Private Wealth Management Flashcards
7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Private Wealth Management flashcards as text
Which of the following BEST describes the primary investment risk of a concentrated stock position?
Answer: High idiosyncratic (company-specific) risk with potential for a large capital loss
A concentrated position exposes the investor to high idiosyncratic risk, meaning poor performance of that single security can cause significant losses not offset by other holdings.
An investor holds a large, highly appreciated concentrated stock position with a very low cost basis. To diversify while DEFERRING capital gains taxes, which strategy is MOST appropriate?
Answer: Contributing shares to an exchange fund and receiving a diversified portfolio after the required holding period
An exchange fund allows an investor to contribute low-basis concentrated shares, receive units in a diversified pooled fund, and defer capital gains tax until the fund interest is eventually sold.
A 'charitable remainder trust' (CRT) is BEST described as a structure that:
Answer: Provides the grantor or named beneficiaries with income for a specified period, with the remainder passing to charity
A charitable remainder trust provides income to the grantor or designated beneficiaries for a specified period or lifetime, after which the remaining trust assets pass to the designated charitable beneficiary.
Which of the following is a PRIMARY estate planning advantage of using a 'family limited partnership' (FLP)?
Answer: It permits valuation discounts on transferred interests, reducing gift and estate tax liability
A family limited partnership allows valuation discounts—for lack of control and lack of marketability—to be applied to transferred partnership interests, effectively reducing the taxable value of gifts and the taxable estate.
Which of the following is the MOST significant limitation of using an exchange fund to manage a concentrated stock position?
Answer: The strategy defers but does not eliminate the embedded capital gains tax liability
While an exchange fund defers capital gains taxes, the liability is not eliminated; when the investor eventually sells the diversified fund interest, capital gains taxes will be owed based on the original low cost basis.
In private wealth management, a 'dynasty trust' is PRIMARILY designed to:
Answer: Transfer wealth across multiple generations while minimizing cumulative transfer taxes
A dynasty trust is designed to hold assets for multiple generations—potentially in perpetuity in states that allow it—using the generation-skipping transfer tax exemption to minimize transfer taxes across generations.
When a high-net-worth individual establishes a 'qualified personal residence trust' (QPRT), what is the PRIMARY estate planning benefit?
Answer: The present value of the future gift of the residence is discounted, reducing the taxable gift amount
A QPRT allows the grantor to transfer a residence to heirs at a discounted taxable gift value because the gift is calculated as the present value of the future remainder interest, not the full current fair market value.