sourced income is taxed by the foreign country and not the resident country this is called the: A) Credit method C) Deduction method m Question #26 of 46 bo ok c B) Exemption method w w A) o Which of the following equations represents the relative value of a tax free gift? (1−T g )[1+rg (1−tig )] n n B) w [1+re (1−tie )] (1−T e ) [1 + r g (1 - t ig )] n n [1 + r e (1 - t ie )] (1 - Te ) C) [1 - Tg  + (Tg T e x g/e)][1 + r g (1 - t ig )] n n [1 + r e (1 - t ie )] (1 - Te ) Question #27 of 46 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 10/17 10/11/2018 Learning Management System The type of jurisdiction where a country taxes assets transferred from one person to another within a country regardless of whether or not they are citizens or foreigners is called: A) residence jurisdiction transfer taxes B) source jurisdiction transfer taxes C) territorial tax jurisdiction transfer taxes Which of the following best describes estate planning? in Question #28 of 46 en tre A) Delineating how your assets will be transferred so a court does not decide for you B) Transferring your assets during your lifetime or at death in the most e cient manner to the individuals you intend to receive them most e cient manner .o m Question #29 of 46 bo ok c C) Transferring your assets at death to the individuals you intend to receive them in the 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 Question #30 of 46 Which of the following equations represents the relative value of a gift when it is subject to taxes? A) (1 - Tg  + T g T e )[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/83414243/print 11/17 10/11/2018 Learning Management System B) [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 ) Question #31 of 46 in Which of the following statements regarding life expectancy and life span is CORRECT? A) One-half of all people in a given pool reach their life expectancy en tre B) One-third of all people in a given pool fail to reach their life expectancy Question #32 of 46 bo ok c C) One-half of all people in a given pool reach their life span In relation to trusts, which of the following is least correct? o trust’s tax liabilities m A) In a revocable trust the settlor who funds the trust is likely to be responsible for the w w B) An individual concerned with future legal liabilities should most likely consider an irrevocable trust C) In a discretionary trust the trustee has complete discretion to distribute the assets and w income earned in the trust Question #33 of 46 Which of the following is most likely to be a factor in determining a tax payer's tax residency country? A) Percentage of income earned within the country B) Foreign language pro ciency https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 12/17 10/11/2018 Learning Management System C) Location of the family home Question #34 of 46 Once an individual reaches the retirement age a main concern is: A) safety of principal, with investment income being secondary B) establishing a spending rate that will not result in their outliving their assets en tre in C) reallocating nancial assets to adopt a more conservative pro le Question #35 of 46 bo ok c In which of the following circumstances would an insurance policy most likely be bene cial for estate planning? A) The estate has a relatively large and illiquid asset B) The jurisdiction where the estate lies has no estate or inheritance taxes w w o m C) There is not likely to be any legal challenge to the will Question #36 of 46 w 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) international governmental agencies B) international companies C) global banks Question #37 of 46 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 13/17 10/11/2018 Learning Management System 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 Question #38 of 46 Joint ownership with rights of survivorship, living trusts, retirement plans, and life insurance are all means of: bo ok c A) avoiding probate and transferring assets without the use of a will B) transferring assets through probate without the use of a will m C) avoiding probate with the use of a will .o Question #39 of 46 w w The type of jurisdiction where a country taxes the income of its residents regardless of where they live and where the income was generated is called: w A) territorial tax jurisdiction B) residence jurisdiction C) source jurisdiction Question #40 of 46 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 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 14/17 10/11/2018 Learning Management System B) tax ine cient, and the degree of control over the management of the assets is limited C) tax e cient, and accessibility of assets held inside the policy can be either good or poor, depending upon the terms of the policy Question #41 of 46 When an investor makes a charitable gift of appreciated securities, in most instances the investor is: in A) not able to take a deduction en tre B) able to take a deduction in the amount of the current fair market value of the gift Question #42 of 46 bo ok c C) able to take a deduction in the amount of the capital gain 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 o she expects to earn 3.0% annually, subject to an e ective rate of tax of 18% The rate of return 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) Yes, as the relative value of the taxable gift is greater than B) No, as the estate tax is less than the gift tax C) No, as the relative value of the taxable gift is less than Question #43 of 46 When an investor makes a charitable gift of appreciated securities: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 15/17 10/11/2018 Learning Management System A) the tax rate is based upon the gifting rate B) the recipient must pay the capital gains taxes C) usually no gift transfer taxes are assessed Question #44 of 46 Serge, a resident of Country C, is looking to reduce his taxes by not declaring income he has A) Serge would likely be guilty of tax evasion en tre jurisdiction, which of the following statements is most likely correct? in earned from an o shore investment trust domiciled in Country D If Country C has a residence B) If there is a credit method tax treaty, Serge will only owe taxes in Country D Question #45 of 46 bo ok c C) Serge is attempting legal tax avoidance m Using legal tax reduction strategies with the intention of avoiding paying taxes altogether is: o A) expected of any tax paying entity or individual and is legal w w B) considered tax evasion which is illegal C) anticipated by government taxing authorities which prosecute such individuals for not w paying taxes Question #46 of 46 Mary, who usually resides in Country A, has recently transferred ownership of a home that she owns in Country B to her son, Warren She had been renting out the property and had paid taxes on the rental income to Country A She is also liable to pay a gifting tax in Country A on the transfer Which of the following statements is most likely to be correct? A) Country A has residence jurisdiction https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 16/17 10/11/2018 Learning Management System B) Country B must not have a wealth transfer tax system w w w o m bo ok c en tre in C) Country B has a source jurisdiction https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414243/print 17/17 ... https://www.kaplanlearn.com/education/dashboard/index/6 6a9 ea0d62bb71ab49592561502 9a3 fd/practice /qbank/ 24 038 518/quiz/ 834 142 43/ print 15/17 10/11/2018 Learning Management System A) the tax rate is based... https://www.kaplanlearn.com/education/dashboard/index/6 6a9 ea0d62bb71ab49592561502 9a3 fd/practice /qbank/ 24 038 518/quiz/ 834 142 43/ print 12/ 17 10/11/2018 Learning Management System C) Location of the family... A) international governmental agencies B) international companies C) global banks Question #37 of 46 https://www.kaplanlearn.com/education/dashboard/index/6 6a9 ea0d62bb71ab49592561502 9a3 fd/practice /qbank/ 24 038 518/quiz/ 834 142 43/ print