CERTIFIED FINANCIAL PLANNER

Transcription

1 CERTIFIED FINANCIAL PLANNER PROFESSIONAL COMPETENCY EXAMINATION Tear this top page off, read it, sign it and please hand in with your answer booklet Session 1 Two (2) Main Questions Date: 16 February 2017 Total Marks : 50 Time: 09:00 12:00 (3 Hours) Pass mark : 60% This examination paper comprises of 7 pages. Each case study should be answered in its own booklet. You are expected to fully motivate all your answers, where applicable. Only answers in your own handwriting in the official answer book will be considered. PLEASE READ THE FOLLOWING RULES AND INSTRUCTIONS FOR THE EXAMINATIONS 1 The duration and type of examination is clearly indicated on the coversheet of the examination paper. 2 If you arrive late, no extra time will be allocated to you. No candidate will be allowed to leave the examination room within the first half hour or the last fifteen minutes of the examination session. 3 This is an open book examination. You are allowed to use textbooks, notes, financial calculators and tax tables during the exam. Candidates are not allowed to use cell phones or any other electronic device for whatsoever reason or purpose. Cell phones must be switched off and securely packed away in the candidate s bag. 4 Please use the stickers provided and place a sticker on the top right hand corner of each examination book as this promote anonymity. Also write your ID number on every page of the answering book. Do not write your name on any booklet. Answer each case study in a separate book. Please tear off the first page, sign at the bottom and include in your examination script. 5 No communication of any nature will be tolerated between candidates whilst the exam is in sitting. Candidates who disobey this rule will be expelled from the exam venue immediately. 6 You may not copy from any person during the examination nor allow anybody to copy from you. Any candidate suspected of cheating during the exam sessions will be investigated and may lead to disciplinary action (even if suspected by assessors after you have left the venue). 7 No smoking shall be allowed during the examination and no candidate shall be allowed to leave the examination venue for this purpose. 8 The results of the examination will be available ten (10) weeks after the examination. 9 Should you not be satisfied with the examination process, examination paper or results, you have the right to lay a complaint or appeal the exam in accordance with the PCE Examination policy available on I with ID number hereby acknowledge that I have read and understand all of the above. 1 Candidate signature

2 LEAVE BLANK as TOP page torn off and collected from Candidates (printing back to back) 2

3 Case Study 1: 09h00 12h00 (3 Hours) 50 Marks Case study Your client Pierre has approached you to assist him with his estate planning. Pierre (57) got married to Karen (50) in Prior to their marriage they executed an antenuptial contract which provides for the exclusion of the community of property with the inclusion of the accrual system. In the antenuptial contract Pierre recorded a commencement value of R while Karen recorded a commencement value of R The Consumer Price Index value in the month of their marriage was 32.7 and the latest available value is Pierre and Karen have two children: Frederick (21) and Pierre Rudolph (16). Pierre supplies you with the following client information sheet: Description: Note: Liabilities: Assets: Assets: Family Home Holiday Flat Furniture Motor vehicle % shareholding in Cabinets R Us (Pty) Ltd Loan account in Cabinets R Us (Pty) Ltd Loan account in Groot Pierre Familie Trust Unit Trust Investment Bank Account Total assets Liabilities: Mortgage Bond Credit Card Hire Purchase Total liabilities

4 Pierre provides you with details of the following life insurance policies that have been taken out on his life: Note: Life cover: A life policy with Meteor Insurers A life policy with Quasar Insurers Notes and assumptions: 1. Pierre bought the house in 2003 for R as the family s residence. To date no improvements have been made to the property but some minor maintenance was done. 2. Pierre purchased the the flat in 2010 for R with money that he inherited from his mother. 3. A Hilux double cab which was purchased for R , and was only used for personal use. 4. A cabinetry and woodworking company. Pierre holds 60% of the shares and the other 40% is held by John. The two started the company in 2010 with shares of R1.00 each. The value of R is Pierre s 60% share. This value is arrived at after takeing into account the debts owed to the shareholders. Pierre and John have not entered into a buy and sell agreement. Pierre was personally involved in the business since its inception. Pierre tells you that the company requires working capital of R per month to enable it to buy manufacturing materials and pay its staff wages. At present the company has R in its bank account. The rest of its value consists of its premises and machinery required to manufacture its cabinets. 5. The loan is interest free and payable on demand. 6. The loan is interest free and payable on demand. When the trust was formed seven (7) years ago Pierre sold a property for an amount of R to the trust and the loan account was created. 4

