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CFA Level III > Session 12 - Private Wealth Management (I) > Flashcards

Session 12 - Private Wealth Management (I) Flashcards

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1
Q

Contrast private client and institutional client investment concerns;

A

1/ Investment objectives
- for private, may not be clearly defined or quantified, may compete with one another, changes over time
- vs. institutional, more clearly defined objectives, unlikely to change over time
2/ Constraints
- for client, shorter horizon, lower risk tolerance, higher liquidity requirement
– different horizons for different objectives
– portfolios are smaller in size - limitations to certain asset classes
– not tax-exempt
- vs. institutional, long horizon, single investment objective
3/ Other Distinctions
- private client has no formal governance structure
- more vulnerable to emotional or biased investment decisions
- regulatory different for indvl and inst. inv
- private clietns w/ similar sets of financial considerations and objectives may pursue different investment strategies

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2
Q

Discuss information needed in advising private clients;

A

1) Personal Info
- - family situation
- - Proof of Client ID
- - Employment/ Career
- - Source of client’s wealth
- - Explicit return objectives
- - Investment preferences - liquidity, ESG
- - FInancial objectives and risk tolerance
2) Financial info
- - Asset, liabilities, CF
- - Projection of expenses, planned disbursement
3) Other relevant info
- - Wills, trust, life, and disability insurance
- - Decision-making parameters (who can approve or change IPS, approve the trade, etc), Service needs, and expectations

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3
Q

Identify tax considerations affecting a private client’s investments

A
    • Taxes on income
    • Wealth based taxes –> property, gifts
    • consumption/spending taxes
    • Tax avoidance (tax-free accounts, tax-free gifts)
    • Tax reduction (tax-exempt bonds, low turnover funds)
    • Tax deferral (retirement accounts, defer gains)
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4
Q

Identify and formulate client goals based on client information

A 
1/ Planned goals 
-- can be reasonably estimated or quantified within an expected time horizon
2/ Unplanned goals 
-- unforeseen financial needs 
-- property repairs, medical expenses
- Wealth Manager's Role:
-- goal quantification, prioritization
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5
Q

Evaluate a private client’s risk tolerance;

A
  • Risk tolerance
  • Risk Capacity
  • Risk Perception
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6
Q

Risk Capacity

A

= ability to accept financial risk

  • determined by wealth, income, investment time horizon, liquidity needs
  • clients with greater risk capacity can tolerate greater financial losses without compromising goals
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7
Q

Risk Perception

A

= the subjective assessment of the risk involved in the outcome of an investment decision
- use of risk tolerance questionnaires, conversations with clients

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8
Q

Risk tolerance

A

= level of risk an individual is willing and able to bear

– opposite of risk aversion (high RA = lower RT)

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9
Q

Describe technical skills needed in advising private clients;

A

Technical skills - specialized knowledge and expertise necessary to provide investment advice
1/ Capital market proficiency
- generalist understanding of markets and asset classes
2/ Portfolio construction ability
- portfolio that is appropriate for each client
- understanding of each asset class risks/ returns, correlations, investment vehicles, managers, strategies, etc
3/ Financial Planning knowledge
- working knowledge of estate law, taxation, and insurance
4/ Quantitative skills
5/ Technology Skills
- Portfolio optimization software, simulation tools, PM software
6/ Language Fluency

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10
Q

Describe soft skills needed in advising private clients;

A

Soft Skills - Ability to effectively interact with others
1/ Communication skills
- Active listening, effective verbal and written communication skills, presentation skills
2/ Social Skills
- Ability to understand and relate to others, empathy
3/ Education and coaching skills
4/ Business development and sales skills

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11
Q

Evaluate capital sufficiency in relation to client goals;

A
  • Process to determine if a client has, or is likely to accumulate, sufficient financial resources to meet objectives
    1/ Deterministic forecasting – straight-line manner, Simple but unrealistic 𝑷𝑽𝒑(𝟏.𝟎𝟔)𝟏𝟓 = 𝑭𝑽
    – requires return assumptions, PV of anticipated future contributions/variables
    2/ Monte Caro simulation – allows for the uncertainty of key variables
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12
Q

When capital will not be sufficient to meet goals/objectives

A

1/ Contributions must increase
2/ Goals must become more modest
3/ Goals must be delayed
4/ Higher expected returns (within risk tolerance) must be pursued

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13
Q

What tools can you use to analyze retirement goals?

