CERTIFIED FINANCIAL PLANNER

Transcription

1 Page 1 of 8 CERTIFIED FINANCIAL PLANNER PROFESSIONAL COMPETENCY EXAMINATION Tear this top page off, read it, sign it and please hand in with your answer booklet Session 2 Two Questions Date: 20 August 2015 Total Marks: 50 Time: 09:00 12:00 (3 Hours) Pass mark: 60% This examination paper comprises of 8 pages. There is NO Annexures for this case study only the case study. 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. Candidate signature

2 Page 2 of 8 INSTRUCTIONS TO CANDIDATES Financial planning represents much more than the sale of a product it represents best practice and professional advice, and it is solution driven, based on the client s objectives, needs and concerns. You are requested to approach the paper based on these principles. Read through the facts of the case study thoroughly before you attempt to answer the questions; You must use any Annexures such as Fund Fact Sheets if provided in the exam paper to answer the case studies. Please clearly indicate which question you are answering; Please clearly refer to applicable legislation in the correct format, also stipulate why you state the quoted legislation and how it relates to the facts of the case study; Remember the assessor may not make assumptions of your behalf. You need to fully motivate your answers to the questions. When answering calculation questions please note: o Do NOT just show total values in any calculations; show a full breakdown of your calculations and list all items where applicable o Round all amounts to the nearest Rand o When using the resultant rate use four decimals o When asked to do more than just calculations, i.e. calculate, summarise and recommend don t forget to answer the rest of the question! Some candidates sometimes only do the calculations without answering the rest of the question do not through marks in the water due to this. o Only answers in pen will be marked (pencil will be ignored) All of the best with the CFP professional competency examination!

3 Page 3 of 8 Background: John (48) and Jenny (46) are longstanding clients of yours. They are married in community of property. They have two minor children Xander (13) and Jana (12). John is a national sales manager with a large company and Jenny is a homemaker. John would like to retire in 12 years time at 60, but they are worried that they may not have sufficient provision for retirement provision and would like your advice on the matter. John also needs your assistance in filing his income tax return for the 2015 tax year. Income in the 2015 tax year: John earns a salary of R In the 2015 tax year John received an incentive bonus of R John received a travel allowance of R and he qualified for a deduction of R in respect of the business usage thereof. His employer made a contribution of R to his medical scheme. During the 2015 tax year John sold units in a Collective Investment Scheme and made a taxable capital gain of R He also received interest on a savings account of R8 000 while Linda received R interest during the 2015 tax year. John contributes 7,5% of his salary to his company s pension fund Linda inherited a flat from her grandfather. The property provides her with a rental income of R per year. Monthly income needs: John and Jenny informed you that they require the equivalent of R per month before tax, in today s value, in order to cover their living expenses.

4 Page 4 of 8 Question 1.1: John wants to know how much money he requires at the time of his retirement in order to provide them with a monthly income, before tax, of R per month in today s value. This amount needs to escalate to keep up with inflation. NB: You can assume that inflation is 6% and that investment growth of 10% can be obtained. You can also accept that this income will have to be provided for a period of 30 years from his retirement. All calculations should be rounded to the nearest rand. Calculate the resultant rate to four decimal places. Calculate the amount needed at retirement in order to provide the required income during retirement. (7 marks) Question 1.2: John s father Eric recently passed away on the 21 July In terms of Eric s Will, he bequeathed his entire estate to John s brother, James. However upon Eric s retirement from the Dell Pension Fund in 2010, Eric transferred R of his pension interest in the said fund into a living annuity. At the time of his death the commutation value of the living annuity was R Eric took R of the above fund in cash upon retirement. Eric also received a cash withdrawal benefit of R from a provident fund when he resigned from a previous employer in John was nominated by Eric as the beneficiary to the living annuity. John wants to know what his options are in respect of the living annuity. You explain to him that he has the option to either take the amount as a cash lump sum or to continue with the living annuity as the new annuitant. John decides to take the full commutation value. Calculate the tax payable in respect of the lump sum commutation and advise John on who is ultimately liable for the tax payable on the lump sum benefit. (6 marks)

