Private Wealth Mgt (1)

Question 1

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Ability & Willingness to take risk

Answer 1

Ability - Objective-quantitative

If inv. goals are modest relative to the size of the port., the investor has greater ability to take risk (can afford vol)

Longer inv horizon also contributes

Willingness - Subjective-qualitative

Professional and personal choices may give a hint (“…demonstrating tolerance for business risks that he may feel he controls…”, “…company debt decisions…”)

Question 2

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5 Constrains (IPS)

Answer 2

1. Liquidity (emergency cash + cash flow for expenses, consider transaction costs, illiquidity and price vol)
2. Time Horizon (significant port rebalancing event, such as multi-stage, with pre and post-retirement)
3. Tax concerns (max after-tax return, including tax avoidance)
4. Legal & regulatory (Personal trusts, fiduciary capacity)
5. Unique Circumstances (constrains port choice, such as concen. stock positions, BOD membership, etc.)

Question 3

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Irrevocable vs. Revocable Personal Trusts

Answer 3

Binary choice (control vs flexibility)

Irrevocable - grantor give power away. Grantor does not have any tax implications

Revocable - Totally flexible. Downside is that it is still taxable

Question 4

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Safety 1st rule (shortfall risk)

Answer 4

If E (r) - 2σ > client threshold return = accept portfolio

Question 5

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Deterministic Model of Asset Allocation vs Monte Carlo

Answer 5

Deterministic = MVO, hist. returns

Monte Carlo = Probability Allocation model, path dependent. Multifactor model that includes tax, savings, mkt conditions, and others.

Question 6

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Effective capital gains tax rate (T*) and FV_taxable

Answer 6

r* = r * (1 - p_it_i - p_dt_d - p_cgt_cg)​

T* = t_cg * (1 - p_i - p_d - p_cg) / (1 - p_it_i - p_dt_d - p_cgt_cg)​

FV_taxable = (1 + r*) ⁿ (1 - T*) + T* - (1 - B) t_cg

Question 7

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TDA vs TE

Answer 7

TDA vs TE

TDA is taxed in the future, contribution on a pre-tax basis.
TE is taxed now (contribution on an after-tax basis)!

The only difference is the tax rate that will be applied. If T0 = Tn, then it will result in the same amount

Question 8

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Asset Location

Answer 8

heavily taxed assets (bonds) ->TDA or TEA.

lightly taxed assets (equities) and riskier assets -> taxable accounts.

Question 9

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Prob. (joint survival)

Core Capital - 2 options + how to calc

Answer 9

Core Capital with Mortality Tables

• Prob. (joint survival) = p(Husband) + p(Wife) - [p(Husband) * p(Wife)]
• Core Capital_{n years} = ∑ P (surv_t)(spending_t) / (1+rf)^t
• May be adjusted for safety reserve (spending) or Ocupational Income volatility (added to rf)
• Includes + cash flow (such as salary)

Core Capital with Monte Carlo Analysis

Question 10

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RV _TaxFreeGift

Answer 10

Question 11

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RV _{TaxableGift (recipient pays)}

Answer 11

Question 12

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RV _{TaxableGift (donor pays)}

Answer 12

Question 13

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RV _{CharitableGift}

Answer 13

Question 14

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Source Jurisdiction vs Residence Jurisdiction

3 Tax Conflict Solutions

(1) Credit Method
(2) Exemption Method
(3) Deduction Method

Answer 14

• Source jurisdiction (territorial system) - income generated within borders, whether by citizens or foreigners.
• Residence jurisdiction - income of its residents

(1) Credit Method

T_CreditMethod = Max [T_Residence , T_Source]

(2) Exemption Method

T_{ExemptionMethod} = T_Source

(3) Deduction Method

T_{DeductrionMethod} = T _Residence + T_Source - (T _Residence * T_Source)

Question 15

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Estate Planning Tools

Answer 15

1. Trusts - grantor (settlor) transfer assets to beneficiaries outside of the probate process.
   
   1. Revocable/Irrevocable
   2. Avoid probate, make resources available to beneficiaries w/o yielding control
2. Foundations
3. Life Insurance
4. Controlled Foreign Corp.

Question 16

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TDA and TEA taxes

Answer 16

TDA FV = (1 + r)ⁿ(1 − t_n) [Gross contributions, taxed in the future]

TEA FV = (1 + r)ⁿ

Question 17

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Wealth-Based Taxes

Answer 17

FVIFAT = [(1 + r)(1 − t_w)]ⁿ

Question 18

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Deferred Taxes

Answer 18

FV = [(1 + r)ⁿ (1 − t_cg) + t_cgB]

Question 19

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Accrual Taxes

Answer 19

FV = [1 + r (1 − t_i)]ⁿ