Free CFA Level III: Private Wealth Advising the Wealthy Practice Questions

B is correct. FATCA requires foreign financial institutions (FFIs) to identify and report account information (balances, interest, dividends, and other income) for accounts held by US persons (citizens, residents, and entities with US ownership) to the IRS. FFIs that do not comply face a 30% withholding tax on US-source payments made to them. FATCA was enacted to combat tax evasion by US persons hiding assets in offshore accounts.

A is incorrect. FATCA does not require US citizens to renounce citizenship. It requires reporting of foreign accounts. US citizens may maintain foreign accounts; they must report them (via FBAR and Form 8938) and pay taxes on the income, but they are not required to close the accounts or renounce citizenship.

C is incorrect. FATCA does not require Treasury Department approval for international wire transfers. It is an information reporting regime, not a transaction approval system. Wire transfers are subject to separate AML/KYC regulations, not FATCA.

C is correct. When RSUs vest, the full fair market value of the shares on the vesting date is included in the executive's W-2 income and taxed as ordinary income (subject to federal income tax, state income tax, Social Security, and Medicare taxes). The company typically withholds shares or cash to cover the tax obligation. After vesting, any further appreciation is treated as a capital gain (short-term or long-term depending on the holding period from the vesting date), and any decline is a capital loss.

Choice A is incorrect because RSUs are taxed at vesting, not at sale. The vesting event triggers ordinary income recognition on the full fair market value of the shares, which creates a significant tax liability in the vesting year — often requiring the executive to sell a portion of the vested shares to cover the withholding obligation.

Choice B is incorrect because RSUs receive less favorable tax treatment than ISOs. ISOs allow deferral of regular income tax until sale (with long-term capital gains treatment for qualifying dispositions), whereas RSUs trigger ordinary income recognition at vesting. RSUs have no mechanism for qualifying disposition treatment and no ability to defer the tax event.

C is correct. Pre-sale planning is critical because many tax and estate planning strategies must be implemented before the sale (and before the value becomes "locked in" at the sale price). Key pre-sale activities include: (1) establishing irrevocable trusts (GRATs, IDGTs, SLATs) to transfer future appreciation to heirs at a lower gift tax cost; (2) analyzing whether an asset sale or stock sale structure produces better after-tax results; (3) exploring QSBS (Section 1202) eligibility for potential capital gains exclusion; (4) considering Opportunity Zone investments for gain deferral; and (5) developing a comprehensive post-sale wealth management plan including investment strategy, income planning, and charitable giving.
Choice B is incorrect because once the sale is complete and proceeds are received, many planning options are no longer available. Estate planning structures must be funded before the value increase from the sale is realized, and deal structure optimization is impossible after closing.
Choice A is incorrect because distributing all profits as bonuses would reduce the company's earnings and potentially its sale price, which is counterproductive. Compensation planning should be reasonable and designed to retain key employees through the sale process, not to artificially reduce the company's value.