There’s a question in the Schweser review workshop questions that is confusing me. (private wealth management - 10 d)
Its trying to establish the relative value of generation skipping vs bequesting twice(and getting taxed twice).
The theory behind it makes sense. Its more efficient to skip a generation. However, im not sure why they calculated it the way they did.
The way the generstion skipping is computed is
(1+r) ^ 40 x (1-t)
fv of not generation skipping is
((1+r) ^ 5 x (1-t) ) x ((1+r) ^ 35 (1-t))
the first generation dies in 5 years and the second in 35 years.
The confusing part is why the generation skipping is calculated as n=40 when they will technically be taxed within 5 years(upon first death) and hence will not get to compound returns for the additional 35 years.