CFA Level III Pathway: Private Wealth Practice Questions
Question 1
Irene, 66, owns 100% of an operating company. She wants to pass economic value to her three children over time, keep voting control until she retires, and avoid forcing a sale of the business. Which tool best meets these goals?
- A. Gift 100% of the company outright to the children now, so they can run it as they choose
- B. Sell the company to a third party and gift the proceeds to the children
- C. Recapitalize into voting and non-voting shares; gift non-voting shares over time
- D. Transfer all voting shares to the eldest child now to secure continuity
Show answer and explanation
Correct answer: C. Recapitalize into voting and non-voting shares; gift non-voting shares over time
A voting/non-voting recapitalization separates control from economic value. The founder can gift non-voting shares gradually, keep decision rights until retirement, and later transfer the voting shares according to the succession plan.
- A. Gives up control immediately, contrary to her goal.
- B. Forces the sale she wants to avoid.
- C. Correct. Ownership value moves to the children while she keeps the voting shares.
- D. Hands control to one child now and leaves the other two without a stake or voice.
Question 2
If Lucas, the sole earner, were to die, his dependents would need 60,000 EUR at the end of each of the next three years, discounted at 10%. The household has 50,000 EUR of liquid assets earmarked for this purpose. Using an income-replacement approach, how much life insurance coverage is needed?
- A. EUR 99,211.12
- B. EUR 149,211.12
- C. EUR 130,000.00
- D. EUR 199,211.12
Show answer and explanation
Correct answer: A. EUR 99,211.12
PV of need = 60,000 x (1/1.10 + 1/1.10^2 + 1/1.10^3) = 60,000 x 2.486852 = 149,211.12 EUR. Coverage needed = 149,211.12 - 50,000 = 99,211.12 EUR. Insurance should fill the shortfall after existing resources are counted.
- A. Correct. Present value of the need less the earmarked assets.
- B. Gives the present value of the need but ignores the existing 50,000 of liquid assets.
- C. Sums the payments (180,000) without discounting, then subtracts the assets.
- D. Adds the existing assets to the need instead of subtracting them.
Question 3
A family of 30 members across three generations wants a smaller body that represents each family branch, meets regularly, and makes decisions on family matters between full-family gatherings. Which governance structure fits this description?
- A. A family council
- B. A family assembly open to every member for information sharing
- C. A trust protector appointed under the family trust deed
- D. A board of independent directors for the operating company
Show answer and explanation
Correct answer: A. A family council
Family governance often has a family assembly (all members, communication and education) and a family council (elected representatives, regular decisions). A charter or constitution records the agreed values and decision rules.
- A. Correct. A family council is a representative body that handles family matters between full gatherings.
- B. An assembly is the broad forum for all members, not a smaller decision-making body.
- C. A protector has defined powers over a trust, not a mandate over family matters.
- D. A company board governs the business, not family relationships and policies.
Considering a career as an advisor?
Explore careers at ParsonexQuestion 4
Country X taxes net realized capital gains at 20% and allows realized losses to offset gains in the same year. Wen has realized gains of 80,000 USD this year and holds a position with an unrealized loss of 50,000 USD. She sells it and buys a similar, but not substantially identical, fund. What is her capital gains tax for the year?
- A. 16,000 USD
- B. 10,000 USD
- C. 6,000 USD
- D. 0 USD
Show answer and explanation
Correct answer: C. 6,000 USD
Net realized gain = 80,000 - 50,000 = 30,000; tax = 30,000 x 20% = 6,000 USD, versus 16,000 without harvesting, a saving of 10,000. The replacement fund keeps market exposure while avoiding a wash-style disallowance.
- A. This is the tax with no harvesting: 80,000 x 20%.
- B. This is the tax saved by harvesting (50,000 x 20%), not the tax owed.
- C. Correct. Net gain of 30,000 taxed at 20%.
- D. Assumes the loss eliminates all tax, but the loss is smaller than the 80,000 gain.