Relative Value Formulas - Estate Planning

CFA Level III Portfolio Management
#1

Is anyone else having trouble remembering/understanding these? If anyone could link or be kind enough to explain that would be great

#2

Punting those out. Havent even seen them in mocks or past AMs… Will probably cost max ( 2 X 3 ) 6 points on D-Day…

#3

Hmm you’re probably right - there’s bigger fish to fry. I might try and spend 30 mins reading CFAI on it.

Question 2 on 2013 AM references the formulas, sort of…

#4

I am not going to write down the proper formulas here and I doubt the exam will require to calculate relative value. Rather, you will have to decide whether to gift now or bequest. The variables that will affect your decision are:

  • Is gift tax greater than estate tax?
  • Is the tax paid by the receiver?

Use arithmetic to decide on the above given that:

  • Gift tax is in the numerator and estate tax in the denominator…
  • If tax paid by receiver the numerator increases…

Simple really, worth potentially 6-9 marks.

#5

Thanks for this - yeah it’s actually not that bad at all, the formulas just look ugly.

I had a quick read of the curriculum on this too, they explain it pretty well. Agreed - it’s a nice one to have up the sleeve!!

#6

If tax is paid by receiver wouldn’t the numerator decrease by the amount of the tax making it relatively less attractive when compared to a bequest?

#7

Deliberate mistake to check alertness of the forum :blush:

Correct. Numerator will be comparatively greater when tax is paid by the donor vs the receiver.

#8

The denominator is same in all formulas, (1+Rie(1-Tie))N (1-Te)

The numerator is playing with Tax or Tax credit effects on always same base (1+Rig(1-Tig))N

thus combinations are:

(1+Rig(1-Tig))N

or with just added suffixes

(1+Rig(1-Tig))N (1-Tg)

or

(1+Rig(1-Tig))N (1-Tg+TgTe)

the concern is distinguish between Rig and Rie and applicable taxes.