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CFA Level III Pathway: Private Wealth Practice Questions

Official outline
CFA Institute Level III exam topics and pathways
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7
Updated
Nov 3, 2026

  1. Question 1, medium

    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 explanationHide answer

    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.

  2. Question 2, hard

    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 explanationHide answer

    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.

  3. Question 3, easy

    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 explanationHide answer

    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.

  4. Question 4, medium

    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 explanationHide answer

    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.

  5. Question 5, hard

    Oscar's estate is 30 million EUR, of which 85% is a family manufacturing company with no market for its shares. Country X requires estate tax to be paid within nine months of death, estimated at 5 million EUR. His children want to keep the company. What is the best planning step now?

    • A.Pre-fund liquidity, such as life insurance held outside the estate, plus a share redemption plan
    • B.Plan for the heirs to sell a minority stake quickly after death to raise the cash needed for the tax
    • C.Wait until death and then ask the tax authority for an extension, since timing is uncertain
    • D.Reinvest more of his savings into the company to raise its value
    Show answer and explanationHide answer

    Correct answer: A. Pre-fund liquidity, such as life insurance held outside the estate, plus a share redemption plan

    Estates dominated by illiquid private-business interests risk forced sales when taxes fall due. Pre-funding liquidity, often with insurance owned outside the estate, plus a redemption or buy-sell arrangement, lets heirs keep the business.

    • A. Correct. Liquidity is arranged before death so the business need not be sold.
    • B. A rushed sale of an illiquid minority interest is likely at a steep discount.
    • C. Relying on a discretionary extension is not a plan and may not be granted.
    • D. Increases the illiquid share of the estate and worsens the cash shortfall at death.

  6. Question 6, hard

    Tomas pledges 10,000 shares in a prepaid variable forward and receives cash today. The floor price is 100 USD and the cap price is 140 USD. At settlement the stock trades at 125 USD. Between the floor and the cap, the contract has him deliver enough shares to have total value equal to 10,000 x 100 USD. How many shares does Tomas keep?

    • A.2,500 shares
    • B.2,000 shares
    • C.0 shares
    • D.8,000 shares
    Show answer and explanationHide answer

    Correct answer: B. 2,000 shares

    Delivered shares = 10,000 x 100 / 125 = 8,000, so he keeps 10,000 - 8,000 = 2,000 shares. Below the floor he delivers all 10,000; between floor and cap he keeps a declining share of the upside; above the cap he keeps all further appreciation.

    • A. Uses the 25 USD gain over the floor divided by the floor price, applied to all shares, instead of the gain divided by the settlement price.
    • B. Correct. He delivers 8,000 shares and keeps the remainder.
    • C. Assumes all shares are delivered, which applies only when the price is at or below the floor.
    • D. This is the number delivered, not the number kept.

  7. Question 7, medium

    In Country X, a private foundation must distribute at least 5% of assets annually and publicly discloses its officers and grants. A donor-advised fund (DAF) held at a public charity gives an immediate deduction for contributions, has no donor-level payout schedule, and allows anonymous grants. Gabe wants a large deduction this year, wants to recommend grants over many years, and wants low administration and anonymity. Which vehicle fits best?

    • A.A private foundation, because it gives the donor the most control over grants and staffing
    • B.A series of annual direct gifts, each deducted in the year it is made
    • C.A private foundation with a corporate trustee to reduce the administrative work
    • D.A donor-advised fund
    Show answer and explanationHide answer

    Correct answer: D. A donor-advised fund

    A donor-advised fund separates the timing of the deduction from the timing of grants and carries little administration. A private foundation offers more control but adds payout rules, disclosure and compliance work.

    • A. Control comes with a payout rule, public disclosure and administrative burden, which conflict with his stated aims.
    • B. Does not give the large up-front deduction or the ability to spread grants over many years.
    • C. A trustee reduces some work but the foundation's payout and public disclosure still apply.
    • D. Correct. It front-loads the deduction while allowing grants to be spread over time with low administration and anonymity.

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