Reading 18: Excerpts from Invest....ivate Investors－LOS a income, investment, returns, account, multiple

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 4: Private Wealth Management
Reading 18: Multiple Asset Locations
LOS a: Explain how the taxation of income, investment returns, wealth transfers, and charitable bequests leads to the use of multiple account structures (locations) with differing tax status.

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The primary motivation for an individual investor to hold assets in multiple accounts is to:

A) maximize returns.

B) reduce risk.

C) minimize or eliminate taxes.

D) match investment horizon objectives.

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Answer and Explanation

The primary motivation for an individual investor to hold assets in multiple accounts is to minimize or eliminate taxes.

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Taxes on assets are assessed on:

A) realized returns and transfers.

B) total returns and transfers.

C) accruals and transfers.

D) total returns and re-registration.

Answer and Explanation

Taxes on assets are assessed on realized returns and transfers. In general, returns that are not realized, such as unrealized capital gains, are not taxed.

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In addition to improving tax efficiency, the use of multiple accounts can:

A) facilitate the transfer of assets to charitable entities.

B) broaden the investment universe.

C) permit risk arbitrage.

D) improve the transparency and simplify record keeping.

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Answer and Explanation

In addition to improving tax efficiency, the use of multiple accounts can facilitate the transfer of assets to charitable entities. For example, the establishment of a foundation can clarify the intended mission for the bequests, and increase awareness among potential recipients.

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What are the two principal criteria for holding assets in multiple accounts, and what criteria can be used to evaluate the effectiveness of the various account structures?

A) The two principal criteria are to minimize taxes and achieve effective diversification. The five criteria used to judge the effectiveness of the various account structures are tax efficiency, the implied time horizon, ease of access to assets held therein, degree of control over the management of the assets, and the ability to assign value to assets used to fund the account.

B) The two principal criteria are to minimize taxes and facilitate the tax-efficient transfer of assets to heirs or recipients of charitable bequests. The five criteria used to judge the effectiveness of the various account structures are tax efficiency, the implied time horizon, ease of access to assets held therein, degree of control over the management of the assets, and the ability to assign value to assets used to fund the account.

C) The two principal criteria are to minimize taxes and facilitate the tax-efficient transfer of assets to heirs or recipients of charitable bequests. The five criteria used to judge the effectiveness of the various account structures are tax efficiency, the implied time horizon, ease of access to assets held therein, degree of control over the management of the assets, and the ability to maximize excess returns.

D) The two principal criteria are to minimize taxes and achieve effective diversification. The five criteria used to judge the effectiveness of the various account structures are tax efficiency, the implied time horizon, ease of access to assets held therein, degree of control over the management of the assets, and the ability to maximize excess returns.

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Answer and Explanation

The primary objective is ordinarily to minimize taxes. The secondary objective is often to facilitate the tax-efficient transfer of assets to heirs or recipients of charitable bequests. Diversification is not an objective, since this can ordinarily be affected in a single account structure.

The five criteria used to judge the effectiveness of the various account structures are tax efficiency, the implied time horizon, ease of access to assets held therein, degree of control over the management of the assets, and the ability to assign value to assets used to fund the account. The ability to maximize excess returns is not overtly related to multiple account structures in any way.

The primary objective is ordinarily to minimize taxes. The secondary objective is often to facilitate the tax-efficient transfer of assets to heirs or recipients of charitable bequests. Diversification is not an objective, since this can ordinarily be affected in a single account structure.

The five criteria used to judge the effectiveness of the various account structures are tax efficiency, the implied time horizon, ease of access to assets held therein, degree of control over the management of the assets, and the ability to assign value to assets used to fund the account. The ability to maximize excess returns is not overtly related to multiple account structures in any way.