You are the financial advisor counselling Mr. Timur and his wife, Mrs. Timur.
Timur is 78 years old and has a 38 -year-old son, Abbos. Abbos has 16-year-old twin sons. Timur wishes to provide for his family but intends to donate the majority of his assets to Children Charity Funds in Tashkent. Timur’s total asset base is currently USD 120,000,000.
Mr. Timur and his family migrated to United Kingdom many years ago and presently residing there. Timur lives in a community property jurisdiction that entitles Mrs Timur to receive half of the community property tax-free upon his death. Most of Timur’s wealth is considered separate property, with the community property amounting to only 10% of her total assets.
Exhibit 1 summarizes gift and inheritance tax rates applicable to the Timur family.
Exhibit 1 Gift and Inheritance Tax Rates Tax Type Tax Rate Spousal inheritance tax 20% Spousal gift tax 25% Non-spousal inheritance tax 50% Non-spousal gift tax 30% Note: All taxes are due immediately at the time of the transfer and are paid for by the recipient. Timur feels that his wife’s legal entitlement under the community property rules will not be sufficient to meet his financial needs. You establish that if Timur was to die today, his wife would need to inherit USD 8,000,000 net of any taxes to meet her needs.
Timur’s son, Abbos, works for MDIST as a local lecturer. He enjoys a lavish lifestyle, as Timur provides for Abbos’ spending needs beyond his salary. Timur states that he will stop providing ongoing support and instead make an immediate one-time gift to Abbos. Abbos’ goals are to maintain his lifestyle, cover his sons’ university expenses starting year 2021, and retire in four years. Timur asks you to estimate the amount of the gift that would cover gift taxes and allow Abbos to achieve his goals. You have been appointed as Abbos’ financial advisor and gathers the following information from Abbos:
Until retirement, Abbos’s annual after-tax salary will be USD 30,000 and his annual spending needs will be USD 200,000. • Combined annual cost of education for the sons is USD 190,000 for each of the next four years, and the first payment is due in a year. • Abbos has no savings.
You determine that Timur’s gift to Abbos could be invested in a portfolio expected to earn a before-tax rate of return of 8% per year for the next four years. When Abbos retires in four years, he will need an investment portfolio valued at USD 5,000,000 to maintain his lifestyle in retirement. Abbos’s investment returns will be taxed at 25% annually.
Calculate
A) Using only the information provided, calculate the minimum inheritance (in USD) from Timur ’s estate to his wife in order to meet his spending needs and taxes. Show your calculations.
B) Using only the information provided, calculate the amount (in USD) of the one-time gift, before gift taxes, that must be transferred from Timur’s assets to Abbos to allow him to achieve his goals
Note: Assume that salaries and ongoing expenses are end-of-year cash flows.
C) After the assets are transferred from Timur to Abbos, you will prepare Abbos’s IPS (Investment Policy Statement). Identify a factor that decreases and a factor that increases Abbos’ ability to take risk.
D). Formulate each of the following constraints for Abbos’ IPS:
i. Time horizon
ii. Liquidity