5 7. The portfolio was built up over the last few years through regular purchases. The base cost of the portfolio is R Karen has assets of R and liabilities of R The policy with Meteor Insurers was taken out by Pierre and is payable to his estate. 10. A policy for R with Quasar Insurers. The policy is payable to Pierre s brother Neil who took the policy on Pierre s life in 2006 while they were involved in a joint business venture in order to buy out Pierre s interest in the business should he pre-decease Neil. They have since decided to close the business, but Neil has decided to continue with the policy on Pierre s life. The annual premium is R Pierre has given you a copy of his will which contains the following provisions: a. Pierre bequeaths his holiday flat and his unit trust portfolio to his children, Frederick and Pierre Rudolph. b. Pierre bequeaths the remainder of his estate to his family trust, Die Groot Pierre Familie Trust. Pierre s intention is that Karen will be provided for by this trust should he pass away. He does not want her own estate to be increased significantly by a direct bequest. The Will provides that the trustees are to take the bequest into the trust (mentioned in b. above) and add it to the existing trust assets which is to be utilised for the benefit of the beneficiaries in accordance with the trust s provisions. On further questioning you discover that the Groot Pierre Familie Trust is a discretionary inter vivos trust which Pierre created. The beneficiaries 1 of the trust are: Karen and Pierre and Karen s descendants. 1 Income and Capital beneficiaries 5

6 Question 1 [46 marks] Pierre wants to know how the administration of his estate will look like should he pass away today. Assist him by providing answers to the following: 1.1. Calculate the Capital Gains Tax Payable should Pierre pass away today. Assume that Pierre has a marginal tax rate of 41%. (8 Marks) 1.2. Calculate the accrual claim that arises should Pierre pass away today. (Do not include the CGT payable in the calculation.) (9 Marks) 1.3. Calculate the estate duty liability in Pierre s estate should he pass away today. You can assume the following expenses over and above those provided: a. Funeral and death bed expenses to be R b. Administration costs and Master s fees (excluding executor s fees) will be R c. You may also assume that the executor will be registered for VAT. (9 Marks) 1.4. Calculate the liquidity in Pierre s estate. (6 Marks) 1.5. Critically comment on the possible practical implications of your answer in 1.4 above. (3 marks) 1.6. According to the facts of the case study above, it is Pierre s intention that the trust should provide for Karen s maintenance. Will the bequest to the Groot Pierre Familie Trust qualify as a deduction for estate duty purposes? Motivate your answer by referring to legislation. (2 Marks) 1.7. Explain how, Pierre and/or the Groot Pierre Familie Trust will be impacted by the new proposed section 7C of the Income Tax Act. (3 Marks) 1.8. Advise Pierre in respect of two (2) strategies that will minimize or eliminate the impact of the new proposed section 7C on his and/or the trust s financial position. (4 Marks) 6

