CFA III SS 4 Private Wealth Management.txt

• Opposite of Life Insurance - hedge longevity risk
• Fixed: usually no inflation adjustment; can't withdraw, rate is locked
• Variable: payments based on mixed assets selected by client; receive fixed number of units, value fluctuates with value of assets

• 1. Loss due to decline in value; hedge with diversification
• 2. Outliving assets; annuity
• 3. Not saving enough for planned longevity; employ savings program, consume less

• HC decreases over time, FC increases, total wealth should slowly increase
• If HC is steady and risk free, FC can be more risky. HC includes social security, steady job, pension

• 1. high RT = low demand bc more willing to accept loss of HC
• 2. high wealth = low demand
• 3. high probability = high demand
• 4. high age = low demand bc less HC to lose
• 5. high bequest desire = high demand

• 1. Loan: use RE as collateral, non-recourse is analogous to protective put
• 2. Sale and Lease: sell RE and buyer leases back. lease payments are tax deductible
• 3. Donor advised fund or charitable trust: take tax deduction on full market value; charity can sell with no tax liability; can retain some influence on use of RE

• 1. Sale: sell to strategic buyer; strategic generally offers higher price
• 2. Recapitalization:owner retains around 30% of stock and control, sells 70% back to company
• 3. Management buy-out or sale to employees: purchaser usually lacks money, which may hurt price. could also hurt firm if negotiation fails
• 4. Sell non-core assets: sell assets and use cash to diversify
• 5. Line of credit: open line of credit with firm as collateral
• 6. Sell to family: retains ownership, gift would provide no cash but may still be taxed
• 7. Employee Stock Ownership Plan, IPO: transfer ownership to employees, tax advantage

• 1. Perfect hedge eliminates all systematic and nonsystematic risk - may be taxable event
• 2. Cross hedges with "like" product - different but similar stock, related index. still hold nonsystematic risk
• 3. Several investors pool concentrated positions and receive pro rata shares of fund diversification without sale 

• 1. protective put: most expensive, buy at the money (ATM) put
• 2. knock-out put: if stock rises to X, put terminates. cheaper than number one
• 3. ATM and OTM puts: offset ATM put cost by selling OTM at lower strike. will be protected against small declines
• 4. put and call: buy put and sell call, protects at no cost but lose upside
• 5. prepaid variable forward (PVF): ex. receive 90 shares now, repay shares, but number owed decreases as price rises. retains some upside.

• 1. Short against the box: short shares owned - proceeds create liquidity 
• 2. Forward sale: sell forward contract on stock
• 3. Forward with options: buy put and sell call with same strike
• 4. Total equity swap: pay return on stock for LIBOR + X

• 1. establish LP to hold concentrated position, retain control
• 2. gift some shares, will be discounted due to lack of marketability and liquidity

• 1. Reduce risk caused by position - hedge
• 2. Generate liquidity to meet diversification or spending needs
• 3. Optimize tax efficiency 

Sell, Hedge, Monetize

• Source: taxes paid where income generated
• Resident: taxes paid by citizens regardless of location
• Credit: reduce tax owed by taxes paid in source (tax rate to reduce cannot exceed domestic tax rate) - full relief
• Exemption: reduce taxable income by income taxes paid in source
• Deduction: deduct foreign taxes from income - partial relief

• Gen skip: bequest directly to second generation to avoid double taxation
• Revocable: donor remains in control, can contribute and withdraw
• Irrevocable: can't be attacked by creditors, donor can't withdraw, no control
• Fixed trust: distributions set by settlor (donor)
• Discretionary trust: distributions determined by trustee, settlor can provide wishes
• Spendthrift: for children or anyone otherwise unable to manage money, how the distributions are spent is determined by the trustee
• Life insurance advantages: no tax, transfers outside of probate process

• Objectives: return, risk
• Constraints: time, tax, legal, liquidity, unique

Transfer future appreciation and tax liability to future generations

Create voting preferred (owner/donor) and common stock (gift) - structure so growth accrues to common over time

• Cautious: Emotional, overanalyze out of fear, tend to do nothing
• Methodical: Thinking, high risk aversion, always researching
• Individualistic: Thinking, lower risk aversion, similar to methodical other than risk aversion
• Spontaneous: Emotional, lower risk aversion, constantly changing portfolio

• 1. Source: active vs passive - Barnewell two way model
• 2. Measure: subjective perception of wealth
• 3. Stage of Life: 
• Foundation - education, early career
• Accumulation - mid-late career, income increasing
• Maintenance - retirement
• Distribution - death

• 
• Calculate total before taxing unrealized CG, then subract (CG effective rate calculated above)*(total before taxing unrealized - cost basis)

• 1. testament: will
• 2. probate: process where court examines will and distributes property
• 3. intestate: no or invalid will - "died intestate"
• 4. gift: alive, gift taxes; bequest: dead, estate and/or inheritance tax
• 5. forced heirship: children have right to parents estate
• 6. comm prop: spouse has right to 1/2 of other's estate
• 7. sep prop: each spouse has own estate
• 8. clawback: may return gifts given back to estate for proper distribution

• r = return on stock
• tig = tax rate on receiver 
• tie = tax rate on estate
• Tg = gift tax rate
• Te = estate tax rate

 - additional is partial gift tax benefit from lowering estate value

Amount of assets necessary to meet all future liabilities - amount needed through retierment

a) Mortality table - Find probability of survival for a least one of investor or spouse; multiply by spending per year; discount to present; add safety reserve

b) Monte Carlo

• Deterministic: single point estimate; no path dependence - if value lowers, distributions are a higher proportion of portfolio, so lowers future returns
• Monte Carlo: Much more flexible, handle many inputs, reflects path effect