Practicing financial planning for professionals and CFP(R) aspirants

SAGE was founded in 1965 by Sara Miller McCune to support the dissemination of usable knowledge by publishing innovative and high-quality research and teaching content Today, we publish over 900 journals, including those of more than 400 learned societies, more than 800 new books per year, and a growing range of library products including archives, data, case studies, reports, and video SAGE remains majority-owned by our founder, and after Sara’s lifetime will become owned by a charitable trust that secures our continued independence Los Angeles | London | New Delhi | Singapore | Washington DC | Melbourne Practicing Financial Planning Thank you for choosing a SAGE product! If you have any comment, observation or feedback, I would like to personally hear from you Please write to me at contactceo@sagepub.in Vivek Mehra, Managing Director and CEO, SAGE India Bulk Sales for purchase of books in bulk We also make available special imprints and excerpts from our books on demand For orders and enquiries, write to us at Marketing Department SAGE Publications India Pvt Ltd B1/I-1, Mohan Cooperative Industrial Area Mathura Road, Post Bag New Delhi 110044, India E-mail us at marketing@sagepub.in Get to know more about SAGE Be invited to SAGE events, get on our mailing list Write today to marketing@sagepub.in This book is also available as an e-book Practicing Financial Planning For Professionals and CFP® Aspirants Sid Mittra, Ph.D., CFP® Emeritus Professor of Finance,Oakland University, Michigan Anandi P Sahu, Ph.D Professor and Chair of Economics, School of Business Administration Oakland University, Michigan Brian Fischer, CFA Financial Analyst at Evensky & Katz/Foldes Financial Wealth Management Honorary Academic Consultant Harold R Evensky, CFP® President, Evensky & Katz Wealth Management Former Chairman, CFPđ Board of Standards Copyright â Sid Mittra, 2016 All rights reserved No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system, without ­permission in writing from the publisher First published in 1990 by Prentice Hall This edition is published in 2016 by SAGE Publications India Pvt Ltd B1/I-1 Mohan Cooperative Industrial Area Mathura Road, New Delhi 110 044, India www.sagepub.in SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320, USA SAGE Publications Ltd Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kingdom SAGE Publications Asia-Pacific Pte Ltd Church Street #10-04 Samsung Hub Singapore 049483 Published by Vivek Mehra for SAGE Publications India Pvt Ltd, typeset in 11/14 pt Myriad Pro by Zaza Eunice, Hosur, Tamil Nadu, India and printed at BR Printers, San Jose, California Library of Congress Cataloging-in-Publication Data Available ISBN: 978-93-860-4285-9 (PB) SAGE Team: Amit Kumar, Indrani Dutta, Sudeshna Nandy, Apeksha Sharma and Rajinder Kaur Contents Foreword by Harold R Evensky xxi Preface to the Twelfth Edition xxiii Acknowledgmentsxxv About the Authorsxxvii Introduction to Financial Planning and Basic Tools Chapter Emerging Role of the Financial Planner Chapter Personal Financial Planning Process Chapter Time Value of Money: The Universal Tool 26 48 Risk Management Planning 83 Chapter Life Insurance: Structure, Concepts, and Planning Strategies Chapter 5 Health, Homeowner’s, Automobile, and Liability Insurance: Structure, Concepts, and Planning 85 165 Cash Management and Educational Planning 251 Chapter Cash Management, Savings, Credit, and Debt Planning Chapter Educational Planning 253 295 Investment Planning 331 Chapter Investment Products and Markets: An Introduction Chapter Investment Management: Concepts and Strategies Chapter 10 Investment Planning Strategies 333 382 441 Tax Planning 471 Chapter 11 Basic Federal Income Tax Structure Chapter 12 Tax Planning: Concepts and Strategies 473 505 Retirement Planning 537 Chapter 13 Basic Structure of Retirement Income Chapter 14 Retirement Planning: Concepts and Strategies 539 588 Estate Planning 623 Chapter 15 Basic Structure of Estate Planning Chapter 16 Estate Planning: Concepts and Strategies 625 657 vi Practicing Financial Planning Comprehensive Financial Plan 715 Chapter 17 Comprehensive Financial Planning 717 Special Topics in Planning 727 Chapter 18 Divorce: Financial Planning Implications Chapter 19 Planning for Widows Chapter 20 Planning for Nontraditional Families Chapter 21 Management of Financial Planning Practice Chapter 22 Sale of Financial Planning Practice 729 752 766 785 801 Index 815 Detailed Contents Foreword by Harold R Evensky xxi Preface to the Twelfth Editionxxiii Acknowledgmentsxxv About the Authorsxxvii lntroduction to Financial Planning and Basic Tools Chapter 1  Emerging Role of the Financial Planner Demands of the Financial Future The Emerging Trends