Schweser QBank 2017 portfolio management and wealth planning04 estate planning in a global context

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 worl

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Test ID: 7426241 Estate Planning in a Global Context

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Which of the following methods results in a partial resolution to the residence-source conflict on foreign sourced income taxes?

Credit method

Deduction method

Exemption method

Explanation

The Deduction Method provides only partial resolution of the residence-source conflict 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 conflict 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

The Exemption Method also provides complete resolution of the residence-source conflict 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 effectively eliminates the residence-source conflict, because foreign-generated income is taxed by the source country, only

Which of the following statements most accurately describes a discretionary trust?

The settlor has discretion as to how to disseminate the assets of the trust

The settlor has discretion to retain ownership control of the assets within the trust

The assets are protected against claims made against the beneficiary

Explanation

In a discretionary trust the trustee decides who to and how the assets are distributed based on the settlor's wishes thus the beneficiaries have no legal right to the income generated by the trust or assets of the trust Because the beneficiaries have no legal right to the trust assets or income the beneficiaries' 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

With respect to the effectiveness of life insurance for individual investors, it is:

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tax efficient, and accessibility of assets held inside the policy can be either

good or poor, depending upon the terms of the policy

tax efficient, and the degree of control over the management of the assets is

unlimited

tax inefficient, and the degree of control over the management of the assets is limited

Explanation

With respect to the effectiveness of life insurance for individual investors, it is tax efficient, 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 benefits paid to beneficiaries are generally tax free with no reporting required

Which of the following best describes estate planning?

Transferring your assets at death to the individuals you intend to receive them

in the most efficient manner

Transferring your assets during your lifetime or at death in the most efficient manner

to the individuals you intend to receive them

Delineating how your assets will be transferred so a court does not decide for you

Explanation

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 efficient way

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?

40%

0%

10%

Explanation

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

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

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Question #6 of 35 Question ID: 465066

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The primary motivation for estate planning is to:

maximize returns

match investment horizon objectives

minimize taxes

Explanation

The primary motivation for estate planning is to minimize taxes

Which of the following equations represents the relative value of a gift when the donor pays the gift taxes?

Explanation

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)

1

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)

2

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)

3

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When an investor makes a charitable gift of appreciated securities, in most instances the investor is:

able to take a deduction in the amount of the current fair market value of the

gift

able to take a deduction in the amount of the capital gain

not able to take a deduction

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

Which of the following equations represents the relative value of a gift when it is subject to taxes?

Explanation

1

2

3

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Once an individual reaches the retirement age a main concern is:

establishing a spending rate that will not result in their outliving their assets

safety of principal, with investment income being secondary

reallocating financial assets to adopt a more conservative profile

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

Which of the following statements regarding life expectancy and life span is CORRECT?

One-third of all people in a given pool fail to reach their life expectancy

One-half of all people in a given pool reach their life expectancy

One-half of all people in a given pool reach their life span

Explanation

One-half of all people in a given pool reach their life expectancy By definition, 100% of people reach their life span, what ever its length may be

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:

residence jurisdiction

territorial tax jurisdiction

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

Which of the following statements regarding life expectancy and life span is CORRECT?

Life expectancy is unknown, but life span is known

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Life expectancy is known, but life span is unknown

Life expectancy is unknown, and life span is unknown

Explanation

Life expectancy is known, but the actual life span for an individual is unknown

Concerning a married couple, which of the following statements is most accurate? When one of them dies:

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

their half of the estate is transferred to the surviving spouse on a tax-free basis

the value of the estate in excess of the estate tax exemption is transferred to the

surviving spouse on a tax-free basis

Explanation

When one of them dies, their half of the estate is transferred to the surviving spouse on a tax-free basis

Of the principal targets of taxation, which is ordinarily least relevant to the investment professional?

Expenditures

Assets owned

Assets transferred

Explanation

The four main targets of taxation are: income tax, spending tax, wealth tax, and wealth transfer taxes Of the four main targets taxes on spending (expenditures) are ordinarily least relevant to the investment process

When foreign sourced income is taxed by the foreign country and not the resident country this is called the:

Exemption method

Credit method

Deduction method

Explanation

The Exemption Method provides complete resolution of the residence-source conflict 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.,

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that income is exempt from domestic taxation) This effectively eliminates the residence-source conflict, because foreign-generated income is taxed by the source country, only

The Deduction Method provides only partial resolution of the residence-source conflict 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 conflict 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

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:

source jurisdiction transfer taxes

residence jurisdiction transfer taxes

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

Using legal tax reduction strategies with the intention of avoiding paying taxes altogether is:

considered tax evasion which is illegal

expected of any tax paying entity or individual and is legal

anticipated by government taxing authorities which prosecute such individuals for not

paying taxes

Explanation

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

When an investor makes a charitable gift of appreciated securities:

usually no gift transfer taxes are assessed

the recipient must pay the capital gains taxes

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the tax rate is based upon the gifting rate

Explanation

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

The legal process that takes place at death in which a court is involved is known as:

the testamentary process in which the decedent's assets are transferred

according to their will

probate in which among other things the validity of the decedent's will is determined,

and their remaining property is distributed

the intestate process in which the decedent's property is inventoried and claims

against the decedent are resolved

Explanation

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 The most common tool used to transfer assets is a will (also known as a testament) A will is the legal document that states the rights others will have to your assets at your death If a person dies without a will or their will is determined to be invalid, then they are said to have died intestate

Which of the following equations represents the relative value of a tax free gift?

Explanation

1

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Questions #24-29 of 35

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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?

Revocable trust

Generation-skipping trust

Foundation

Explanation

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 infinite term Generation-skipping trusts are very long-term

Joint ownership with rights of survivorship, living trusts, retirement plans, and life insurance are all means of:

avoiding probate with the use of a will

transferring assets through probate without the use of a will

avoiding probate and transferring assets without the use of a will

Explanation

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

Christine Davis is single, 31 years old, and is the chief financial officer of a small aerospace parts firm located in the Midwest

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U.S., Oshkosh Aerospace Davis has approached William Weinke, her financial 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 significant size and does not expect to receive an inheritance She has had difficulty accumulating

significant savings because she only recently was promoted to CFO and before that did not receive a significant salary Despite her new job and title, Davis does not expect to have much flexibility 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 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 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 effective method of controlling for it Johnson states that Davis is at the most risk and that the most effective 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 efficiency is an important consideration and that the tax efficiency 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

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 Specifically, 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 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 effective 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 incurring taxes by liquidating the stock, Brooks could actually save on taxes

Are Weinke's statements concerning the investment policy for Davis and Brooks CORRECT?

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