A

1/ Mortality tables - indicates life expectancies at specified ages
2/ Annuities - provide a series of fixed payments in exchange for a lump-sum payment
- immediate annuity (begins right away)
- deferred annuity (begins at some later date)
3/ Monte Carlo simulation
- uses actual portfolio to estimate retirement needs
- produces a prob. of reaching a goal, but not a shortfall measure

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14
Q

Behavioral Considerations during Retirement

A

1/ Heighten loss aversion
2/ Consumption gaps - retirees spend less than expected
3/ The annuity puzzle - individuals tend not to prefer annuities
4/ Preference for investment income over capital appreciation

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15
Q

IPS purpose and + of it

A
  • written planning document – objectives and risk tolerance over a relevant time horizon
    (+)
  • encourages investment discipline
  • reinforces the client’s commitment to follow the strategy
  • focuses on LT goals
  • evidence of client-focused inv. mgmt process
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16
Q

Expand on Background and investment objectives sections of the IPS

A
  • labeled as ongoing or one-time
  • detailed and quantified whenever possible
  • which are the primary objective when there are multiple
  • MV of portfolio and relevant accounts
  • any other investment assets outside the portfolio + any CF from external sources
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17
Q

Expand on Investment parameters of the IPS

A
  • risk tolerance
  • investment time horizon
  • asset classes used
  • other investment preferences
  • liquidity preferences - ESG, legacy holdings, non-advised holdings
  • constraints - restrictions investments and strategies
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18
Q

Expand on Portfolio Asset Allocation of the IPS

A
  • target alllocation for each asset class
  • SAA –> target + upper/lower bounds (for rebalancing)
  • TAA–> asset class target ranges
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19
Q

Expand on Portfolio Management of the IPS

A

a) Discretionary authority - ability of manager to act without client approval
b) Rebalancing - methodology and frequency of reviews - time-based or threshold-based
c) Tactical changes - if allowed, when and to what degree
d) Implementation - types of investment vehicles (MF, ETFs, proprietary investments)
- use of outside managers

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20
Q

Expand on Duties and responsibilities of the IPS

A

a) Wealth Manager responsibilities
- Developing the SAA, investment recommendations, monitoring, rebalancing, cost management, the use of derivatives and leverage, drafting/maintaining the IPS, performance reporting, voting proxies, perhaps 3rd party responsibilities (e.g. custodian)
b) IPS Review - how freq.

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21
Q

Expand on IPS Appendix

A

a) Modelled portfolio behavior

b) Capital market expectations

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22
Q

Traditional approach vs Goal-based investing approach

A

a/ Traditional approach
- Identify asset classes, develop CME (E(R), s.d., corr), determine portfolio allocation, asset constraints, implement the portfolio, determine asset location)
b/ Goal-based investing approach
- same process as above but align investments with goals (assign investments to goals)
- perform MVO for each sub-portfolio
- goals stated as max. volatility or min. probability of success

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23
Q

Describe effective practices in portfolio reporting

A
  • asset allocation report
  • performance summary
  • detailed performance (by asset class, indvl securities)
  • historical performance since inception
  • contributions/withdrawals
  • purchases/sales
  • currency exposures
    • WM might add economic/market commentary letter
    • if goal-based investing –> reporting may focus on progress towards goals (vs. performance of asset classes/securities)
    • BM reports - performance by asset class relative to the BM
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24
Q

Describe effective practices in a portfolio review

A
  • actual meeting with the client
  • review the investment plan, ask about investment objective changes, risk tolerance, time horizon, circumstances, comparisons of asset allocation vs. target
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25
Q

Evaluate the success of an investment program for a private client;

A
  1. Goal achievement - do not ask if investment strategy succeeded during the last period, but whether it is likely to succeed in meeting client goals without requiring meaningful adjustments
  2. Process consistency - has the plan been followed with respect to 3rd party managers, rebalancing, tax considerations, unique
    circumstances, tactical allocations
  3. Portfolio performance
    - absolute and relative risk & return
    - downside risk consistent with risk tolerance
  4. Definitions of success - manager and client should have the same definition of what success looks like
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26
Q

Discuss ethical and compliance considerations in advising private clients;

A
  1. Fiduciary Duty & suitability → given client circumstances
    - Obligation to deliver a high standard of care when acting for the benefit of another party
  2. Know your client (KYC) – obtain essential facts about every client for whom they open and maintain an account
  3. Confidentiality
  4. Conflicts of interest - Investment product commissions
    - Fees based on activity or AUM
    ⇒ Compliance considerations/
    - Regulatory requirements for dealing with clients”
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27
Q