Concept of Financial Planning “Science and Art” of Financial Planning 11 The Client 13 Coordination with other Professionals 17 Competence20 Commitment to Ethics 23 Summary25 Chapter 2  Personal Financial Planning ­Process 26 Introduction26 Nature and Structure of Engagement 27 Collect Qualitative and Quantitative Data 32 Develop Assumptions/Analyze Financial Data 35 Plan Recommendations 39 Communication of Recommendations 42 Plan Implementation 44 Monitor and Review the Plan 45 Professional and Regulatory Standards 45 Chapter 3  Time Value of Money: The Universal Tool 48 Introduction48 Simple Interest 48 Future Value: Fixed Sum  49 Present Value: Fixed Sum 54 Future Value: Annuity 58 Present Value: Annuity 59 Earnings before interest and taxes Executive compensation Executive compensation   Adjusted EBITDA 67,500 100,000 167,500 20 Interest expense 21 Principal amortization 22   Total payments to Seller 23 Aggregate payments to Seller Source: Created by Jack DiFranco 800,000 (100,000) 700,000 Debt Amortization; Beginning balance Less: principal amortization Ending balance 9% $1,016,000 (50,000) 125,352 (100,000) 25,352 16 17 18 19 10% Less: executive distributions   Net available cash Less: principal amortization Net cash flow (cushion) (72,457) 108,685 66,667 175,352 12 13 14 15 40% Distribution for taxes   After tax earnings Add back amortization   Total cash flow after taxes (67,500) (66,667) 181,142 Year $78,994 181,315 55,000 315,309 10 11 Less: interest expense Less: intangible amortization Earnings before taxes Table 22.3  Proforma Cash Flow Analysis 57,375 125,000 182,375 700,000 (125,000) 575,000 (55,0001) 175,193 (125,000) 50,193 (109,018) 163,526 66,667 230,193 (57,375) (66,667) 272,544 Year $125,179 213,656 57,750 396,586 45,000 150,000 195,000 575,000 (150,000) 425,000 (60,500) 227,779 (150,000) 77,779 (147,742) 221,613 66,667 288,279 (45,000) (66,667) 369,354 30,375 175,000 205,375 425,000 (175,000) 250,000 (66,550) 280,008 (175,000) 105,008 (186,594) 279,892 66,667 346,558 (30,375) (66,667) 466,486 13,500 200,000 213,500 250,000 (200,000) 50,000 (73,205) 331,722 (200,000) 131,722 (225,507) 338,261 66,667 404,927 (13,500) (66,667) 563,768 For the Year Ending Year Year Year $173,103 $219,493 $264,227 247,281 280,365 312,855 60,638 63,669 66,853 481,021 563,528 643,935 2,250 50,000 52,250 50,000 (50,000) (80,526) 380,995 (50,000) 330,995 (263,236) 394,854 66,667 461,521 (2,250) (66,667) 658,090 Year $312,120 344,692 70,195 727,007 0 0 0 (88,578) 388,221 388,221 (273,422) 410,133 66,667 476,799 (66,667) 683,554 Year $321,483 355,033 73,705 750,221 Sale of Financial Planning Practice Table 22.4  Free Cash Flow Income $518,042 Less office expenses before   Executive compensation (Table 22.1, line F) $202,733 Income after office expenses Less interest expense $315,309 $67,500 (Table 22.3, line 4) (Line 5) Less principal amortization $100,000 (Line 18) $72,457 (Line 8) Cash flow before executive distributions Less executive distributions $75,352 $50,000 (Line 12) Net cash flow (cushion) $25,352 (Line 15) Less tax payments Source: Created by Jack DiFranco The total payment by the buyer to the seller, which includes the sale price of $800,000 plus interest, equals $1,016,000 (line 23) True Net Cash Flow The two critical questions for the buyer of a financial planning practice are: “What is the true bottom line?” and “After meeting all the overhead obligations, can the practice make the payments associated with the sale and generate a reasonable profit?” While these questions are addressed in Table 22.3, the results of this analysis are demonstrated more clearly in Table 22.4 for the first year of the projection A brief discussion of the items included in this table for the first year now follows The analysis begins by restating the total income for Year 1, taken from Table 22.1, line F From this amount, office expenses of $202,733 are deducted to arrive at the cash flow after expenses Office expenses are calculated as follows (see Table 22.2): Total Expenses (line 9) $439,048 Less Executive #1 Compensation (line 3) $181,315 Less Executive #2 Compensation Total Expenses $55,000 $202,733 The compensation of $55,000 for Executive #2 is included in the salaries and benefits figure of $119,726 (line 2) This is what is called the adjusted EBITDA From adjusted EBITDA, following items are deducted: (a) Interest on the unpaid 813 814 Practicing Financial Planning balance of the sale price, $67,500; (b) Payment of principal, $100,000; and (c) Tax payment on the profit of the practice, $72,457 This amount equals the cash available before distributions to Executive No Distributions of $55,000 to this executive results in a net cash flow of $25,352 (Table 22.3, line 15) This is the net profit for running the practice, or it can be