CFA CFA Level 3 Charitable Gratuitous Transfers

Charitable Gratuitous Transfers

  • This topic has 14 replies, 4 voices, and was last updated Sep-17 by fabian.
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    • vincentt
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      Hi all, I need a little help as I’m stuck with the following formula:

      Re – pretax earnings of the asset if held by the giver
      Tie – income tax for the asset if held by the giver
      Rg – pretax earnings of the asset if held by receiver
      Te – estate tax rate
      Toi – current income tax benefit associated with a charitable transfer

      First part of the numerator:
      (1 + Rg) ^ N
      – Since receiving the asset, it will grow at a tax free return of Rg. Not an issue.

      Toi [ 1 + Re (1 – Tie) ] ^ N (1 – Te)
      – This is what confuses me, since this is comparing giving the asset to a charity now vs transferring to a beneficiary N years later, shouldn’t the formula just add back the Toi as part of the growth to the (1 + Rg) ^ N?

      In the CFAI text (Vol 2 p300 or the screen shot above), it stated that “The tax advantages of charitable giving allow the donor to either increase the charitable benefit associated with a given transfer of excess capital from the estate, or …”, so wouldn’t it be right to say that the additional funds from the tax deduction or savings that the charity could claim from the government (referring to Gift Aid Scheme in the UK) would also be part of the initial donated funds. Hence, should grow (FV) at the same rate as the (1 + Rg) ^ N instead of increasing it at the giver’s after-tax return rate [ 1 + Re (1 – Tie) ] ^ N.

      Also, my second issue is with the tax deduction amount (from donating to the charity) which was increased at the giver’s after-tax return rate and was taxed by the estate tax rate at N (meaning a bequest instead of a charity). I thought this whole formula is to find out the relative value of giving the asset as a charitable gift against a bequest?

      Thanks guys.

    • vincentt
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      I think i got it now! Ignore this post.

    • Sophie Macon
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      Argh, was just getting into it @vincentt‌ . Sometimes writing down the questions help. Perhaps you can share your answers with the community just to complete your question then?

    • vincentt
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      @sophie haha.

      Well, there isn’t really an answer to this as the CFA’s method is very likely to be a US system so perhaps different to the gift aid scheme in the UK.

      Basically, I think CFA assumes that by donating to the charity now you are able to get some tax deduction and they assume the tax deduction is “credited” back into your account as an asset (which you are better off than not donating to a charity). Then assume you’ll gain after tax return and then get taxed (estate/gift tax) when the donor pass it on as a gift or bequest.

      My concept was that since you are donating amount X to a charity, the charity is able to get an additional amount x * Toi from the tax office (gift aid scheme). Hence, the formula in the second part of the numerator will be different.

    • Sophie Macon
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      Thanks @vincentt‌. It’s interesting how the syllabus evolve over time. CFA has now gone more in depth in this topic compared to my time, likely question to focus on getting right in the exam!

    • vincentt
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      @Sophie‌ it seems like there’s a lot of focus on how to be more tax efficient. We shall see when I hit the question.
      By the way, is it advisable to practice the morning session (essay) with the past years papers? If so, up to how many years before the syllabus changes too much?

    • Reena
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      hey @vincentt‌ thanks for sharing the answer, seems to make sense.

      I haven’t really planned to practice past year essay questions, as syllabus may have varied. I have about 3-4 sets of practice papers for L3 (including CFA mock), once that’s done, I may consider doing last year’s, but that’s about it. Going further back may be less relevant. My thoughts anyway…

    • vincentt
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      @Reena‌ no prob at all, just trying to synchronize the syllabus with what I know of a real life example.

      Thanks for the info, how’s revision so far?

    • Reena
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      So far so slow @vincentt. Level 3’s pace feels less intense than Level 2, but that’s because it’s more wordy and less focused on calculation. I have a bad feeling about the essay section and trying to finish up my studies with 1.5 months to go until practice papers!

      How’s yours coming along?

    • vincentt
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      @Reena‌ things are slightly different though interesting some of the stuff are repeating a little on some topics.

      I’m aiming to finish by end of march but might overrun by a few days into April, we shall see..

    • fabian
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      I thought @vincentt was offering to send us all some money…

    • vincentt
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      @fabian‌ I could but you will be taxed at a very high rate!

    • fabian
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      @vincentt‌ you’re assuming my income tax is very high 😀

      In any case, highly taxed free money is better than no money!

    • vincentt
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      @fabian‌ haha this is gift tax by me, nothing to do with your income 😛

      So what if the tax is 140%, are you still keen? (I don’t mind double taxed in this case)

    • fabian
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      @vincentt government loses, I’m keen to see what happens at a 140% tax rate!

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