Private Client Segments

A
  1. Mass affluent
  2. High Net Worth Segment
  3. Ultra High Net Worth Segment
  4. Robo advisors
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28
Q

Expand on Mass affluent

A 
→ Financial planning, risk management, retirement planning
→ Non-customized solutions
- High client/manager ratio
- Commissions structure to fee-based 
- Can be discretionary or not
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29
Q

Expand on High Net Worth segment

A

→ Lower client-to-manager ratio

  • Customized investment management, tax planning, wealth transfer issues
  • Less liquid investments (due to higher wealth), more sophisticated portfolios, the requirement for stronger product knowledge
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30
Q

Expand on Ultra Net Worth segment

A
  • Multi-generational time horizons, highly complex tax, and estate-planning considerations
  • Few clients/ manager
  • Other services → bill payment, travel planning, advice on acquiring assets such as artwork, wine, etc.
  • Typically, multiple family members – family governance issues
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31
Q

Expand on Robo-advisors

A
  • Primarily digital client interface/experience
  • Gathers info, uses MVO to recommend portfolio allocation, implements w/ MFs & ETFs
  • Will also monitor and rebalance as needed
  • Provide regular reporting
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32
Q

What are different tax structures and typical major tax categories?

A
  • Tax structures – national, regional, local
  • Typical major categories:
    1/ Taxes on income – interest, dividends, realized and unrealized capital gains
    2/ wealth-based taxes – property and transfers
    3/ Taxes on consumption – sales & value-added taxes
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33
Q

What are global common elements?

A

• Most are progressive, some flat
• Many have special tax provisions for interest (exemptions, favorable rates, exclusions)
• Dividends may have special treatment (exemptions,
special rates, exclusions)
• Capital gains/losses may have special rates/provisions (long vs. short term, partial/full exclusion)

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34
Q

General tax regimes

A 
1/ Common progressive regime 
2/ Heavy dividend tax regime 
3/ Heavy cap. gains tax regime 
4/ Heavy interest tax regime
5/ Light cap. gain tax regime
6/ Flat & light regime 
7/ Flat & heavy regime
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35
Q

Common progressive regime

A

– progressive tax rates for ordinary income, favourable treatment for interest, dividends, capital gains

36
Q

Heavy dividend tax regime

A

– progressive, dividends taxed as ordinary income (int. + cap. gains favourable)

37
Q

Heavy cap. gains tax regime

A

– progressive, cap. gains taxed as ordinary income (div. + interest favourable)

38
Q

Heavy interest tax regime

A

– progressive, interest taxed as ordinary income (div. + cap. gains favourable)

39
Q

Light cap. gain tax regime

A

– progressive for all, cap. gains favourable

40
Q

Flat & light regime

A

– flat tax, div. + int. + cap. gains favourable

41
Q

Flat & heavy regime

A

– flat for all, interest favourable

42
Q

Expand on Interest and dividends taxed if every year

A
  • If taxed every year, use 𝐅𝐕𝐈𝐅 = [𝟏 + 𝐫(𝟏 − 𝐭)]^𝐧, Tax drag > tax Rate
    • tax drag increases with time and return
  • If taxes were deferred to the end of the period, Tax drag = tax rate
43
Q

Expand on Deferred Capital Gains

A
  • 𝑭𝑽𝑰𝑭 = (𝟏 + 𝒓)^𝒏(𝟏 − 𝒕𝒄𝒈) + 𝒕𝒄𝒈
  • value of the capital gain deferral increases with return and time horizon
  • can be even more efficient if tax rates are the same for dividend, interest, and capital gains
44
Q

Expand on Cost Basics

A
  • proportion of current MV

- 𝑭𝑽𝑰𝑭𝒄𝒈𝒃 = (𝟏 + 𝒓)^𝒏(𝟏 − 𝒕𝒄𝒈) + 𝒕𝒄𝒈𝑩

45
Q

Expand on Wealth-Based Taxes

A
  • for Typically property and Maybe on aggregate assets (including financial assets) above a certain amount
    𝑭𝑽𝑰𝑭 = [(𝟏 + 𝒓)(𝟏 − 𝒕𝒘)]^𝒏
46
Q

