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MIS 4500 (31)
Lecture 16

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Management Info. Systems
MIS 4500
Pourang Irani

Lecture 16: Estate Planning in a Global Context Trust: vehicle through which an individual (settlor) entrusts certain assets to a trustee who manages the assets; many civil countries do not recognize foreign trusts Civil law:  forced heirship rules: o children have right to fixed share of parent’s estate (may exist regardless of estangement or nonmarital)  maybe move assets to offshore trust to avoid  maybe gift or donate assets during lifetime; some jurisdictions have “clawback” provisions for lifetime gifts o spouses have guaranteed inheritance rights  community property regimes: each spouse has automatically passing, indivisible 1/2 interest in income earned during marriage (gifts and inheritances received b/f and after marriage are separate property) (other half through will or intestate)  separate property regimes: each spouse is able to own and control property as individual and to dispose, subject to spouses other rights Net worth tax / Net wealth tax: on assets’ entire capital base  lifetime gratuitous transfers (inter vivos transfers): lifetime gifts; gift tax may apply depending on residency or domicile of donor, residency or domicile of recipient, tax status of recipient, type of asset and location of asset  Testamentary gratuitous transfers: transfers upon death; taxation depending on residency or domicile of donor, residency or domicile of recipient, type of asset and location of asset  taxes may apply to transferor or the recipient; may be flat or progressive; usually after deduction for statutory allowance; may depend on relationship of transferor or recipient (spouses often tax exempt) Core Capital: amount of capital required to fund spending to maintain given lifestyle, fund goals and provide adequate reserves for unexpected commitments  survival probability: multiply future cash flow needs by probability that such cash flow will be needed o joint probability if married couple: p(survival) = p(H survives) + p(W survives) – p(H survives) x p(W survives) N o PV(Spending need) = p(Survival jSpending j j1 1 r j o estimated that two people can maintain same living standard for 1.6 times the cost of one o discount such probable cash flow needs  using the expected return of pension fund assets to discount liabilities they are intended to fund systematically under-prices those liabilities  Monte Carlo simulation w/ expected returns and volatility o safety reserve: for capital market volatility and uncertain future family commitments; suggested 2 yrs of spending  Monte Carlo simulation: determine core capital that sustains spending at least, say, 95% of the simulated trials o Ruin probability: probability of depleting one’s financial assets b/f death) o volatility reduces future accumulations: R  r  1  ; geometric mean G 2 approximately equals arithmetic mean minus half the volatility; also b/c withdrawals after down volatility reduce capital base Excess Capital: anything over core capital  may gift during lifetime: o certain gifts may be tax-free: allows for gifts to grow to benefit of donee: relative after-tax value of tax-free gift made during one’s lifetime compared to bequest transferred as part of taxable estate is: n RV  FV Gift  1 r gt ig TaxFreeGiftFV Bequest 1 r 1t 1T  e ie e o taxable gifts: FV Gift 1 rg1t ig1T g   RV TaxableGift  n , if paid by recipient; FV Bequest 1 re1t ie1T e efficient if gift tax is lower than estate tax;  same if progressive tax rate (small gifts over time are efficient);  but U.S. and other jurisdictions may required cumulative lifetime gift and estate tax computation  generation skipping: transfer high-returning assets; relative value is 1/(1- T 1, where T 1s tax rate of capital transferred from first to second generation; consider specific generation skipping transfer tax o location of gift tax liability:  could result in taxation of donor and donee in case of nross-border gift FV Gift 1 rg1t ig1T g T g e  if paid by donor: RV TaxableGift  n ; FV Bequest 1 r et ie1T e (benefit from reduction of size of taxable estate) o spousal exemptions: note that there are two, and good to use to transfer to someone else than to living spouse. o Valuation discounts: tax levied on fmv, which requires valuation; lack of liquidity; lack of control; use family limited partnerships o Deemed dispositions: gains may be taxed at death; may benefit from avoiding by gifting o Charitable Gratuitous Transf
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