CFA Private Wealth Management 2 â Questions and Answers
Question 1: Which of the following investment accounts provides tax-DEFERRED growth in the United States?
- Roth IRA
- Traditional IRA (Correct answer)
- Standard taxable brokerage account
- Health Savings Account (HSA) used for non-medical expenses
Correct answer: Traditional IRA
A Traditional IRA provides tax-deferred growth, meaning contributions may be tax-deductible and all taxes are paid only upon withdrawal, unlike a Roth IRA which offers tax-free growth.
Question 2: What is 'asset location' in the context of tax-efficient portfolio management?
- Allocating assets geographically across international markets to exploit tax treaties
- Placing different asset types in accounts with the most favorable tax treatment for each (Correct answer)
- Selecting assets based on their domicile country's withholding tax rates
- Matching asset duration to the investor's tax-planning time horizon
Correct answer: Placing different asset types in accounts with the most favorable tax treatment for each
Asset location involves strategically placing assets in taxable versus tax-advantaged accounts to minimize the overall tax burden, such as placing tax-inefficient assets in tax-sheltered accounts.
Question 3: Which of the following BEST describes the strategy of 'tax-loss harvesting'?
- Selling appreciated securities before year-end to lock in gains at favorable rates
- Selling losing positions to realize capital losses that offset gains and reduce tax liability (Correct answer)
- Deferring income to future tax years to reduce the current year's tax burden
- Converting traditional IRA assets to a Roth IRA to benefit from future tax-free growth
Correct answer: Selling losing positions to realize capital losses that offset gains and reduce tax liability
Tax-loss harvesting involves selling securities at a loss to offset realized capital gains, thereby reducing the current tax liability while maintaining the desired portfolio exposure through a similar replacement security.
Question 4: In estate planning, what is the primary advantage of the 'step-up in cost basis' rule for inherited assets in the United States?
- It eliminates all estate taxes owed on the inherited assets at death
- It resets the cost basis to fair market value at death, eliminating embedded capital gains tax (Correct answer)
- It allows heirs to defer taxes on inherited assets for up to ten years after inheritance
- It converts capital gains into ordinary income, which may receive more favorable treatment
Correct answer: It resets the cost basis to fair market value at death, eliminating embedded capital gains tax
The step-up in basis rule resets an inherited asset's cost basis to its fair market value at the date of death, effectively eliminating the capital gains tax liability on appreciation that occurred during the decedent's lifetime.
Question 5: Which trust structure allows the grantor to retain full control of assets and revoke or modify the trust during their lifetime?
- Irrevocable life insurance trust (ILIT)
- Charitable remainder trust (CRT)
- Revocable living trust (Correct answer)
- Qualified personal residence trust (QPRT)
Correct answer: Revocable living trust
A revocable living trust allows the grantor to maintain complete control of assets and modify or revoke the trust at any time during their lifetime, though it does not provide estate tax reduction benefits.
Question 6: Which of the following is the PRIMARY estate planning benefit of placing assets in an irrevocable trust?
- The grantor retains full control and management rights over the assets
- Assets are removed from the taxable estate, potentially reducing estate taxes at death (Correct answer)
- The trust income is taxed at the grantor's personal tax rate rather than the trust rate
- Assets can be reclaimed by the grantor if personal financial circumstances change
Correct answer: Assets are removed from the taxable estate, potentially reducing estate taxes at death
The primary estate planning benefit of an irrevocable trust is that assets permanently transferred into it are removed from the grantor's taxable estate, potentially reducing estate taxes owed at death.
Question 7: In private wealth management, the 'generation-skipping transfer' (GST) tax is BEST described as:
- A tax imposed on transfers passing directly or in trust to beneficiaries more than one generation younger than the donor (Correct answer)
- A tax on transfers of appreciated assets between siblings in the same generation
- An excise tax on charitable remainder trusts benefiting the grantor's grandchildren
- A penalty tax applied to early IRA distributions transferred to minors
Correct answer: A tax imposed on transfers passing directly or in trust to beneficiaries more than one generation younger than the donor
The generation-skipping transfer (GST) tax is imposed on asset transfersâeither directly or through trustsâto beneficiaries who are more than one generation younger than the donor, preventing avoidance of estate taxes across generations.
CFA Private Wealth Management 2
Which of the following investment accounts provides tax-DEFERRED growth in the United States?