Expand on Blended Taxing Environments

A
  • in reality, portfolios are subject to a variety of different taxes for interests, dividends, capital gains
  • 𝒓∗ = 𝒓(𝟏 − 𝒑𝒊𝒕𝒊 − 𝒑𝒅𝒕𝒅 − 𝒑𝒄𝒈𝒕𝒄𝒈) = after-tax return = pre-tax return (weighted coverage tax rate)
  • As more of the current return is taxable (i.e. not deferred), the impact of the deferred cap. gains are diminished
  • As less is taxable, the impact of deferral ↑
  • when there are unrealized capital gains use the effective capital gains tax rate
47
Q

Discuss the tax profiles of different types of investment accounts and explain their effects on after-tax returns and future accumulations;

A

1/ Taxable - Investments are made on an after-tax basis - Returns taxed as previously discussed
2/ Tax-deferred accounts
- Contributions are typically made on a pre-tax basis (i.e. tax-deductible)
- Funds accrue tax-free, all withdrawals are treated as ordinary income (said to have ‘front-end loaded tax benefits’)
Tax-Deferred Accounts = FVIFTDA = (1+r)^n(1-Tn)
3/ Tax-free accounts - ‘Back-end loaded tax benefits’
- Contributions are not tax-deductible, but all returns are tax-free
- FVIFTaxFx = (1-To)(1+r)^n
- if use after-tax asset allocation
– estimating time horizons is difficult
– difficult to communicate to clients
– portfolio may be too risky on a pre-tax basis if the allocation is done on an after-tax basis

48
Q

Discuss the relation between after-tax returns and different types of investor trading behavior;

A

⇒ The value created by using investment techniques that effectively manage tax liabilities called “tax alpha”
• Trading Behavior/ – tax burden for many asset classes depends on an investors trading behavior
• Trader
• Active investor
• Passive investor
• Tax-exempt investor

49
Q

Expand on Trader

A
  • Recognizes all portfolio returns in the form of annually taxed short-term gains
    = $1000[1+r(1-tcg-short)^]n
50
Q

Expand on Active investor

A
  • Gains are longer-term in nature, may receive more favorable tax treatment
  • Active managers must earn greater pre-tax alphas than passive managers to offset the tax drag of active trading
    = $1000[1+r(1-tcg-long)]n
51
Q

Expand on Passive investor

A
  • Passively buys & holds

= $1000[(1+r)^n(1-tcg-long)+tcg-long]

52
Q

Expand on Tax-exempt investor

A
  • Never pays capital gains taxes

= $1000(1+r)n

53
Q

Explain tax loss harvesting and highest-in/first-out (HIFO) tax lot accounting;

A
  • The practice of realizing a loss to offset a gain or income
  • The tax savings can be invested, increasing the asset base
  • Highest-in, first-out (HIFO) tax lot accounting
    • When lots are purchased at different prices, select those purchased at the highest price for the first sale
  • When the current yr. the tax rate is low, maybe worth letting the loss remain unrealized if tax rates will be higher next period
54
Q

Demonstrate how taxes and asset location relate to mean-variance optimization.

A
  • Pre-tax efficient frontiers may not be reasonable proxies for after-tax efficient frontiers
  • The same asset at different locations (i.e. type of account) is essentially a distinct after-tax asset
  • It will produce different after-tax accumulations
  • Use accrual equivalent returns (vs. pre-tax returns) and after-tax s.d. (vs. reg. s.d.)
55
Q

Definition of Estate and Estate Planning

A
  • Estate ⇒ all of the property a person owns or controls

- Estate planning ⇒ the process of preparing for the disposition of one’s estate upon death and during one’s lifetime

56
Q

Definition of Will, Testator, and Probate

A
  • Will/Testament ⇒ outlines the rights others will have over one’s property after death
  • Testator ⇒ the person who authorized the will and whose property is disposed of according to the will
  • Probate ⇒ the legal process to confirm the validity of the will so that executors, heirs, and other interested parties can rely on its authenticity
57
Q

Disadvantages of Probate and how it can be avoided

A
  • The process can be lengthy & costly, delays the transfer of assets
  • Can be avoided (or its impact limited) by holding assets in other forms of ownership
    • Joint ownership with right of survivorship
    • Trusts
    • Insurance (e.g. segregated funds)
58
Q

Legal Systems

A
  • Common law system – testator usually has the freedom of disposition (the right to use their own judgment regarding property)
  • Civil law system – restrictions on such dispositions
  • Common law – law is primarily developed through decisions of the courts
  • Civil law – law developed primarily through legislation
59
Q

Forced heirship rules

A

– children have the right to a fixed share of a parent’s estate (spouses as well)

