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CFA L3 Matheus > Section 4 - R22 - Topics in PWM (Tax) > Flashcards

Section 4 - R22 - Topics in PWM (Tax) Flashcards

1
Q

Tax Types (List)

A
  1. Income Tax (wage, rent, dividend, interest)
  2. Gains Tax (capital gain)
  3. Wealth or Property Tax (own)
  4. Stamp Duties (purchase of REIT)
  5. Wealth Transfer Tax (estate, inheritance)
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2
Q

Income Tax (Description)

A
  • Interest: Tax as ordinary income
  • Dividends: Pait out after corporate tax and then taxed again as income
  • Cross Border Income: withholding tax
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3
Q

Capital Gains Tax (Description)

A
  • Capital Gains: Tax Basis = Cost Basis
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4
Q

Real Estate Tax (Description)

A
  • Principal residence is exempt
  • Net Income from RE investments is taxed after depreciation and costs of maintenance
  • Depreciation lowe cost basis, which is recaptured on sale
  • Rollover between properties is possible to defer tax
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5
Q

Tax Status of Accounts

A
  1. Taxable
  2. Tax-Deferred: PGBL. Contribute to reduce income, withdrawals in 10y will be taxed
  3. Tax-Exempt: contributions do not reduce income but there is no tax in the investment
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6
Q

Tax Haven (Definition)

A

Countries with no or very low tax rates

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6
Q

Territorial Tax System (Definition)

A

Locally sourced income is taxed only (Singapore, Phillipines)

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7
Q

Worldwide Tax System (Definition)

A

Tax on all income, regardless from where the citizen is

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8
Q

Which asset class is more efficient?

A
  • Equities
  • Dividends often receive preferential treatment
  • Capital Gains generally taxed at lower rates
  • Investor retains control over timing of realized gains
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9
Q

Tax Efficient Funds (Compare two)

A

Momentum Funds > Style Funds
- Momentum they sell losers earlier (realizing tax losses) and let winners run
- Style Funds: sell holdings to maintain style adequacy, realizing gains earlier

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10
Q

After Tax HPR (Formula)

A

R1 = [(Value t - Value 0) + Income - Tax]/Value 0

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11
Q

R1 After-Tax Return (Formula)

A

R1 = R - (Tax/Value 0)

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12
Q

Cumulative After-Tax Return R1 (Formula)

A

R1g ~ [(1+R1)(1+R2)…(1+Rn)]^(1/n) - 1]

Returns may be quarterly or monthly

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13
Q

Intra-Month After Tax Holding Period Return (Formula)

A

R’ = R - (Tax)/ Value 0 + Cj(N-j)/N, where

Cj = CashFlow (Dividend)
N = How Many Days ~ one month
j = Date Cj was received

(N - j) = Holding Period of that Cashflow

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14
Q

Post Liquidation Return (Formula)

A

R pl = [(1+R1)(1+R2)(1+Rn) - Liquidation Tax / Final Value] ^(1/n) - 1

Liquidation Tax: (Vt - Tax Basis) * Capital Gains Tax Rate

  1. Multiplique retornos after tax
  2. Desconte (em % do valor final) o Liquidation Tax
  3. Decomponha o retorno para N períodos

Obs.: Tax é descontado no final do período, após accrual de todo o retorno after-tax

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15
Q

After Tax Excess Return (Formula)

A

After-Tax Excess Return = R1 - B1

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16
Q

Tax Alpha (Formula)

A

α = X1 - X

X1 = After-Tax Excess Return = R1-B1
X = Pre-Tax Excess Return = R-B

B ~Benchmarks

17
Q

Portfolio Management Tax Strategies

A
  • Decumulation: withdraw from taxable accounts first
  • Charitable Giving: gift appreciated securities in taxable accounts to this entity
18
Q

Tax Avoidance and Evasion (Description)

A
  1. Tax Avoid: legal activity
  2. Tax Evasion: Illegal concealment of income and non-payment of taxes
19
Q

Tax Strategies (List)

A
  1. Structure investments in a legitimate manner to reduce amount of taxes owed
  2. Defer recognition of taxable income
20
Q

Tax Management
a) Legal Investment Vehicles (Describe)

A
  • Partnership: tax liabilities passed through to partners
  • Mutual Funds: income passed as earned + capital in NAV on redemption. Uses losses to offset gains.
21
Q

Tax Management
b) Usage of tax loss (Describe)

A
  • Tax Loss Harvesting: realize losses to offset gains
  • Tax Lot Accounting: Each purchase has its cost basis
22
Q

Tax Management
c) Quantitative Tax Mgmt (Describe)

