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CFA Level 3 - Portfolio Management - Topics in Private Wealth Management
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1/5
Anna, a 58-year-old successful pediatrician, has accumulated a net worth of $8 million through her medical practice and wise investments. She is married with two adult children and plans to retire within the next 7 years. Anna's primary financial goals are to maintain her current lifestyle in retirement, support her favorite charitable causes, and leave a substantial legacy for her children and future grandchildren. Her risk tolerance is moderate, and she seeks a balance between growth and preservation. Anna's financial advisor suggests three potential strategies for managing her wealth and achieving her objectives: 1) Establishing a charitable remainder trust that provides income to Anna and her husband for a set term before transferring the remaining assets to their chosen charities; 2) Creating a comprehensive estate plan that includes a revocable living trust, irrevocable life insurance trust, and strategic annual gifting to reduce their taxable estate; or 3) Implementing a tax-efficient wealth transfer plan using a combination of gifting and dynasty trusts to provide for multiple generations. Which approach would be most suitable for Anna's situation, considering her goals, risk profile, and time horizon?
a.
Creating a comprehensive estate plan that includes a revocable living trust, irrevocable life insurance trust, and strategic annual gifting to reduce their taxable estate would be the most suitable approach for Anna's situation. This strategy addresses her goals of maintaining her lifestyle in retirement, supporting charitable causes, and leaving a legacy for her children and future grandchildren while considering her moderate risk tolerance and 7-year time horizon until retirement. The revocable living trust provides flexibility and control over her assets during her lifetime, while the irrevocable life insurance trust can provide tax-free benefits to her heirs. Strategic annual gifting reduces her taxable estate over time.
b.
Implementing a tax-efficient wealth transfer plan using a combination of gifting and dynasty trusts to provide for multiple generations may not be the most suitable approach for Anna's situation. While this strategy can help transfer wealth to future generations in a tax-efficient manner, it may not adequately address her goals of maintaining her current lifestyle in retirement and supporting her favorite charitable causes. Additionally, dynasty trusts can be complex and may not provide the flexibility and control that Anna desires, given her moderate risk tolerance and relatively short time horizon until retirement.
c.
Establishing a charitable remainder trust that provides income to Anna and her husband for a set term before transferring the remaining assets to their chosen charities may not be the most optimal solution for Anna's situation, considering her comprehensive goals and risk profile. While this strategy can provide income during retirement and support charitable causes, it may not adequately address her desire to leave a substantial legacy for her children and future grandchildren. Moreover, charitable remainder trusts can be inflexible and may limit Anna's control over her assets during her lifetime, which could be a concern given her moderate risk tolerance and 7-year time horizon until retirement. A more comprehensive estate planning approach that incorporates multiple tools and strategies may better align with her overall objectives.
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