called the cushion available for meeting an unexpected contingency Incidentally, starting with year seven, after the debt relating to the sale of the practice is liquidated, the buyer will have the potential for making a decent profit on the investment Still, over the first six years, much would depend upon how the business is run and the ingenuity of the buyer to take this practice to a higher level of profitability and excellence   In this chapter the real-world case study presented to determine the value of a practice justifies the claim that special skills, good judgment, and an appreciation of the biases and idiosyncrasies of both the buyer and the seller are required for the successful sale of a financial planning practice Index A.M Best Company, 130 accountant(s), 17–19 active income, 471 adjustable life insurance policy, 105 age-weighted profit sharing plans for retirement, 568–570 aggressive growth funds, 341 alimony maintenance payment, 744–746 alternative minimum tax (AMT), 494–497 adjustments or preference items, 496–497 computation of, 495 definition of, 494 American dream, American Exchange (AMEX), 360 American Institute of Certified Public Accountants (AICPA), 28 American Opportunity Credit (AOC), 316–317 American Recovery and Reinvestment Act, 315–316 American Tax Relief Act of 2012 (Tax Relief Act), 474, 642 annuity calculation of, 58–59 definition of, 58 due future value, 60–61 present value, 61–62 future value of, 58 present value of, 62 asset allocation funds, 342–343 asset allocation model (AAM), 414–416 steps involved in, 418–419 use by investor, 441–443 asset allocation strategy, 304–305 asset reallocation, 304–305 Attorney, 17–18 auto dealers, 280 automatic savings plans, 269 automatic teller machines (ATMs), 276 average client, 13, 760 average cost method, 407–408 balanced/equity income funds, 342 bank, meaning of, 279 bankers, 17, 19, 281, 784 bankruptcy, 3, 253, 278 how to avoid, 288–290 modern interpretation, 287–288 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 289–290 benchmark method, 133 benefit payments, 158, 161–162 blue chip stocks, 336, 361 Blue Cross and Blue Shield (BC/BS) health insurance plan, 165 bond ratings, 335, 383 bond risk, concept of, 379 bond yield, 381 Brochure Rule, 31 budgeting assumptions, 36 Bush, George W., 178, 679 business expenses, 139, 206, 471 business organization amendment of tax return, 530 corporate executives, 527–528 professionals, 528 S corporations, 528–529 sole proprietorship, 527 tax audit, 530 business uses of life insurance business protection when lost key employees, 138–146 facilitation of transfer of business ownership buy–sell agreements, 136–137 insurance for professional, 138 key employee life insurance, 137 bypass trust, 665 call option with stock sale, 403 callability risk, 381 callable bonds, 334 capital asset pricing model (CAPM), 410–411 capital gain(s) and sale of residence, 476 tax calculation, 477 capital gains and losses, 474 computation of, 476–477 capital maximization strategy (CMS), 150–156 capital needs analysis, 121–123, 146–148, 150 cash flow analysis, 255 statement of, 258 steps involved in, 256–257 cash flow management, 254, 261 cash flow planning, 257, 261 816 Practicing Financial Planning cash management, 68–73 objectives of, 250 planning budgeting, 254–255 meaning of, 253–254 cash value life insurance, 142, 313, 728 cash-value or permanent insurance policies, 97–99 Certified Financial Planner (CFP) Board of Standards, 8, 20, 22–26, 35, 40, 42, 45, 47, 785 Charitable Lead Trust, 673–674, 774 Charitable Remainder Annuity Trust (CRAT), 673, 679 Charitable Remainder Trust (CRT), 510, 674 Charitable Remainder Unitrust, 673 charitable trust, 18, 108–109, 662, 673 Chartered Financial Analyst (CFA), 19 Chartered Financial Consultant (ChFC), 21 Chartered Life Underwriter (CLU), 21 child and dependent care credit, 492, 736 child tax credit, 494 client(s), 3, 8–9, 31–33 See also Engagement, financial ability to fund insurance premiums, 124 circumstances, 34 common denominators, 13–16 emerging, 13 financial welfare, 48 goals, 120–121 lifetime, 10 prospective, 12, 28–29, 31, 45 -specified assumptions, 36 closed-end funds, 339, 359–362 collateral assignment method, 140–141 college debts, reduction of, 321–322 college education, 291 costs, 292–293 investing for, 294 saving for cost of, 295–297 saving plans Coverdell ESA, 297–299 Section 529 of IRC, 299–304 UGMA and UTMA, 296–297 college funding calculation, 308–309 college funds, best places to invest in, 302 college savings plan, 296–304 commercial banks, 276–277, 279–280, 330 commercial insurance companies, 165–166, 169 common stock features of, 336 types of, 336–338 community property states, 634–636 comparative insurance policy cost, 132–136 competence of financial planner, 20–23 