7 1.9. Consider the Second Interim Report on Estate Duty by the Davis Tax Committee, released on 24 August Briefly advise Pierre on two (2) ways in which your calculations above and/or any other aspect of his financial planning MAY be impacted by the proposals contained in the document. No calculations are required Pierre merely needs an indication of how the proposals may impact him in future. Do NOT provide theoretical answers consider only aspects relevant to Pierre and his situation. (2 Marks) Question 2: [4 marks total] Your client Hanel purchased a sinking fund policy on 10 January The term is for five years. Since then she has made the following contributions: a) 2013 a lump sum contribution of R ; b) 2014 a further lump sum contribution of R ; c) 2015 a lump sum contribution of R ; d) 2016 a lump sum contribution of R In the beginning of 2017 Hanel comes to you wanting to make a further lump sum contribution of R Explain to Hanel what the impact of section 54 of the Long Term Insurance Act will be on her investment should she do so. (2 marks) 2.2 Calculate the maximum amount that Hanel can contribute without giving rise to these consequences. Show full calculation/s (2 marks) The END Total mark allocation 50 7

8 1. Question1: 1.1. Asset Proceeds Base Cost Exemption Gain Family Home Holiday Flat Unit Trust Inv Hilux Double Cab Cabinets R Us Capital Gain (1 mark only if correct) Less exclusion (1 mark only if exclusion is applied in correct place) Nett Capital Gain Taxable Capital Gain % (1 mark mark with error for applying correct inclusion rate to the net capital gain) 41% (1 mark for correct answer only 8

9 to benefit candidates who did the whole calculation correctly) 1.2. Original assets revalued at CPI: Pierre: R x 110/32 = R (1 Mark) Karen: R x 110/32 = R (1 Mark) Pierre Value Karen Value Family Home Assets Holiday flat Furniture Motor Vehicles % : Cabinets R Us Loan Acc : Cabinets R Us Loan Acc: trust Unit Trust Investment Bank Account Life Insurance to Estate Sub total Sub-total Exclusion: Inheritance Liabilities: Mortgage Bond Liabilities Liabilities: Credit card Liabilities: Hire purchase Total Assets (1 mark - Total Assets (1 mark only if only if correct) correct) Commencement Value Commencement value

10 Accrual (1 mark with error) (1 mark with error) R R = /2 = R in favour of Karen.(1 mark with error) (Note 1: There are differing opinions on whether or not the CGT at death should be used to reduce the accrual claim and as such the students were instructed not to bring the CGT expense into the calculation.) 10

11 1.3. Description Property Family Home Holiday flat Furniture Motor Vehicles % : Cabinets R Us Loan Acc : Cabinets R Us Loan Acc: trust Unit Trust Investment Bank Account Deemed Property Life Policy: Meteor Insurers Life Policy: Quasar Insurers ( ) (See Note 1) (1 mark with error for inclusion as deemed property) Total Property and Deemed Property Liabilities + Deductions Mortgage Bond Credit Card Hire Purchase Accrual Claim (1 mark with error) CGT (1 mark with error) Funeral and death bed expenses Admin and masters fees

12 Executors fees (See Note 2) Total Liabilities Nett Estate for Estate Duty (1 mark with error) 4A Exemption Dutiable Estate ) Estate 20% (1 mark for correct answer only to benefit student who did whole calculation correctly) Note 1: Policy Contributions PMT N 10 I 6 PV Note 2: Executors fees: Family Home Holiday flat Furniture Motor Vehicles % : Cabinets R Us Loan Acc : Cabinets R Us Loan Acc: trust

13 Unit Trust Investment Bank Account Life Policy: Meteor Insurers Total Executors 3.99% (1 mark with error) 13

14 1.4. Bank Policy: Meteor Insurers Loan Account: Cabinets are Us Loan Account: trust (1 mark) Total Less liabilities Mortgage Bond Credit Card Hire Purchase Accrual Claim (0.5 mark with error) CGT (0.5 mark with error) Funeral and death bed expenses Admin and masters fees Executors fees (0.5 mark with error) Estate Duty (0.5 mark with error) Total Liabilities Shortfall (1 mark correct only) 14

