COR167e Managing Your Personal Finances TMA – 2 – Case study- Vision Unlimited is a partnership between two eye specialists, Dr Smart Kwek Poh Soon and Dr Brilliant Heng Lye Huat, Singapore

CASE STUDY

WEALTH PROTECTION – TAX PLANNING

Vision Unlimited is a partnership between two eye specialists, Dr Smart Kwek Poh Soon and Dr Brilliant Heng Lye Huat, sharing profits in the ratio of 6:5. The partners are considering setting up a consultancy company to handle their accounting and administrative functions. The partners’ wives and family members will either be employed or be appointed as directors. Dr Smart and Dr Brilliant proposed that the consultancy company make the following payments:

1. Salary of $120,000 to Dr Smart’s wife for acting as General Manager. Mrs Smart is a full-time housewife.

IL          Director’s fee of $120,000 to Dr Brilliant’s mother, who is residing in Australia.

III. Salary of $8,000 to Sparkle, son of Dr Brilliant, who recently graduated from Republic Polytechnic with a Diploma in Communication.

Dr Smart is also an employee of a Medical Group and his company provided the following benefits in 2018:

1. His employer provided a company car for him. Running expenses of $25,000 were paid by the company. Total mileage travelled was 15,000, 40% being for business use. The cost of the car is $210,000 with a residual value of $32,000.

IL    An all-expenses paid holiday to Bali for Dr Smart and his family. The total amount paid was $8,500.

• A partly furnished apartment from I March 2018 to 31 December The annual value of the apartment is $25,000. Dr Smart and his family stayed in a self-rented bungalow before I March 2018.

An employee stock option was granted to Dr Smart by his employer on 1st January 2016. This entitled Dr Smart to purchase up to 100,000 shares within five years at an option price of $1. Dr Smart exercised the option on 30 July 2018 to purchase  50,000 shares when the market price was $1.50. Dr Smart sold the shares on 31 October 2018 at a price of $2.80, realising a profit of $90,000.

Dr Smart exercised the remaining portion of the share option on I August 2018 and the last closing price was $1.80. Dr Smart has yet to sell this lot of 50,000 shares.

Dr Smart wrote a book for which he received a royalty income in 2018. The following breakdown is as follows:

WEALTH ACCUMULATION – INVESTMENT PLANNING

Dr Smart bought 5000 shares of Promiseland shares on 18 September 2018. On 25 August 2018, the board of directors of Promiseland announced a dividend of 20 cents per share to holders of record on 22 September 2018.

The table below shows Promiseland’s return from 2012 to 2017:

WEALTH GIVING – ESTATE PLANNING

Dr Smart’s Summary of Insurance Policies

 

Dr Smart uses his English name “Smart” on his house title deeds, his dialect name “Smart Chin Chye” on his car registration , and his alias “Smart Tua Huat” on his other assets to indicate legal ownership. Dr

Smart wants to use only “Smart Tua Huat” in his will and says, “Everyone knows me as “Smart Tua Huat” and has been calling me that for the past eight years.”

Dr Smart is planning to have his will revised. Dr Smart’ s existing will contains the following prov1s10ns:

• “I hereby disinherit my brother He will not receive any bequests, devises, or inheritances from my estate.”
• “I hope that my coin collection will be given to my “
• “I hereby give my Toyota (SKG 2367) to my niece, Jennifer.”
• “I hereby give Bruce $100,000.”

Since the will was executed, the Toyota was destroyed in an accident and Dr Smart’s wife learned about Bruce. Bruce had threatened to expose some past indiscretions by Dr Smart if he was not provided for in his will.

Question 1: WEALTH PROTECTION – TAX PLANNING (34 marks)

la             Explain the differences between tax avoidance and tax evasion. Give 3 examples of each to illustrate the critical aspects of Wealth Guarding through Tax and Insurance Planning.

(8 marks)

Tax avoidance is considered a legal activity to undermine the taxation system by the means of loop-holes for example: A creation of shell corporations in which minimal to no assets are invested and without active business operations these corporations can help reduce tax burdens on high-earners are new corporations in Singapore can be exempted for up to three years of taxation.

