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ECOM079-Applied Wealth Management

2021

Multiple Choice Question 1.

The country that John lives imposes a wealth tax of 0.5 percent on financial assets each year. His   £600,000 portfolio is expected to return 5 percent per year over the next twenty years. Assuming no other taxes, what is his expected wealth at the end of twenty-five years?

A £1,200,100.

B £1,205,857.

C £1,792,506.

D £1,200,100.

E £1,205,857.

 

Multiple Choice Question 2.

John holds his funds in a tax deferred account and a taxable account. Which of the following assets     would be least appropriate in a taxable account in a Flat and Heavy Tax Regime, in which dividends     and capital gains are taxed at ordinary rates and interest income is tax exempt? Assume that all assets are held in a client’s overall portfolio.

A Bonds.

B Shares.

C High dividend paying stocks.

D Real estate.

E Life insurance.


Multiple Choice Question 3.

John and Mary both have £120,000 each split evenly between a tax deferred account and a taxable   account. John chooses to put stock with an expected return of 7 percent in the tax-deferred account   and bonds yielding 4 percent in the taxable account. Mary chooses the reverse, putting stock in the    taxable account and bonds in the tax deferred account. When held in taxable account, equity returns  will be taxed entirely as deferred capital gains at a 20 percent rate, while interest income is taxed        annually at 40 percent. The tax rate applicable to withdrawals from the tax deferred account will be 40 percent. Cost basis is equal to market value on asset held in taxable account.

Johns and Marys Asset Location

Tax Profile

John (£)

Mary (£)

Taxable Account

60,000 bonds

60,000 stock

Tax deferred Account

60,000 stock

60,000 bonds

Total (Before-tax)

120,000

120,000

What is John’s after-tax accumulation after 20 years?

A £245,025.

B £234,720.

C £235,725.

D £236,720.

E £245,925.

 

Multiple Choice Question 4.

In the previous question, what is Mary’s after-tax accumulation after 20 years?

A £273,620.

B £266,405.

C £276,625.

D £286,305.

E £279,720.

 

Multiple Choice Question 5.

What is the after-tax asset allocation for the following portfolio if withdrawals from the tax-deferred account (TDA) will be taxed at 40 percent?

Account

Pretax Market Value (£)

Asset Class

TDA

220,000

Bonds

Tax-exempt

88,000

Stock

Total

308,000

 

A 70% bonds; 30% stock.

B 40% bonds; 60% stock.

C 60% bonds; 40% stock.

D 50% bonds; 50% stock.

E 30% bonds; 70% stock.


Multiple Choice Question 6.

Mary is considering whether to save for retirement using a tax-deferred account (TDA) or a tax-exempt account. The tax-exempt account permits tax-free accumulation and withdrawals but contributions are taxable at a 30 percent tax rate. The TDA permits tax-deductible contributions but withdrawals will be   taxed at 40 percent. Assuming contribution limits do not affect the investor’s choice,

what should the investor do?

A Choose the TDA.

B The choices are the same.

C Choose the tax-exempt account.

D Choose none of these two accounts.

E Choose a tax-deductible contributions account.

 

Multiple Choice Question 7.

Which of the following assets would be least appropriate to locate in a tax deferred account in a Heavy Interest Tax Regime assuming all assets are held in a client’s overall portfolio?

A Low dividend paying stock.

B High dividend paying stock.

C Tax exempt bonds.

D Taxable bonds.

E Real estate.

 

Multiple Choice Question 8.

Consider a portfolio that is generally appreciating in value. Active trading is most likely to be most attractive in a :

A low taxable account.

B tax deferred account.

C tax exempt account.

D highly taxable account.

E semi-annually deferred account.

 

Multiple Choice Question 9.

Mary has some securities worth £75,000 that have a cost basis of £100,000. If she sells those              securities and can use the realized losses to offset other realized gains, how much can she reduce her taxes in the current tax year assuming capital gains are taxed at 25 percent?

A £6,260.

B £6,350.

C £6,250.

D £6,450.

E £6,230.

 

Multiple Choice Question 10.

Tax loss harvesting is least effective when … :

A there are few similar investment opportunities for the security with the loss.

B the taxpayer is currently in a relatively high tax environment.

C the taxpayer is currently in a relatively low tax environment.

D there are no similar investment opportunities for the security with the loss.

E the taxpayer is currently in a medium tax environment.

 

Question 11.

John and Mary live in a community property regime with their three children. The community property   regime entitles a surviving spouse to receive one-half of the community property after the first spouse’s death. There are also forced heirship laws in their country that entitle a spouse to one-third of the total  estate and the children are entitled to split one-third of the total estate. After their marriage, John          received an inheritance that was retained as separate property and is worth £100,000 today. The         remainder of the estate is considered community property. Suppose he passes away today with a total estate of £400,000 and wishes to bequeath £150,000 to his surviving mother.

a. Calculate the minimum amount that Mary should receive.

[8 marks]

b. Calculate the minimum amount the children should receive under forced heirship rules.

[4 marks]

c. Comment on whether John bequeath £150,000 to his mother.

[8 marks]

Question 12.

John is 50 years old and he is working on to his estate planning strategy to transfer wealth to his          cousin, Mary. Annual exclusions allow John to make tax-free gifts of £20,000 per year, and gratuitous transfer tax liabilities are the responsibility of the recipient. John notes that the relevant tax rate for       bequests from the estate is likely to be 65 percent. He is aware, however, that gifts (in excess of the    £20,000 exception mentioned above) made prior to age 70 enjoy 50 percent relief of the normal estate tax of 65 percent, and for an effective tax rate of 35 percent. In addition, Mary enjoys a low tax rate of  25 percent on investment income because she has relatively low income. John, on the other hand, is  subject to a 50 percent tax rate on investment income and he is considering gifting assets that are       expected to earn a 6.5 percent real return annually over the next 25 years.

a. Calculate how much of his estate will John have transferred on an inflation-adjusted basis in 25 years without paying estate tax.

[4 marks]

b. Calculate the relative value of the tax-free gift compared to the value of a bequest in 25 years.

[8 marks]

c. Assume that John wishes to make an additional gift that would be subject to gift tax. What would be the relative after-tax value of that taxable gift compared to a bequest 25 years later.

[8 marks]

Question 13.

Discuss the common estate planning tools that either maximize tax benefit, produce a non-tax benefit, or both.

[20marks]

Question 14.

As part of general principles of managing concentrated single-asset positions discuss (i) the objectives in dealing such concentrated positions, (ii) the considerations affecting them, and (iii) their institutional and the capital market constraints.

[20 marks]