15 1.5 Note to marker: the loans are payable on demand and thus must be included as technically liquid. Given bequest of unit trust investment in will, the asset should not be included in calculation itself but implication should be noted in answer. Whilst the loan account in the company is payable on demand the data provided makes it unclear whether the company will be in a position to repay the loan to the estate. Current cash of R with a requirement of R per month for running of business required. Calling up the loan may thus severely impact the ability of the company to continue doing business. Whilst the loan account in the trust is payable on demand the trust assets are earmarked to provide for Karen s ongoing maintenance after Pierre s death. Repayment of the loan to cover estate expenses will thus impact on the level of maintenance the trust can provide to Karen. Note however that the liquidity requirement includes the accrual claim payable to Karen. What would effectively happen is that trust assets will reduce to repay the estate and will find their way back into Karen s estate via the accrual claim which is contrary to Pierre s stated intention. Given the shortfall it is likely that the unit trust portfolio will not be distributed as per the will but liquidated to cover the shortfall. (Whilst candidates may indicate that the holiday house may be sold the reality is that the unit trust portfolio is much more liquid and easy to dispose of by the executor so an answer indicating that the property must be sold must be motivated somehow) 1.6 Under the second proviso to section 4(q) no deduction will be allowed in respect of property that accrues to a trust established for the benefit of the surviving spouse, if the trustee of the trust has a discretion to allocate such property or any income therefrom to any person other than the surviving spouse. 1.7 The provisions of the new section 7C will impact Pierre and the trust in that the loan account is currently interest-free. In terms of the provisions the difference between the official rate of interest (currently 8%) and the interest charged (currently 0%) will be deemed to be a donation by Pierre to the trust with donations tax levied. The first R of the loan will practically be unaffected in that 8% of R is R which is the 15

16 value of the annual exemption.. The provision applies to all affected loans from 1 March thus to existing loans as well and NOT just new loans. The balance of R (R R ) will thus be subject to donations tax at 20% - resulting in a liability of R Note to marker: consider how candidates deal with the loan to the company. There is more than one opinion, but it seems that from the wording of the section an interest-free loan to a company will not be affected. Thus addressing the loan to the trust is sufficient for the marks above. 1.8 Reducing the loan account to the value of R would negate the impact of section 7C provided no other donations are made during a tax-year. It s unclear exactly what assets the trust holds, but if possible one could advise that R of the loan is repaid before 1 March. Alternatively Pierre could donate the loan amount to the trust and as a once-off pay the donations tax of R thus eliminating the loan account in total without requiring trust capital to be affected/reduced/liquidated. Alternatively the loan agreement could be amended to provide for the loan to be interestbearing at the official rate of 8%. This would mean that Pierre must include an amount of interest of R in his own gross income. This doesn t seem to be a viable long-term solution, however. Note to marker: consider the above three obvious ways of dealing with the problem as well as combinations of them. For instance a candidate may say that a strategy can be put in place to reduce/eliminate the loan over a period whilst paying either the interest or the donations tax in the meantime. Apply discretion. Allow 2 marks per specific alternative with a maximum of 4 marks for the question. Please ensure that there is a component of application in the answer i.e. how would the solution impact Pierre or the trust practically based on information provided. 16

17 1.9 Note to marker: there is no section 4(q) deduction here based on Pierre s will and information provided. Discussions around the proposal there is thus irrelevant to Pierre and should earn no marks. There is also no indication that inter-spousal donations are made, thus reference to that proposal should also earn no marks. Increase of the section 4A abatement to R per individual will eliminate his estate duty liability given the current net estate is below that value. He might then also reconsider the provisions of his will as leaving assets directly to Karen won t lead to an increase in her own estate duty liability since she only has R worth of assets now. The recommendation that income and capital gains of discretionary trusts be taxed in the trust will impact the trust capital and its ability to meet Karen s maintenance needs. 17

18 Question 2: 2.1 The contribution will be an excess premium as it is more than 20% higher than the total value of the contributions during any one of the two premium periods immediately preceding that premium period. As such it will give rise to a new extended restriction period of five years : R : R Highest premium of the previous two years is R in Therefore, the maximum lump sum contribution will be: R % = R (1 mark do not award if only the amount of R is given.) 18