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Five-Step Process for Constructed-Response Questions - Post #12 - The CFP Examination - December 2017

Posted by John Gobeil on

In this post, we will apply the five-step process to answer another constructed-response question.

Five-Step Process for Constructed-Response Questions

The five-step process for constructed-response questions is:

  1. read the Response Instructions;
  2. examine the Response Template;
  3. determine how much time you have to answer the question;
  4. read the client situation looking for all relevant information; and
  5. analyze the relevant information and complete the response template.

Sample Examination Item

This question was included in Gobeil's Strategic Financial Planning Study Aid™.

(8 marks) William and Brenda Cargill are 65 years of age. Last year, William fell out of their apple tree and broke his neck. While he has recovered his mobility, he is very cautious and anxious about his health. Brenda's mother died recently of complications from Alzheimer's. Brenda is very concerned about the care of her and William should either become incompetent.

They have two sons who have worked in the financial services industry. James is in jail for insider trading and Fred just obtained his CFP® designation. While both sons are married, William and Brenda never see their families.

Statement of Net Worth

As at December 31

Assets

Brenda

William

Total

Liquid Assets

 

 

 

       Joint Chequing Account

$3,000

$3,000

$6,000

Investment Assets – Non-registered

 

 

 

       Brokerage accounts

570,000

350,000

920,000

Investment Assets - Registered

 

 

 

       RRSPs

128,000

154,000

282,000

Personal Use Assets

 

 

 

       Home

215,000

215,000

430,000

       Automobiles

15,000

9,000

24,000

 

230,000

224,000

454,000

  Total Assets

$931,000

$731,000

$1,662,000

 

 

 

 

Liabilities and Net Worth

 

 

 

 

 

 

 

Liabilities

 

 

 

Credit cards

$3,000

$3,000

$6,000

Other loans

23,000

12,000

35,000

 

26,000

15,000

41,000

Estimated Deferred Taxes

48,000

57,000

105,000

Net Worth

857,000

659,000

1,516,000

  Total Liabilities and Net Worth

$931,000

$731,000

$1,662,000

 

The Cargills want to leave their estates to their sons, but they want James to receive a 15% share.

Response Instructions

Prepare a strategic plan for the Cargills with the rationale for the plan.

(Response Template)

What is the Cargills’ opportunity?

 


What are the Cargills’ potential problems?

1.

2.

3.


What is your strategy?

 


What is the rationale for your strategy?

1.

2.

3.


How to answer a constructed-response question

Given half of a page of information about William and Brenda plus a Statement of Net Worth, you could ask many questions about their financial situation.

So, if you simply started reading and analyzing the client situation, your mind is going to have to consider all of the possibilities. This is a waste of time and energy.

First, read the Response Instructions. Second, examine the Response Template.

The response template has four questions. What is the Cargills’ opportunity? What are the Cargills 3 potential problems? What is your strategy? What is the rationale for your strategy?

We need to determine the Cargills’ opportunity: opportunity to do what? What is the opportunity to address some need?

Now, you have an understanding of exactly what you have to do. We need to know what their problem is and how would you address it.

Third, determine how much time you have to answer the question.

The question is worth 8 marks. Assuming there are 100 marks per paper, you have about 14 minutes, calculated as (8 marks ÷ 100 marks) × 180 minutes in a 3 hour paper).

Now, you know how long you have to answer the question.

Fourth, read the client situation looking for all relevant information: in this case, specifics about their needs and opportunities to address them.

You can highlight the needs, potential opportunities and relevant facts or simply make a list. I think that I would do both.

They have two needs:

  1. Brenda is very concerned about the care of her and William should either become incompetent.
  2. The Cargills want to leave their estates to their sons, but they want James to receive a 15% share.

The specifics about assets and liabilities in the Statement of Net Worth do not seem to be of any particular significance. However, it is worth noting that they have a net worth of about $1.5 million. Your answer would be different if they were living on social assistance.

Fifth, analyze the relevant information and complete the response template.

So, you have to come up with a way or opportunity to address their needs.

  1. Brenda is very concerned about the care of her and William should either become incompetent.
  2. The Cargills want to leave their estates to their sons, but they want James to receive a 15% share.

Hopefully, you think of a joint spousal trust.

(Concepts) An individual and/or the individual’s spouse can establish a joint spousal trust for the individual and spouse’s benefit (ITA 248(1)). Spouses and common-law partners can transfer capital property to a joint spousal trust without the transfer being considered a disposition for tax purposes.