Tax evasion however is an illegal operation in which taxable income is falsified or rewritten to reduce taxation liabilities.

lb(i)         Illustrate  the  critical  aspects  of  Wealth  Guarding  through  Tax  and  Insurance Planning by commenting on the tax implications for

1. Salary to Dr Smart’s wife
2. Director fee to Dr Brilliant’ s mother

• Salary to Sparkle

(6 marks)

lb(ii)        Illustrate  the  critical  aspects  of  Wealth  Guarding  through  Tax  and  Insurance Planning by calculating the following tax liabilities for Dr Smart:

1. Company car
2. An all-expenses paid holiday to Bali

• A partly furnished apartment

(6 marks)

lc(i)          Illustrate  the  critical  aspects  of  Wealth  Guarding  through  Tax  and  Insurance Planning by calculating the amount of Share Option benefit assessable on Dr Smart.

(6 marks)

lc(ii)         Illustrate  the  critical  aspects  of  Wealth  Guarding  through  Tax  and  Insurance Planning by calculating Dr Smart’s tax liabilities for his royalty income.

(8 marks)

Question 2: WEALTH ACCUMULATION – INVESTMENT PLANNING (34 marks) 

• Demonstrate you r understanding of the Wealth Growing Process through Investment Planning and Retirement Planning by indicating your response for each statement

(8 marks)

1   True    False      Liquidity risk considers the risk in liquidating or selling investments.

• True False      The reinvestment rate is more significant to a bondholder than a

True       False                     Older investors usually want more current

• income and less portfolio risk than younger
• True False Modern portfolio theory places emphasis on diversification across industries rather than on complicated quantitative

5    True    False      Stock splits are usually accompanied by a stock price adjustment that leaves the total value of each investor’s holding unchanged.

• True False      When the investment value of a common stock exceeds

both its par and book values, that indicates strong support for its selection.

• True False      Both income and growth stocks may be classified as blue chip

8    True    False      Defensive stocks are the right stocks to hold or bu y when government defence spending increases.

b(i)           What is the ex-dividend date for Promiseland?

(2 marks)

b(ii) Demonstrate your understanding of the Wealth Growing Process through Investment Planning and Retirement Planning by calculating the average annual return for Promiseland’s  shares.

(4 marks)

26.4%+9%+3%+13.6%+(-38.5%)+3.5%=17%

17%  6 years = 2.834% is the average return for promise land shares

b(iii) Demonstrate your understanding of the Wealth Growing Process through Investment Planning and Retirement Planning by calculating the annualised rate of return for Promiseland’s  shares.

(6 marks)

c(i)               Demonstrate your understanding of the Wealth Growing Process through Investment Planning and Retirement Planning by determining the standard deviation of Promiseland’s returns over the six-year period and then interpreting your answers.

(6 marks)

c(ii) Dr Smart wishes to invest a sum of money in a company which he believes will appreciate. Demonstrate your understanding of the Wealth Growing Process through Investment Planning and Retirement Planning by explaining to Dr Smart the differences between

1. Active investing and passive investing
2. Growth-style investing and Value-style investing

(8 marks)

Question 3: WEALTH GIVING – ESTATE PLANNING (32 marks) 

a(i)           The terms listed below are basic to an understanding of estate transfers.

Using the key aspects of Wealth Giving through Estate Planning, match each term given above with the most appropriate description. (10 marks)

 Intestate succession the term for several methods that transfer a person’s estate at death outside of probate, because those methods (survivorship, contract, living trust provision, etc.) are recognised as superseding that person’s will and the intestate succession laws.

Testacy (Testate)

the condition that results from a person’s dying after having made and left a valid will; also used to describe a person who dies and leaves a valid will.

 Right of Ownership the legally enforceable claim of the survivor of a deceased person to the property of the deceased; a distinguishing  characteristic of joint tenancy; a widely recognised form of will substitute.

 Beneficiary designation  a contractual provision usually used with insurance policies and CPF, that indicates the person who is entitled to receive the proceeds upon another person’s death; a widely recognised form of will substitute.

Intestacy (Intestate) the condition that results from a person’s dying without leaving a valid will; also used to describe a person who dies without leaving a valid will.

a(ii)     Trust is the disposition of assets upon death of grantor while Will helps the settlor with the disposition of assets before his death. Is this a valid statement? Explain your answer using the key aspects of Wealth Giving through Estate Planning.

(4 marks)

a(iii)      Dr Smart needs the written approval of his wife’ and children before he can revoke his insurance nomination of beneficiaries. Is this a valid statement? Explain your answer using the key aspects of Wealth Giving through Estate Planning.

(5 marks)

• Using the key aspects of Wealth Giving through Estate Planning, explain to Dr Smart why using only the name “Smart Tua Huat” to name in his will is not feasible and could lead to

(5 marks)

• Using the key aspects of Wealth Giving through Estate Planning, identify the actions that Dr Smart should take to avoid estate planning pitfalls when Dr Smart amends his