5 Page 5 of 8 Question 1.3: Advise John on how he would benefit from an estate planning and tax perspective by remaining invested in the living annuity and by not commuting the Living Annuity. (6 marks) Question 1.4: You calculate that John has a shortfall at present of R in respect of his retirement provisions and that he needs to save R4 267 per month, escalating at 6% per annum in order to erase the shortfall by the time he reaches retirement. Advise John whether or not a retirement annuity would be an appropriate way to invest in order to reduce the above shortfall. Motivate your answer. (6 marks) Background for Question 2 [25] Hendrik (65) and Maggie (63) van Tonder have approached you to assist them with their estate planning. They are married in community of property. They have two children Bennie (13) and Hess (19). Hess is a first year medical student. Bennie, however, suffers from a debilitating illness that has left him physically and mentally incompetent. His parents have spent their lives caring for him. He is expected to pass away in the next three 5 years. While Hess loves her brother dearly she is unable, due to her studies, to see to his care. They are worried about his care should they predecease him. They would also like to keep expenses, both now and in their estates, as low as possible in order to maximise the advantage for their heirs/beneficiaries. In terms of the only bequest in their will they leave their assets to each other. They have appointed XYZ Bank as executors of their estate. They have the following assets and liability:

6 Page 6 of 8 Movable assets: Furniture 150,000 Toyota Hilux 350,000 Business interests: 100% membership Interest: Van Tonder 1,500,000 Saddlery CC Note 1 Loan accounts receivable: 340,000 Immovable assets Farm Oranjezicht Note 2 3,500,000 Investments: Allan Gray Unit Trust 1,400,000 Total 7,240,000 Notes: 1) The Van Tonder Saddlery CC was incorporated in March of 2009 with a member s contribution of R1000. The CC financed its business operations by means of a loan from the Van Tonders. At present the CC has assets worth R and its only debt is the loan account due to the Van Tonders of R ) The Farm Oranjezicht was purchased by the Van Tonders at auction in October 2008 for R It was a cash purchase. The farm was purchased as a lifestyle farm and no farming operations are carried out thereon. The Van Tonders have at no stage resided on the farm. Tax rates: You can accept that Hendrik and Maggie both have a marginal rate of tax of 31%.

7 Page 7 of 8 Previous advice: Hendrik and Maggie have been told that they should create a trust and sell their farm and the Van Tonder Saddlery CC to the trust on loan account in order to save on estate duty at death. They want to know whether this is a good idea. Question 2.1: What is this form of planning called in practice? Explain the workings of the suggestion to Hendrik and Maggie and how it is supposed to save them estate duty. (No calculations are required.) (3 marks) Question 2.2: With reference to applicable legislation, advise Hendrik and Maggie if a trustee of an inter vivos trust can hold a member s interest in the Van Tonder Saddlery CC and if so, which requirements must be met? (5 marks) Question 2.3: Why would you suggest that a trust is an appropriate estate planning tool for Hendrik and Maggie? Why should the survivor of the two of them not simply transfer his/her estate to the two children in equal shares? (4 marks) Question 2.4: Leaving aside considerations of estate duty, Hendrik and Maggie wish to know what the immediate expense in respect of tax and transfer duty/ies will be should the suggestion in its present form be implemented? (i.e. see previous advise above). Show all calculations (8 marks)

8 Page 8 of 8 Question 2.5: A preliminary estate duty calculation in respect of the first dying looks as follows: Property and deemed property Movable assets: Furniture R Toyota Hilux R Business interests: 100% membership Interest: Van Tonder Saddlery CC R Loan accounts receivable: R Immovable assets Portion 2 Farm Oranjezicht R Investments: Allan Gray Unit Trust R Gross joint estate R Less spouses half share of joint estate R R Less: 50% of deductions (R / 2) R Master's fees R 600 Administration costs R Executor's fee (joint estate) R Capital Gains Tax - spousal roll over R 0 R Less funeral costs R Gross estate R Less bequests to spouse R Net estate R 0 Less sec 4A abatement R Dutiable estate R 0 You draw the conclusion that, at present, the surviving of the two spouses are unlikely to have any significant estate duty obligation at the time of his or her death. Bearing in mind your calculations in 2.4 above in respect of the immediate implementation of their original advice. Can you advice the Van Tonders of an alternative way of addressing a potential Estate Duty and CGT liability that may arise as a result of an increase in the value of the Farm Oranjezicht and the Van Tonder Saddlery CC? Explain to them why, in your opinion, your advice in this instance could be a better option. (5 marks)