compounding, 49, 52–54, 56 comprehensive financial planning elements of action plan, 718–719 analysis of core planning areas, 717–718 appendices, 719 client circumstances and plan assumptions, 716–717 conclusion, 719 cover letter, 715 disclaimer statement, 491 engagement letter, 715 executive summary, 716 introduction, 715 summary of client goals, 716 table of contents, 715 software, 719–720 comprehensive health insurance, 171–172 Consolidated Omnibus Budget Reconciliation Act (COBRA), 1985, 177 constant ratio plan (CRP), 400–401 consumer credit based on consumer faith, 281 meaning of, 278 sources of, 279–280 consumer debt, meaning of, 279 consumer finance companies, 279 convertible bonds, 334 coordination, financial planners, 17–20 corporations taxation Roger and Carol Kurt’s 2015 federal income tax analysis, 499 schedule of, 497 cost of attendance (COA), 308–309 Coverdell Education Savings Account (Coverdell ESA), 297–299 credit, 10, 15, 19, 48, 127 categories of, 283–285 counseling, 289 history factors influencing, 281–282 importance of, 281 protection of, 282–283 -oriented society, 189 rating standards, 281–282 types of, 283 unions, 279–280 credit for retirement savings contributions, 493–494 cross-purchase agreement, 137, 703 Crummey trust, 680–682, 684 Index current assumption whole life, 101–102 current income, 111, 122, 129, 142, 341–343, 349, 438 current yield on bond, 383–384 cyclical company stocks, 338 data, financial assumption and analysis development, 35–37 debentures, 333–334, 471 debt burden of, 286–287 limit calculation worksheet, 287 planning, 249, 286–290 debt restructuring technique, 257 default risk, 334–335, 381 Defense of Marriage Act (DOMA), 763 defensive stocks, 338 deferment, 314 deferral with after-tax dollars, 514–515 with pre-tax dollars, 512–514 deferred variable annuity, 363–365 Deficit Reduction Act of 2005, 178 defined benefit plans for retirement, 564–568 defined contribution plans for retirement, 554–564 dental expense insurance, 172 direct consolidation loan, 315 disability benefits filling of gaps, 199 taxation of, 197 disability income insurance, 190–191 contract, 192–194 group and individual, 195–196 loss sharing, 191–192 disability insurance policy selection, 201 disability-to-long-term-care conversion policies, 210 discharge, 180, 213, 289–290, 314 discounted cash flow (DCF) analysis, 799, 804–805 discounting, 54–55, 57, 121, 740, 790, 804 distribution rules for retirement, 570–572 diversification, power of, 411–412 dividends, 62, 95, 107, 110–111–113, 471–474 divorce process alimony maintenance payment definition of, 744–745 modification in, 746 types of, 745 child custody and support, 746–747 equitable distribution of property, 728 property and debt, division of career assets, 743–744 debt allocation, 744 817 marital property, 739–740 personal residence, 742 property division, 741–742 retirement assets, 742–743 valuation of property, 740 dollar cost averaging (DCA), 269, 365, 382–383, 399–400 domestic partners, 763, 772–775 durable power of attorney (DPOA), 631–633, 699, 737, 768 durable power of attorney for health care (DPAHC), 631–632 dynamic asset allocation model, 421, 461, 465 dynasty trust, 683–684 earned income, 293, 296, 471 credit, 492–493 Economic Growth and Tax Relief Reconciliation Act of 2001, 573 economic life cycle, 13, 15 Economic Recovery Tax Act (ERTA) 1981, 654 education cost of future, 292–293 credits, 22, 493 financing cost of, 308–309 itemized deductions for, 316–317 savings report, 324–326 tax benefits for, 318 tax credits and itemized deductions for, 316–317 Education Bond Program, 305 educational investment alternatives, instruments of, 305–308 educational planning, 73–75, 29 educational tax incentives, 315–318 effective interest rate, 63–64 efficient frontier portfolio, 413–414 efficient portfolio theory, 409–410 Employee Retirement Income Security Act (ERISA), 549 employer-provided educational assistance, 306, 315, 483 employer-sponsored qualified plans, 512 endorsement method, 140–141 endowment life policy, 101 engagement, financial letter for, 31–32 qualifying potential client, case studies, 27–31 enrolled agents (EAs), 18 equitable distribution, concept of, 739 equities, trading in buying of stock, 396–397 stock selling, 397–398 818 Practicing Financial Planning equity return, 385–387 equity risk, 387–389 limiting, 399–403 equity-indexed annuity (EIA), 366–367 estate planning process advanced strategies, 706–708 common misconceptions, 623 computation of federal estate taxes, 641–648 state inheritance tax, 648–649 data requirements, 632 distribution of, 633 for business process business purchase agreement, 703–704 installment sale, 702 private annuity, 702–703 guardian for minor children, 633 in real world, traditional strategies, 708–710 issues in