CFA CFA Level 3 Charitable Gratuitous Transfers

# Charitable Gratuitous Transfers

• Author
Posts
• vincentt
Participant
• CFA Level 3
7

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
Participant
• CFA Level 3
5

@Reenaâ€Œ 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..

• 5

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

• 4

Thanks @vincenttâ€Œ. 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!

• Reena
Participant
• CFA Charterholder
4

hey @vincenttâ€Œ 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
Participant
• CFA Level 3
4

@Reenaâ€Œ 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?

• vincentt
Participant
• CFA Level 3
3

@fabianâ€Œ haha this is gift tax by me, nothing to do with your income ðŸ˜›

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

• vincentt
Participant
• CFA Level 3
2

I think i got it now! Ignore this post.

• 2

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

• vincentt
Participant
• CFA Level 3
2

@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.

• vincentt
Participant
• CFA Level 3
2

@Sophieâ€Œ 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?

• vincentt
Participant
• CFA Level 3
2

@fabianâ€Œ I could but you will be taxed at a very high rate!

• 2

@vincenttâ€Œ you’re assuming my income tax is very high ðŸ˜€

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

• 1

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

• Reena
Participant
• CFA Charterholder
0

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?