CERTIFIED FINANCIAL PLANNER

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 www.fpi.co.za I with ID number hereby acknowledge that I have read and understand all of the above. 1 Candidate signature

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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 1992. 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 R800 000 while Karen recorded a commencement value of R400 000. The Consumer Price Index value in the month of their marriage was 32.7 and the latest available value is 110.2. 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 1 3 000 000 Holiday Flat 2 1 400 000 Furniture 200 000 Motor vehicle 3 400 000 60% shareholding in Cabinets R Us (Pty) Ltd 4 2 200 000 Loan account in Cabinets R Us (Pty) Ltd 5 400 000 Loan account in Groot Pierre Familie Trust 6 1 780 000 Unit Trust Investment 7 800 000 Bank Account 200 000 Total assets 8 10 380 000 Liabilities: Mortgage Bond 1 200 000 Credit Card 50 000 Hire Purchase 100 000 Total liabilities 1 350 000 3

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 9 2 500 000 A life policy with Quasar Insurers 10 2 200 000 Notes and assumptions: 1. Pierre bought the house in 2003 for R1 300 000 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 R1 000 000 with money that he inherited from his mother. 3. A Hilux double cab which was purchased for R547 000, 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 20 000 shares of R1.00 each. The value of R2 200 000 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 R200 000 per month to enable it to buy manufacturing materials and pay its staff wages. At present the company has R500 000 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 R1 780 000 to the trust and the loan account was created. 4

7. The portfolio was built up over the last few years through regular purchases. The base cost of the portfolio is R350 000. 8. Karen has assets of R7 000 000 and liabilities of R1 300 000. 9. The policy with Meteor Insurers was taken out by Pierre and is payable to his estate. 10. A policy for R2 200 000 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 R14 400.00 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

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 R30 000 b. Administration costs and Master s fees (excluding executor s fees) will be R15 000. 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

1.9. Consider the Second Interim Report on Estate Duty by the Davis Tax Committee, released on 24 August 2016. 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 2013. The term is for five years. Since then she has made the following contributions: a) 2013 a lump sum contribution of R200 000; b) 2014 a further lump sum contribution of R200 000; c) 2015 a lump sum contribution of R200 000; d) 2016 a lump sum contribution of R150 000 2.1 In the beginning of 2017 Hanel comes to you wanting to make a further lump sum contribution of R300 000. 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

1. Question1: 1.1. Asset Proceeds Base Cost Exemption Gain Family Home 3 000 000 1 300 000 2 000 000 0 Holiday Flat 1 400 000 1 000 000 0 400 000 Unit Trust Inv. 800 000 350 000 450 000 Hilux Double Cab 400 000 547 000 147 000 0 Cabinets R Us 2 200 000 12 000 1 800 000 388 000 Capital Gain 1 238 000 (1 mark only if correct) Less exclusion 300 000 (1 mark only if exclusion is applied in correct place) Nett Capital Gain 938 000 Taxable Capital Gain 375 200 40% (1 mark mark with error for applying correct inclusion rate to the net capital gain) CGT @ 41% 153 832 (1 mark for correct answer only 8

to benefit candidates who did the whole calculation correctly) 1.2. Original assets revalued at CPI: Pierre: R800 000 x 110/32 = R2 750 000 (1 Mark) Karen: R400 000 x 110/32 = R1 375 000 (1 Mark) Pierre Value Karen Value Family Home 3 000 000 Assets 7 000 000 Holiday flat 1 400 000 Furniture 200 000 Motor Vehicles 400 000 60% : Cabinets R Us 2 200 000 Loan Acc : Cabinets R Us 400 000 Loan Acc: trust 1 780 000 Unit Trust Investment 800 000 Bank Account 200 000 10 380 000 Life Insurance to Estate 2 500 000 Sub total 12 880 000 Sub-total 7 000 000 Exclusion: Inheritance -1 000 000 Liabilities: Mortgage Bond -1 200 000 Liabilities -1 300 000 Liabilities: Credit card -50 000 Liabilities: Hire purchase -100 000 Total Assets 10 530 000 (1 mark - Total Assets 5 700 000 (1 mark only if only if correct) correct) Commencement Value 2 750 000 Commencement value 1 375 000 9

Accrual 7 780 000 (1 mark with error) 4 325 000 (1 mark with error) R7 780 000 R4 325 000 = 3 455 000/2 = R1 727 500 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

1.3. Description Property Family Home 3 000 000 Holiday flat 1 400 000 Furniture 200 000 Motor Vehicles 400 000 60% : Cabinets R Us 2 200 000 Loan Acc : Cabinets R Us 400 000 Loan Acc: trust 1 780 000 Unit Trust Investment 800 000 Bank Account 200 000 10 380 000 Deemed Property Life Policy: Meteor Insurers 2 500 000 Life Policy: Quasar Insurers (2 200 000 2 087 656 112 344) (See Note 1) (1 mark with error for inclusion as deemed property) Total Property and Deemed Property 15 967 656 Liabilities + Deductions Mortgage Bond 1 200 000 Credit Card 50 000 Hire Purchase 100 000 Accrual Claim 1 727 500 (1 mark with error) CGT 153 832 (1 mark with error) Funeral and death bed expenses 30 000 Admin and masters fees 15 000 11

Executors fees 513 912 (See Note 2) Total Liabilities 3 790 244 Nett Estate for Estate Duty 12 177 412 (1 mark with error) 4A Exemption 3 500 000 Dutiable Estate 8 677 412 ) Estate Duty @ 20% 1 735 482 (1 mark for correct answer only to benefit student who did whole calculation correctly) Note 1: Policy Contributions PMT 14 400 N 10 I 6 PV 112 344 Note 2: Executors fees: Family Home 3 000 000 Holiday flat 1 400 000 Furniture 200 000 Motor Vehicles 400 000 60% : Cabinets R Us 2 200 000 Loan Acc : Cabinets R Us 400 000 Loan Acc: trust 1 780 000 12

Unit Trust Investment 800 000 Bank Account 200 000 Life Policy: Meteor Insurers 2 500 000 Total 12 880 000 Executors fees @ 3.99% 513 912 (1 mark with error) 13

1.4. Bank 200 000 Policy: Meteor Insurers 2 500 000 Loan Account: Cabinets are Us 400 000 Loan Account: trust 1 780 000 (1 mark) Total 4 880 000 Less liabilities Mortgage Bond 1 200 000 Credit Card 50 000 Hire Purchase 100 000 Accrual Claim 1 727 500 (0.5 mark with error) CGT 153 832 (0.5 mark with error) Funeral and death bed expenses 30 000 Admin and masters fees 15 000 Executors fees 513 912 (0.5 mark with error) Estate Duty 1 735 482 (0.5 mark with error) Total Liabilities 5 525 726 Shortfall - 645 726 (1 mark correct only) 14

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 R500 000 with a requirement of R200 000 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 R1 250 000 of the loan will practically be unaffected in that 8% of R1 250 000 is R100 000 which is the 15

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 R530 000 (R1 780 000 R1 250 000) will thus be subject to donations tax at 20% - resulting in a liability of R106 000. 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 R1 250 000 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 R530 000 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 R336 000 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 R142 400 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

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 R15 000 000 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 R7 000 000 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

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. 2.2 2015: R200 000 2016: R150 000 Highest premium of the previous two years is R200 000 in 2015. Therefore, the maximum lump sum contribution will be: R200 000 + 20% = R240 000. (1 mark do not award if only the amount of R40 000 is given.) 18