estate liquidity, 700 federal income tax considerations, 700–701 stepped-up basis rules, 701 survivorship life insurance, 701–702 objectives of, 624 probate, 696–697 solve financial problems created by death, 622 tools of, 624–625 joint ownership, 634–641 lifetime gifts, 640–641 will, 625–634 trusts, 638–640 unauthorized practice of law, 621–622 estate preservation and distribution strategies probate, 696–697 revocable living trust, 697–699 standby or convertible trust, 699 trust for minor children, 699 the will, 695–696 estate tax reduction strategies Crummey trust, 680–682 dynasty trust leveraging GSTT exemption, 684 family limited partnerships, 675–678 generation-skipping transfer tax (GSTT), 682–683 joint ownership advantages, 656 disadvantages, 657–658 planning strategies, 658–659 lifetime gifts calculation of, 660–661 disadvantages of, 662–663 estate with and without, 663–664 planning ideas involving, 661–662 marital deduction, 654–656 split dollar arrangement, 684–685 sprinkling trust, 680 trusts estate taxes and, 665–675 irrevocable gift trust, 675 wealth replacement trust covering estate taxes, 679–680 replacing gifted assets, 679 estate trust, 670–671 ethics commitment by financial planning professionals, 23 definition of, 23 Eurodollar Futures, 371 exchange-traded futures, 371 exchange-traded index funds (ETFs), 357–358, 360 exclusive provider organizations (EPOs), 165–168 expected family contributions (EFC) for college costs, 297 expense needs vs sources of income, 123 family expected contribution to education cost, 308–309 income policy, 109 patterns, changing scenario in, 3–4 preparation basic needs, 704 bills payment, 705–706 locating important pages, 706 preparing wife for major tasks, 705 survivors, 706 family limited partnerships (FLPs), 675–678 Federal Deposit Insurance Corporation (FDIC), 129 federal estate taxes, 91, 624, 641–648 Federal Insurance Contributions Act (FICA), 179 Federal Reserve Board (FED), 427 federal taxable income computation of, 470–471 gross income calculation, 471–481 financial aid for education, forms of, 309–313 financial future, demands of, financial planners, 13–14, 17–22 additional information collection by, 34–35 to assist clients reposition cash flow, 254 avoid authorized practice of law, 621–622 goals of, 444–446 restrictions imposed on, 11 Index financial planning management corporate structure, 785–796 external environment, 782–785 labor intensive, 781, 783 written business plan blueprint, 782 financial planning process art of, 12 built on cash flow management, 254 communication of recommendations, 42–44 coordination with other professionals, 17–20 definition of, elements of, 40 implementation of, 44 monitoring and review of, 44–45 professional and regulatory standards, 45–47 recommendations of, 39–42 science of, 11–12 since the end of World War II, 13 steps involved in, 9–10 subject areas of, 10 financial stability of insurance policy holder, 129–131 first-in, first-out (FIFO) method, 407 first-to-die insurance policy, 109 Fitch Ratings, 130 fixed income (bond) funds, 342 fixed income investments bond ratings, 335 certificates of deposits (CDs), 330 corporate bonds, 333–334 marketable government issues, 330–331 municipal bonds, 332–333 nonmarketable government issues, 331–332 rights, 335 savings accounts, 329 warrants, 335 fixed-income security return, 378–379 fixed-income security risk, 379–384 flexible spending arrangement (FSA), 503–504 forbearance, 314 forgotten deductions, 502–503 Free Application for Federal Student Aid (FAFSA), 313 future value of fixed sum, 49–54 gender equality, general obligation bonds, 332 generation-skipping transfer tax (GSTT), 682–685, 694, 709, 774 government health care insurance, 165–166, 169 graduated payment, 314 grantor retained annuity trust (GRAT), 685–688 819 grantor retained unitrust (GRUT), 685–688 gross estate, 643–646 gross income adjustments to, 482–484 calculation of, 471–481 group disability policy, 196 group health insurance policy, 155, 175–177, 612 group life insurance policy, 138–139 growth and income funds, 341 growth company stocks, 337 growth funds, 341 guaranteed bonds, 333–334 hard assets, 446, 457–458 health care, 19, 35, 179, 186, 249, 338 coverage, 38 inflation pressure on, 208 licensed practitioner, 115 organizations, 165–169 taxation of benefits, 188 US expenditure on, 164 health insurance contract provisions, 173–175 coverage of US citizens, 174–175 group and individual, 175–176 planning process, steps in, 189–190 policy selection, criteria for, 188–189 sources of, 166 types of, 169–173 worksheet, 211 Health Insurance Portability and Accountability Act (HIPAA), 1997, 174, 177, 205–207, 209 health maintenance organizations (HMOs), 165–168, 170, 173–174, 177, 181, 189–190 health plan organizations, 165–169 high