Reading 17: Excerpts from Invest....ivate Investors－LOS c Investment, benefit, estate, living, between

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 4: Private Wealth Management
Reading 17: Excerpts from Investment Management for Taxable Private Investors
LOS c: Explain the tax-deferral benefit for married couples living in localities where wealth transfers between spouses are exempt from estate and transfer taxes.

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When one spouse dies, the tax-free transfer of assets between spouses means that estate taxes that would have been paid on:

A) the entire estate are often deferred for a considerable time.

B) one-half of the estate are avoided.

C) one-half of the estate are often deferred for a considerable time.

D) the entire estate are avoided.

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Answer and Explanation

When one spouse dies, the tax-free transfer of assets between spouses means that estate taxes that would have been paid immediately on one-half of the estate are often deferred for a considerable time (the surviving spouses remaining life).

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When one spouse dies, the tax-free transfer of assets between spouses means that:

A) the surviving spouse will continue to receive dividends and interest from the entire estate, including that which would have been lost to estate taxes.

B) the surviving spouse will continue to receive dividends and interest from the entire estate, with the exception of that which would have been lost to estate taxes.

C) the assets must be placed in a inter vivos trust.

D) the surviving spouse will continue to receive dividends and interest from the entire estate, but half of the principal is placed in a trust.

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Answer and Explanation

When one spouse dies, the tax-free transfer of assets between spouses means that the surviving spouse will continue to receive dividends and interest from the entire estate, including that which would have been lost to estate taxes.

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Concerning a married couple, which of the following statements is CORRECT? When one of them dies:

A) their half of the estate is transferred to the surviving spouse on a tax-free basis.

B) the value of the estate in excess of the estate tax exemption is transferred to the surviving spouse on a tax-free basis.

C) their half of the estate must be transferred into a trust for the benefit the surviving spouse if the transfer is to be on a tax-free basis.

D) estate taxes are assessed to their half of the estate, and the net estate is transferred to the surviving spouse on a tax-free basis.

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Answer and Explanation

When one of them dies, their half of the estate is transferred to the surviving spouse on a tax-free basis.

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What are the main targets for taxation, what are the fundamental methodologies for improving after-tax returns, and how does a key feature in the tax code assist married couples in pursuing one or both of these methodologies?

A) The main targets for taxation are income and assets transferred. The two main methodologies for improving after-tax returns are to realize income and capital gains in the most advantageous way so that the tax rate is minimized, and to defer the realization of gains for as long as possible. The provision in the tax code that permits the tax-free transfer of assets between spouses upon the death of one of them can assist married couples in pursuing one or both of these tax-reducing methodologies.

B) The main targets for taxation are income, assets held, assets transferred, and expenditures. The two main methodologies for improving after-tax returns are to realize income and capital gains in the most advantageous way so that the tax rate is minimized, and to defer the realization of gains for as long as possible. The provision in the tax code that permits the tax-free transfer of assets between spouses upon the death of one of them can assist married couples in pursuing one or both of these tax-reducing methodologies.

C) The main targets for taxation are income, assets held, assets transferred, and expenditures. The two main methodologies for improving after-tax returns are to realize income and capital gains in the most advantageous way so that the tax rate is minimized, and to defer the realization of gains for as long as possible. The provision in the tax code that resets the cost basis of assets held upon the death of one of them can assist married couples in pursuing one or both of these tax-reducing methodologies.

D) The main targets for taxation are income and assets transferred. The two main methodologies for improving after-tax returns are to realize income and capital gains in the most advantageous way so that the tax rate is minimized, and to defer the realization of gains for as long as possible. The provision in the tax code that resets the cost basis of assets held upon the death of one of them can assist married couples in pursuing one or both of these tax-reducing methodologies.

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Answer and Explanation

The main targets for taxation are income, assets held, assets transferred, and expenditures. The two main methodologies for improving after-tax returns are to realize income and capital gains in the most advantageous way so that the tax rate is minimized, and to defer the realization of gains for as long as possible. The provision in the tax code that permits the tax-free transfer of assets between spouses upon the death of one of them can assist married couples in pursuing one or both of these tax-reducing methodologies. In virtually all cases, this feature of the tax code allows couples to defer the payment of estate taxes, often for a considerable period of time. To the extent that future tax rates are lower than those present at the time the assets are transferred between spouses, there will also be some reduction in the effective tax rate.