This refers to Reading 9, practice problem 12A, unique circumstances. The information says: We benefit from two investment accounts: - The Gift Fund represents our gift to the college. During our life-times, we will receive fixed annual payments of $40,000 (tax free) from the Gift Fund. The answer says: Esbalishment of the Gift Fund had increased the Smith’s dependence on fixed payments. **So why does the establishment of the Gif Fund increase Smith’s dependence on fixed payments?
it is true, isn’t it? They depend on the 40K payout fixed from the fund for their life times.
That is just a statement of fact, and it is a unique circumstance. They do not say whether it is good or bad, though.
But realize that this could be something which could be changed - and so note the language - esp. if they also talk somewhere else with regards to “Ability to take risk”. This could be something that they may need to change - if required and depending on circumstances.
The establishment of the Gift Fund and the reliance for fixed income payments of $40K / year is a self-imposed constraint (a unique circumstance) that the couple has placed on themselves. The couple has essentially traded in a portion of their wealth as a gift in exchange for fixed income payments to be received annually at dates in the future. As such, they have effectively increased their reliance on fixed income payments by establishing the Gift Fund. If no gift was made to the Gift Fund, they would not need to rely on fixed income payments. Hope this helps!
That’s very clear now, thanks OMG