Free CFA Level III: Private Wealth Transferring the Wealth Practice Questions
Wealth transfer on CFA Level III covers estate planning techniques, lifetime gifting strategies, trust structures (revocable, irrevocable, dynasty), and intergenerational wealth transfer planning.
Sample Questions
Question 1
Easy
In estate planning, "probate" refers to the legal process of:
Solution
C is correct.
Probate is the court-supervised process of: (1) validating the deceased person's will (confirming it is legally valid and was the decedent's last will); (2) appointing an executor or personal representative to administer the estate; (3) identifying, inventorying, and appraising estate assets; (4) paying debts, taxes, and administrative expenses; and (5) distributing remaining assets to beneficiaries as directed by the will (or by state intestacy laws if there is no will). Probate is typically public, can be time-consuming (months to years), and may involve significant costs.
Probate is the court-supervised process of: (1) validating the deceased person's will (confirming it is legally valid and was the decedent's last will); (2) appointing an executor or personal representative to administer the estate; (3) identifying, inventorying, and appraising estate assets; (4) paying debts, taxes, and administrative expenses; and (5) distributing remaining assets to beneficiaries as directed by the will (or by state intestacy laws if there is no will). Probate is typically public, can be time-consuming (months to years), and may involve significant costs.
Question 2
Medium
Using Exhibit 1 assumptions, the annual annuity payment on the 10-year zeroed-out GRAT in Strategy 1 is closest to:
Solution
B is correct. A zeroed-out GRAT sets the annuity so that the present value of the retained annuity stream, discounted at the §7520 rate, equals the contribution. The 10-year annuity factor at 4.0% is Annual annuity = $10{,}000{,}000 / 8.1109 ≈ $1,232,909, which rounds to $1,233,000.
Question 3
Hard
Edward asks Raghavan to identify the most important distinction between Strategies 1 and 3 relevant to the Whitfield family's objectives. Raghavan's best response is that:
Solution
B is correct. The substantive distinction Raghavan should emphasize is the presence or absence of a charitable beneficiary, the term length, and who receives the interim annuity stream. A zeroed-out GRAT directs the retained annuity back to the grantor and passes the above-hurdle appreciation to heirs over 10 years with no charitable element. A zeroed-out inter vivos CLAT, by contrast, pays its 20-year annuity stream to charity — only appreciation on the $8M above the payout level reaches the family's heirs, and only after two decades. Because the Whitfield family's objectives combine wealth transfer with (potentially) philanthropic legacy, the correct framing is that Strategy 3 is preferable only if charitable impact is a co-equal goal with transferring wealth to the next generation.