A

Optimize:
- Tracking Error
- Realized Losses
- Realized Gains
- Trading Costs

23
Q

Concentrated Positions (Types)

A
  1. Publicly-traded equities
  2. Privately-owned business
  3. Commercial and Investment Real Estate
24
Q

Factors to Consider in Concentrated Positions (List)

A

a. Degree of Concentration v. Portfolio
b. ↑ Volatility/Downside = Diversify!
c. ↓ Tax Basis (↑ Tax Liability)
d. ↑ Time Horizon = ↑ Offset benefit
e. Restrictions regarding potential sale
f. Emotional attachment to asset

25
Q

Approaches to Concentrated Positions (List)

A
  1. Sell and diversify
  2. Staged diversification
  3. Hedge and Monetize (derivatives are allowed?)
  4. Tax-Free Exchanges (some jurisdictions)
  5. Tax avoid
  6. Charitable giving
25
Q

Staged Diversification (Describe)

A

Position + Completion Portfolio = Benchmark

MORE tracking risk

↑ More Position Sold = ↓ Tracking Risk and ↑ Tax Liability

25
Q

Equity Monetization (Describe)

A
  1. Hedge Position by short sale, TRS or derivatives
  2. Borrow against the position (get cash, invest in other assets)

Note: some jurisdictions may see this as constructive sale

26
Q

Charitable Remainder Trust (Describe)

A
  1. Investor sells Concentrated Position to a Trust
  2. Trust generates income to beneficiaries
  3. When last beneficiary dies, all remaining assets are distributed to charity
  4. Investor gets tax benefit from donation
27
Q

List of Strategies to Diversify from Private Businesses (List)

A
  1. IPO
  2. Sale to 3rd party
  3. Divest non-core assets
  4. Personal line of credit against company shares + put loan to the company and use proceeds to invest in diversified protfolio
  5. Levered recap: get debt and repurchase equity, giving exit to investors
28
Q

List of Strategies to Diversify from Real Estate (List)

A
  1. Mortgage Finance (see NRIAT formula
  2. Charitable Donation
29
Q

NRIAT Formula and Mortgage Finance (Describe rationale)

A

If NRIAT = P + I - It, then borrowing a loan is ok

NRIAT = Net Retained Income After Tax
P = Principal
I = Interest
It = Interest Tax Shield

Use proceeds from loan to diversify portfolio

30
Q

Gift and Estate Planning Objectives (Describe)

A

Transferring assets to next generation or charity after one’s life.

Objectives:
1. Maintain sufficient income and liquidity (for donors lifestyle)
2. Decide on control of assets (retain, relinquish)
3. Asset Protection (from creditors, forced heirship)
4. Tax awareness
5. Business succession
6. Charitable goals

31
Q

Estate Stakeholders (List of Terminologies)

A
  1. Will (Testament)
  2. Testator: Person who authorized the will
  3. Probate: Legal process to confirm the validity of the will
  4. Intestate: Dying without a valid will or one that does not dispose of their property
32
Q

Gifts and bequests (Differentiate)

A

Gifts may be tax free up to a certain amount or threshold

Bequests are estate or inherintance and subject to tax. May be flat, progressive or have statutory allowance

33
Q

Efficiency of Gifts v. Bequests (Formula)

A

FV Gift = [1+rg(1-tg)]^n (1-Tg)
FV Bequest = 1+rb(1-tb)^n

RV taxable gift = FVgift/FVbequest

If > 1, gift is better
Tg and Te are paid by recipient

34
Q

Estate Planning Tools (List)

A
  1. Trusts
  2. Foundations
  3. Life Insurance
  4. Companies
35
Q

Estate Planning Tools (Describe each)

A
  1. Trusts: Holds controllership while allocating to beneficiaries. Protects from divorce. Avoid probate.
  • Revocable or not
  • Fixed or Discretionary distributions
  1. Foundations:
    - Charitable purpose
    - Tax Deductions
    - No tax if achieves certain minimum spending
  2. Life Insurance:
    - Death benefits bypasses probate
    - Tax Free
  3. Companies: Corporations may face lower tax rate. Give Gamacor to Bruno.
36
Q

Family Governance (Describe)

A
  • System to generate, transition and preserve wealth across generations. Provides collective communication and decision making
37
Q

Family Governance Forums (List)

A
  1. Board of Directors: external members added (Banco Safra)
  2. Family Council: selected family members to deal with the board
  3. Family Assembly (Gathering of all members)
  4. Family Office: Invests money from family
  5. Family Foundation: Platform for philantropy
38
Q

Family Planning Strategies for Unexpected Events (List)

A
  1. Divorce: Prenup, Post-nup, Trusts
  2. Incapacity: Assign POA

CFA L3 Matheus (18 decks)

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