328 Reading 30 Estate Planning in a Global Context PRACTICE PROBLEMS 1. ‘The drawing up ofa willis an area of estate planning that requires an individual to have a clear understanding of the tax and succession (or inheritance) laws of any jurisdiction of relevance to the testator. Although an individual may elect to draw up a will, the validity of the will could be subject to various challenges in the probate process. In addition, probate may create sizeable court fees as well as unwelcome publicity and a delay in the distribution of assets. Describe how an individual can attempt to reduce or even avoid the impact of: A probate. B_ forced heirship. 2 After a lengthy career as a metallurgical engineer, Greg Pearsall recently retired at age 70 and is looking forward to spending retirement with his wife Christine, who is 75 years old. Although both Greg and Christine are now retired, they ‘would prefer to maintain their present lifestyle which currently requires annual spending of $75,000 in real terms. Inflation is expected to be 6 percent, and the ‘nominal risk-free rate is 10 percent. The Pearsalls’ survival probabilities for the next five years based on their current age are listed in the table below. Greg Christine Year Age (Survival) Age piSurvival) 1 a 0.9660 %6 0.8235 2 n 09371 7 0.7996 $ B osis2 78 oz 4 ™ 8883 ~ 0.7208 5 6 0548 80 0.6919 ‘ne will survive over each A What is the probability that either Greg or Chri of the next five years? B Is it appropriate to use the expected return of the assets used to fund their spending needs when calculating the capitalized value of the Pearsalls’ core capital spending needs? Why or why not? © What is the capitalized value of the Pearsals’ core capital spending needs over the next five years? 3 As part oftheir estate, Tony and Eleanor Hall currently own a $2.5 million portfolio of equities and bonds that has an average annual pretax return of 10 percent. The Halls’ after-tax return on the portfolio is 7 percent (the tax rate is 30 percent). Due to the rapid deterioration in their health, the Halls are considering transferring the $2.5 million portfolio to their eldest grandchild, Joe, during the current financial year. By transferring their investment portfo- lio directly to their grandson, the Halls are attempting to reduce the transfer taxation effect of their inheritance. Although S1.5 million can be transferred tax free, local jurisdiction requires that the remaining $1 million transfer be subject to a 30 percent tax rate, which is Joe's responsibility as donee. The Halls have consulted with their financial planner as they ave uncertain whether the 30 percent tax rate would also apply if their gift to their grandson is delayed and transferred as a bequest five years from today. Their grandson currently pays a ‘marginal tax rate of 25 percent. (©2011 CFA Institute, AlPractice Problems [A Discuss the effectiveness of the Halls’ generation skipping strategy. B_ Calculate the relative after-tax value of the Hall's $1 million gift (above and beyond the $1.5 million exclusion) to their grandson. Assume the $I mil- lion transfer is subject to 30 percent tax whether it takes place today or is delayed and transferred as a bequest in five years. © Given that the $1 million transfer is subject to 30 percent tax whether it takes place today or is delayed and transferred as a bequest in five years, is there any advantage in delaying payment of the gift by five years? 4 After five decades of living in Country A, a wealthy entrepreneur, Andrew Lloyd, has recently retired and taken up residency in Country B. Although he now lives in Country B, Lloyd has retained a number of investment properties in Country A. The investment income tax rate is 45 percent and 30 percent in Country A and Country B, respectively. [A Define source and residence tax as two possible primary tax systems of Country A and Country B, B Discuss three potential double taxation contficts that could arise due to Lloyd's new residency in Country B. Calculate Lloyd's tax rate lability under the following three methods pro- viding for double taxation relief, assuming scenarios where either country claims source or residence jurisdiction: 1. Credit method. ii, Exemption method. fi, Deduction method.