To qualify as a joint spousal trust, all of the following conditions must be met:

  • the transferor must be at least age 65 when the trust is created;
  • the transferor and his spouse are entitled to all of the trust income; and
  • no other person is entitled to the capital of the trust during the transferor, the spouses’ lifetimes (ITA 104(4) & 248(1)).

Upon the latter death of the settlor, and his spouse or partner, a disposition will be deemed to take place at the property’s fair market value at that time. Any capital gain, capital loss or recapture of depreciation will be attributed to the spouse or partner who was the last to die.

As an inter vivos trust, any income attributed to a joint spousal trust is taxed at the top, combined federal and provincial marginal rate.

The trustee would allocate the trust’s taxable income between the settlors and the trust to minimize income taxes and the clawback of social security benefits. However, under the income attribution rules, the trustee would also have to attribute the property income and any capital gains or capital losses to the settlor who transferred the property to the trust.

The settlors of a joint spousal trusts would also name the income and capital beneficiaries after the latter death of the spouses. The trust would not revert to the settlor’s estate upon the latter of their deaths.

Now complete the template.

In the event of incapacity of the settlor, the trustee of a joint spousal trust continues to own and manage the property for the beneficiary. The settlors of a joint spousal trusts would also name the income and capital beneficiaries after the latter death of the spouses.

What is the Cargills’ opportunity?

Establish a joint spousal trust to provide for fiduciary management of your assets should you be unable to do so yourselves.


Next, we need to consider what problems might still remain.

Who would be the trustees if Brenda and William become incompetent? Who should they name as the beneficiaries after the latter death of the spouses? RRSPs cannot be transferred to a joint spousal trust because they are already trusts. How could they manage RRSPs and any other assets that cannot be practically transferred to a joint spousal trust?

What are the Cargills potential problems?

1.     Choosing alternative trustees to manage your assets should you become unable to do so.

2.     Providing for the distribution of the remaining trust assets upon the second death.

3.     Providing for the management of your RRSPs and any other assets that cannot be practically transferred to a joint spousal trust.


Strategy
, a word of military origin, refers to a plan of action designed to achieve a particular goal or objective. In game theory, a strategy refers to one of the options that a player can choose.

Once you have decided which strategies to adopt, you need to identify the tactics to implement the strategies. A tactic is a plan of action to implement a particular strategy.

A strategy is the plan to win the war; a tactic is the plan to win the next battle.

They have two needs:

  1. Brenda is very concerned about the care of her and William should either become incompetent.
  2. The Cargills want to leave their estates to their sons, but they want James to receive a 15% share.

So there are two elements to the strategy: one to deal with each of their identified needs.

What is your strategy?

Establish a joint spousal trust transferring ownership of your brokerage accounts and home to the trustee and name your sons as beneficiaries upon the second death with a 15% share for James.


Your rationale is the set of reasons or a logical basis for your strategy, your course of action.

The trustee would have all of the power necessary to manage the property. The trustee would have a fiduciary obligation and would be personally liable for any breach.

The trust would not revert to the settlor’s estate upon the latter of their deaths. The settlors of a joint spousal trusts would name the beneficiaries after the latter death of the spouses.

What is the rationale for your strategy?

1.     The first rationale for establish a joint spousal trust is the trustee would have all of the power necessary to manage the property.

2.     The second rationale for establish a joint spousal trust is the trustee would also have the obligation to serve as a fiduciary of your interests and would be personally liable for any breach of this obligation.

3.     The rationale for naming your sons as beneficiaries is upon the latter of your deaths, the assets of the trust would pass to the income and capital beneficiaries that you have named in the trust document.


First, read the Response Instructions. Second, examine the Response Template. Third, determine how much time you have to answer the question. Fourth, read the client situation looking for all relevant information. Fifth, analyze the relevant information and complete the response template.

If you have never heard of a joint spousal trust, you cannot answer this question. However, if you are familiar with such trusts, this question is not very difficult and you could probably answer it in 14 minutes without running out of time.

However, you might be rushed to do it in 14 minutes if you read the client situation before the Response Instructions and Response Template.

Effectiveness of our study aids

We always appreciate feedback on the effectiveness of our study aids. Together, we can continue to have the best study aids available.

John Gobeil, BSc, CFP®
David Gobeil, CPA, CA, CFP®

Certified Financial Planner® and CFP® are certification marks owned outside the U.S. by the Financial Planning Standards Board Ltd. The Financial Planners Standards Council is the marks licensing authority for the CFP marks in Canada, through agreement with FPSB.


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