income taxpayers, 475, 485, 494 home owner contract policy coinsurance, 212 coverage of, 217 deductibles, 212–213 elements of, 212 forms of, 213–219 insured amount, 213 loss sharing, 212–213 major provisions under endorsements, 221–222 insured, definition and locations, 219–220 specialty forms of insurance, 222–223 unscheduled personal property, 220–221 820 Practicing Financial Planning planning process, 223–225 annual checkup, 226–230 cost issue, 225–226 self-analysis, 226 taxation benefits, 223 home ownership, 507–508 hospital indemnity insurance, 169–170 hospital insurance, 169–171, 183, 185 hospital-service-incurred plans, 169–170 HP-12C calculator, problem-solving with, 65–67 human life value approach, 121–122 income acceleration, 517 income deferral, 517 income stocks, 336, 338, 405 income tax computation of basic computation, 491 marginal tax rate, 491–492 tax credits, 492–494 deductions, 484–490 tax exemption number of dependents, 490–491 personal and dependency exemption, 490 structure, 471 indemnity principle, 161–162 index funds, 343 indexed universal life, 105 individual disability policy, 195–196 individual health insurance policy, 175–176 individual life insurance policies, 91, 122 See also Life insurance policy planning for individual calculation of individual needs, 121–123 selection of policy, 123–136 setting up of client goals, 120–121 individual retirement accounts (IRAs), 259, 301–302, 309, 482–483 See also Retirement income contributions, 287, 312, 483, 494, 512, 514, 581, 597–598 deductible vs nondeductible contributions, 581 deductions from gross estate, 646 distribution systematic withdrawal, 606–607 early withdrawal penalty, 525–526 eligibility for, 578 long-term accumulation, 581 rollover, 596–597 rollover vs transfer, 583 roth, 580 taxation, 597 traditional, 578–580 types of individual retirement annuity plan, 582–583 individual retirement plan, 582 individual taxpayer reduction techniques deductions flexible spending arrangement (FSA), 503–504 forgotten deductions, 502–503 marriage penalty, 505–506 moving expenses, 504 other deductions, 506–507 prepayment strategy, 505 tax-deductible interest, 504–505 deferral technique with after-tax dollars, 514–515 with pre-tax dollars, 512–514 deflection technique child employment, 516 gifts, 516 kiddie tax, 515–516 diminution technique alternate minimum tax, 523–524 appreciated property contributions, 518–519 charitable contributions, 518 early withdrawal penalty, 525–526 employee business expenses, 521–523 expense shifting, 523 income acceleration, 517 income deferral, 517 interest deductions acceleration, 519 investment interest, 520–521 itemized deductions to accelerate or defer income, 517–518 medical expenses, 519 mutual fund sales, 525 personal and qualified residence interest, 519–520 S corporation strategy, 526 second home, 523 shifting of income, 523 social security benefits, 524 splitting business income, 524–525 state income tax, 518 diversion of tax reduction charitable donations, 510–511 home ownership, 507–508 like-kind exchanges, 510 limited partnerships, 509 master limited partnerships (MLPs), 510 matching incomes and losses, 508–509 municipal bonds, 508 Index publicly traded partnerships (PTPs), 510 tax shelters, 509 tax-free social security benefits, 511 inflation risk, 306, 331, 380 role in financial calculations, 64–65 informational interview, 28–29 installment sales strategy, 688–689 insurance against significant risks, 162–163 counselor, 19, 121 insurance for your paycheck, 190 loss control through preventive measures, 163 shopping for, 163 interest rate effective, 63–64, 285–286 nominal, 53, 64, 380 risk, 75, 342, 379, 382, 416 interest-adjusted cost index method, 132–133 interest-sensitive whole life (ISWL), 101 interests-adjusted cost method, 133–134 internal rate of return (IRR), 65 International Board for Standards and Practices of Certified Financial Planners (IBCFP), 20 international/global funds, 341 investment derivatives, 370–372 investment growth, 36, 341, 440–441 investment planning process, 19, 437–438 steps involved in identification of clients goal, 438–445 portfolio reorganization, 457–459 preference of investor, 453–454 risk tolerance level, 445–453 investor preference cash reserves and emergency funds, 454–455 definition of, 453 growth of equity, 456 income flow, 455–456 long-term growth and tax advantages, 456–457 target investment portfolio, 457 irrevocable gift trust, 675 iShares, 359, 361–362 job-task activities domain knowledge, 26–27 of financial planners, 45 plan recommendations, 39 Jobs and Growth Tax Relief Reconciliation Act of 2003, 469, 474, 506 joint life insurance policy, 109 joint ownership of property, 624–641 821 advantages of, 656 disadvantages of, 657–658 planning strategies, 658–659 junk bonds, 334, 