CERTIFIED FINANCIAL PLANNER PROFESSIONAL COMPETENCY EXAMINATION FEBRUARY 2017

Transcription

1 SUGGESTED ANSWERS CASE STUDY 1: 50 Marks 09H00 12H00 (3 hours) Question1: 1.1. Asset Proceeds Base Cost Exemption Gain Family Home (46 Mark) Holiday Flat Unit Trust Inv Hilux Double Cab Cabinets R Us Capital Gain Less exclusion Nett Capital Gain Taxable Capital Gain % 41% (8) 1.2 Original assets revalued at CPI: Pierre: R x 110.2/32.7 = R Karen: R x 110.2/32.7 = R

2 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 Total Assets Commencement Value Commencement value Accrual R R = /2 = R in favour of Karen. (9)

3 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) Total Property and Deemed Property Liabilities + Deductions Mortgage Bond Credit Card Hire Purchase Accrual Claim

4 CGT Funeral and death bed expenses Admin and masters fees Executors fees (See Note 2) Total Liabilities Nett Estate for Estate Duty A Exemption Dutiable Estate Estate 20% Note 1: Policy Contributions PMT N 10 I 6 PV

5 Note 2: Executors fees: Family Home Holiday flat Furniture Motor Vehicles % : Cabinets R Us Loan Acc : Cabinets R Us Loan Acc: trust Unit Trust Investment Bank Account Life Policy: Meteor Insurers Total Executors 3.99% (9)

6 1.4 Bank Policy: Meteor Insurers Loan Account: Cabinets are Us Loan Account: trust Total Less liabilities Mortgage Bond Credit Card Hire Purchase Accrual Claim CGT Funeral and death bed expenses Admin and masters fees Executors fees Estate Duty Total Liabilities Shortfall (6)

7 1.5 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. (3) 1.6 Under the second proviso to section 4(q) (1 mark) 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. (2) 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 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 (2)

8 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. (4) 1.9 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. (2)

9 Question 2: (4) 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. (2) : R : R Highest premium of the previous two years is R in Therefore, the maximum lump sum contribution will be: R % = R (2)