60
Q

Marital property rights

A

➀ Community property regimes – each spouse has an indivisible 1⁄2 interest in income earned during marriage - Upon death, spouse gets 1⁄2 of the community property (other 1⁄2 transferred through will)
➁ Separate property regimes – each spouse is able to own and control property as an individual

61
Q

Explain the two principal forms of wealth transfer taxes and discuss effects of important non-tax issues, such as legal system, forced heirship, and marital property regime;

A

⇒ Lifetime Gratuitous Transfers (inter vivos transfers)
- Made during the lifetime of the donor
- May or may not be taxed (depends on jurisdiction)
⇒ Testamentary Gratuitous Transfers
- transfers made after the death
- Taxes may be applied to the transferor or the recipient
⇒ Wealth transfer tax inheritance tax
- May be a flat or progressive tax
- May be a threshold allowance

62
Q

Determine a family’ score capital and excess capital, based on mortality probabilities

A
  • Core capital can be estimated by calculating the expected future cash flows by multiplying each future cash flow by the probability that it will be needed
  • 𝒑(𝒔𝒖𝒓𝒗𝒊𝒗𝒂𝒍) = 𝒑(𝒉𝒖𝒔𝒃𝒂𝒏𝒅 𝒔𝒖𝒓𝒗𝒊𝒗𝒆𝒔) + 𝒑(𝒘𝒊𝒇𝒆 𝒔𝒖𝒓𝒗𝒊𝒗𝒆𝒔) − 𝒑(𝒉𝒖𝒔𝒃𝒂𝒏𝒅 𝒔𝒖𝒓𝒗𝒊𝒗𝒆𝒔) × 𝒑(𝒘𝒊𝒇𝒆 𝒔𝒖𝒓𝒗𝒊𝒗𝒆𝒔)
    ⇒ Safety Reserve – adds to core capital estimate to incorporate the risk of asset underperformance
  • produce a sequence of poor returns (uncertainty of capital markets)
  • Allows spending beyond that articulated in the spending needs (uncertainty of future commitments)
63
Q

Estimating Core Capital w/ Monte Carlo simulation

A
  • Estimate the amount of capital required to sustain a pattern of spending over a particular time horizon with a 95% level of confidence
    i.e. determine core capital that sustains spending in at least 95% of the trials
  • Safety reserve may also be added but would be
    smaller than mortality table method
64
Q

Estimating Core Capital w/ Sustainable Spending Rates

A

– what %age of capital can be spent each yr. such that the probability of outliving assets is below some threshold level
e.g. prob. of ruin < 9%, 4% of capital/yr = sus. spending rate $500,000 spending needs
Core capital = 𝟓𝟎𝟎,𝟎𝟎𝟎/0.04= $𝟏𝟐,𝟓𝟎𝟎,𝟎𝟎𝟎

65
Q

Explain the estate planning benefit of making lifetime gifts when gift taxes are paid by the donor, rather than the recipient;

A

⇒ Lifetime gifts – will lower estate or inheritance taxes
→ Tax-free gifts/ – fall below periodic or lifetime allowances
→ Taxable gifts:
- Can also gift assets with higher expected returns to the second generation, first-generation holds assets with lower expected returns (lowers estate tax)
⇒ Location of the Gift Tax Liability/
- Tax liability of a gift may be with the donor or the recipient - A cross border gift may result in both being taxed based on tax laws in each jurisdiction
- If the donor pays taxes, the tax benefit of the lifetime gift vs. the bequest increases (tax paid decreases the size of the estate, and ∴ estate tax)

66
Q

Spousal Exemptions

A
  • Many jurisdictions with the estate or inheritance taxes allow for bequests & gifts to spouses without tax liability
  • If the value of the estate is below some exclusion threshold, the estate can pass without inheritance tax
67
Q

Valuation Discounts

A

– discounts for illiquidity and lack of control - Transferring assets subject to valuation discounts reduces the basis on which transfer tax is calculated
∴ can intentionally create illiquidity and lack of control by placing assets in a family limited partnership (FLP)
- Transfer minority interests

68
Q

Deemed Disposition

A
  • rather than an estate or inheritance tax, some jurisdictions used ‘deemed disposition’
  • Estate pays tax on any unrealized cap. gains (i.e. the estate is deemed to have disposed of the assets at current market values)
69
Q

Charitable Gratuitous Transfers

A

– most charitable donations are not subject to transfer taxes (quite the opposite ⇒ qualify for tax reductions)

70
Q

Explain the basic structure of a trust and discuss the differences between revocable and irrevocable trusts;