342 juvenile insurance, 126 kiddie tax, 493, 515–516 large-cap stocks, 337 less-than-total disability, definition of, 193 liability coverage characteristics of coverage benefits, 240–241 stacks on underlying, 241–242 director liability insurance, 242 professional liability insurance, 242–243 risk management process, 243–244 life concerns, 13–14 life cycle/target date funds, 343 life insurance companies, 129, 131, 151, 280, 363–364 life insurance policy(ies) contract, 109 policy riders, 114–115 provisions of, 109–113 in non-qualified plans, 145 in qualified plans, 143–145 issues pertaining to capital maximization strategy, 150–156 life settlement options, 152–153 living death benefits, 154–155 need to buy, 146–150 policy illustrations, 155–156 taxation of, 115–116 distributions during life, 117–118 income and estate taxation of death benefits, 116 trust, 151–152 types of, 91–99 life insurance trust, 671–672 lifetime gifts, 659–660 calculation of, 660–661 disadvantages of, 662–663 estate with and without, 663–664 planning ideas involving, 661–662 rules governing, 659–660 lifetime learning credit, 298, 300, 317–318, 493 like-kind exchanges, 510 limited liability company (LLC), 485–486, 526 limited partnerships, 529, 582, 676 limited-pay whole life insurance policy, 100 Lipper company, 352–353 822 Practicing Financial Planning liquidity risk, 381–382 London Interbank Offered Rate (LIBOR), 371 long-term care insurance contracts benefit trigger, 204 covered services, 203–204 loss sharing, 202 options and riders, 204–205 cost of care, 201–202 family needs assessment, 210–211 planning process, 207–209 reasons to buy, 209–210 taxation of benefits, 205–207 loss sharing principle, 161–162 low-load insurance, 307 managed care organizations, 166–167 See also Health plan organizations marital trust, 666–667, 669 master limited partnerships (MLPs), 456, 510 maturity risk, 380–381 medical expense insurance, 170 medicare policy coverage, 177–178 eligibility criteria, 178 supplemental policies, 182–185 types of coverage, 179–182 medigap policy, 182–185 mega-cap stocks, 337 micro-cap stocks, 337 Mid-cap SPDRs (MDY), 360 mid-cap stocks, 337 minor’s trust, 699 Modified Endowment Contract (MEC), 101, 307 modified or graded-premium whole life, 100 monetary policy, 383, 427 money-market funds, 265, 274–276 Monte Carlo simulation, 41 Moody’s Investor Services, 130 Morgan Stanley Capital International Europe, Australia and the Far East (MSCI EAFE) Index, 353–354 Morningstar, 412, 430 Morningstar risk-adjusted rating, 352 mortgage bonds, 334 mortgage loans, 148, 280, 369, 486, 520 moving money to the right strategy, 464 multiple compound periods per year, 52–54 multiple year annual compounding, 49–51 municipal bonds, 265, 277, 332–333, 382 mutual funds(s) advantages of, 339–340 alphabet, 348 closed-end vs open-end funds, 339 data services, 352–353 definition of, 339 disadvantages of, 340 fee reduction strategies, 346–348 fees and expenses, 343–346 reading of prospectus, 348–352 rebalancing in practice, 426 rebalancing of portfolio, 427 returns, 403 sale of, 403–406 sizing up of portfolio, 423–425 and taxes capital gains or losses on fund sales, calculation of, 407–408 fund distributions, 406–407 types of, 340–343 nano-cap stocks, 228 NASDAQ, 338 NASDAQ–100 Index Tracking Stock (QQQ), 361 National Association of Insurance Commissioners (NAIC), 125, 160 National Foundation for Consumer Credit, 289 net asset value (NAV), 339 net costs method, 134–135 net worth planning calculation of, 250 meaning of, 250 planning strategy, 253 statement of, 251–252 Newborns’ and Mothers’ Protection Act of 1996 (NMHPA), 177 nominal interest rate, 53, 64, 380 non-blue chip stocks, 337 nonqualified deferred compensation plan, 612–613 nontaxable income, 480–481 nontraditional families, planning for domestic partners, 772–776 same-sex married couples, 763–764 single parents, 776–780 unmarried couples, 764–772 occurrence of risk high probability of, 87 low severity loss and high probability, 88 low severity loss and low probability, 90 Index Old Age, Survivors, Disability, and Health Insurance (OASDHI) Program, 196 online brokers, 372 partnership, definition of, 526 passive income, 15, 457, 478–479, 528, 530 Patient Protection and Affordable Care Act of 2010, 173–175 penny stocks, 338 pension plans, 592 personal auto policy (PAP)/automobile insurance policy basic coverage under damage to insured auto, 232–233 duties after accident or loss, 233 general provisions, 233–234 liability to other, 231–232 medical payments, 232 uninsured motorists, 232 compensation for physical damages, 237 miscellaneous considerations, 234–235 no-fault insurance, 235–23 planning process annual checkup, 238 self-analysis of insurance, 238 premiums, factors affecting, 234 types of, 236–237 personal