A

Trust – holds and manages the assets of a settlor for the benefit of the beneficiaries
- governed by the trust document
Revocable Trust
- Settlor retains right to rescind trust, regain ownership of assets
- Settlor is the owner of assets for tax purposes
- No creditor protection
Irrevocable
- Creditor protection
- Trustee pays taxes
- Trust is the legal owner of the assets
- Both forms bypass probate
- Transfer of assets dictated by the trust document and not the Will
- the beneficiaries are not legal owners of the assets

71
Q

Fixed Trust

A

⇒ Fixed/ – distributions to beneficiary occur at certain times or in certain amounts (terms of the distribution are pre-determined)

72
Q

Discretionary Trust

A

⇒ Discretionary/ – trustee determines whether and how much to distribute (trustee has sole and uncontrolled discretion)
- Discretionary trusts protect assets from claims of creditors against beneficiaries

73
Q

Concepts of trust, control, asset protection, taxes of trusts

A
  • Concept of trust is unique to common law (may not be recognized in a civil law jurisdiction)
    • Control – trusts make resources available to a beneficiary without yielding complete control over the resources
    • Asset Protection – irrevocable trusts protect assets of the settlor from creditors
    • Tax reduction – income generated by trust assets may be taxed at a lower rate
  • Lower progressive tax bracket
  • Set up trust in the low tax jurisdiction
  • Assets may be transferred to a trust for estate tax purposes but not income tax purposes (income may remain taxable to the settlor)
74
Q

Foundations

A

– based in civil law countries and unlike a trust, is a legal person
- Choice of trust or foundation usually an issue of jurisdiction

75
Q

Source jurisdiction vs residence jurisdiction taxes

A

⇒ Source jurisdiction – country taxes income as a source within its borders
- Also called a territorial tax system
⇒ Residence jurisdiction – all income (foreign & domestic) is subject to taxation (worldwide income)
- Most common
- Typically noncitizen residents, resident citizens, but not non-resident citizens
- No international standardized residency test (residency thresholds differ between countries)

76
Q

Taxation on wealth & wealth transfers source

A

⇒ Taxation on wealth & wealth transfers
Source - tax wealth economically sourced
• Wealth in the country
Residence – tax worldwide wealth

77
Q

Taxation on wealth & wealth transfers

A

⇒ Taxation on wealth & wealth transfers - Wealth transfers – depends on
a) donor country b) recipient’s country c) location of asset

78
Q

Exit taxation

A

→ Exit taxation – if applicable, applies to unrealized gains (i.e. deemed disposition)

79
Q

Residence-residence conflict

A
  • Residence-residence conflict – 2 countries claim residence of the same individual, subjecting the individual’s worldwide income to taxation by both countries
80
Q

Source-source conflict

A

– 2 countries claim source jurisdiction of the same asset

81
Q

Residence-source conflict

A

– individual in Country A subject to residence jurisdiction, assets in Country B subject to source jurisdiction
– most common source of double taxation, most difficult to avoid with tax planning

82
Q

Evaluate a client’s tax liability under each of three basic methods (credit, exemption, and deduction) that a country may use to provide relief from double taxation;

A
  • Source countries have primary jurisdiction to tax income within their borders, residence country is typically expected to provide double taxation relief
    • Credit method: taxpayer tax liability is reduced by taxes paid to a foreign country exercising source jurisdiction (e.g. dividend withholding)
  • Credit is limited to the amount taxpayer would pay domestically
    e.g./Tres = 50% Tsource = 40%
    40% paid to foreign country 10% top-off paid domestically
    Tcm = max [TRes, TSource]
    • Exemption method – residence country imposes no tax on foreign-source income
    TEx = TSource
    • Deduction Method – residence country allows taxpayers to reduce taxable income by the amount of taxes paid
    TDed = TRes + TSource (1 – TRes) = TRes + TSource – TResTSource
  • Results in the highest tax liability
  • Tax treaties exist between countries (tax relief specified can be credit, exemption, or deduction)
83
Q

Tax avoidance

A

– strategies that conform to both the spirit and the letter of tax codes

84
Q

Tax evasion

A

– circumventing tax obligations by illegal means by misrepresenting/not reporting information

85
Q

Discuss how increasing international transparency and information exchange among tax authorities affect international estate planning.

A
  • Information exchange between tax authorities in increasing
  • Exposing once ‘secret banking’ relationships
    ⇒ Increased transparency

CFA Level III (12 decks)

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