financial planning, 8–9, 20, 22, 25–47 See also Financial planning Personal Financial Specialist (PFS), 21 personal records, organization of, 163–164 personal residence interest, 519–520 plan presentation, 37–39 plan revisions, 43–44 planning for disability risk process, 199–201 planning process for education funding plan, 322–324 steps in, 318–320 point-of-service plans (POS), 165 pooled income fund, 674 portfolio construction theory, 409–427 portfolio income, 471 portfolio management, 427 portfolio manager, 17, 19, 344, 349–350 portfolio presentation, 459 portfolio reorganization steps involved in, 458 strategy, 458–459 post-divorce planning priorities cash and debt management cash flow, analyzing, 729–730 823 personal financial statements, creation of, 728–729 client goals and new identity, 727 collection of client data, 726–727 education funding, 734 estate planning, 737–738 investment assets, 733–734 retirement planning, 736–737 risk management and insurance disability insurance, 732 health insurance, 732 life insurance, 731–732 long-term care insurance, 733 tax planning, 735–736 power of attorney, 631, 653, 737 preferred provider organizations (PPOs), 165–168, 170, 172–173, 181, 189–190 preferred stock, 62, 335–336 prepaid tuition plan, 300–301 prescription drug insurance, 172–173 present value of annuity, 61–62 of perpetuity, 62 of uneven payment series, 62–63 present value of fixed sum, 54–57 primary insurance amount (PIA), 196 private annuity, 689, 694–695 profit sharing plans, 592–593 public accounting, 23 publicly traded partnerships (PTPs), 510 qualified personal residence trust (QPRT), 690–692 qualified plans distribution for retirement IRAs taxation, 597 pension plans, 592 profit sharing plans, 592–593 required distributions, 593–596 self-employed plans taxation, 597 tax considerations, other excess contributions, 598 insufficient distributions, 598–599 premature distributions, 597–598 taxation of plan benefits, 596–597 qualified residence interest, 487, 496, 519–520 qualified state tuition program (QSTP), 299 Qualified Terminable Interest Property (QTIP) Trust, 646–647, 653–654 qualitative data for financial planning, 32–33 quantitative data for financial planning, 33–34 824 Practicing Financial Planning ratings of life insurance companies, 131 Real Estate Investment Trusts (REITS), 369–370 real estate losses, 506 real rates of interest, 286 real-estate investments, 370 recapitalization, 692 record-keeping, 163–164, 277–278, 561 Registered financial planner (RFP), 21 rental expense, 502, 506–507 replacement of insurance policy, 127–129 retirement changes in environment, 6–8 poverty after, realities of, 5–7 retirement budget analysis of expenditure, 586–588 potential shortfall, 589–592 potential surplus, 592 retirement income, 588–589 retirement income annuity principle, 600–603 company-sponsored qualified plan and self-employed plan, 600 corporate and small business retirement plans as qualified plans, 512 coverage requirements, 551–552 funding requirements, 553 participation requirements, 551 plan investment rules, 553–554 plans, types of, 554–578 specific requirements, 549–551 vesting requirements, 552–553 distribution choices, 605 government sponsored plans social security, 538–540 IRA rollover, 604–605 lump sum distribution, 596 needs analysis, retirement budget, 586–592 social security benefits, 607–608 tax treatment of annuity payments, 603–604 retirement planning additional considerations early planning needed, 614 minimum distribution rules, 593–596 combo strategy, structure of, 615–617 strategies early retirement, 611–612 loans and withdrawals from qualified plans, 608–610 nonqualified deferred compensation plan, 612–613 pension enhancement strategy, 610–611 social security taxes, 511, 540 retirement years, golden 15-year record, 463 investment vehicles, 463–464 retirement plans, 464–465 return-of-premium whole life policy, 102 revenue bonds, 332–333 risk management planning, 67–68 See also Financial planning process risk management process methods of, 85–87 steps involved in, 88 strategy, assessment of, 87–90 risk tolerance guidelines, 421–422 risk tolerance level, 265, 396, 399, 419, 437, 441, 445–453 risk(s) avoidance, 86 reduction, 86 retention, 86 sharing, 87 strategies of, 87–90 transfer, 86–87 risk–reward connection, 416–419 robo-advisors, 372–373 Rule of 72, 51–52 sale/gift leaseback, 692–693 sale of financial planning practice best time to sell, 798 case study, 801–810 process of, 798–799 valuation of, 799–801 savings and loan associations, 271, 280, 330, 471, 706 savings bonds for education, 305–306 savings-first approach, 268–269 scenario analysis, 41 second-to-die insurance policy, 107–108, 680, 701, 707 Section 303 stock redemption, 693–694 Securities and Exchange Commission (SEC), 31 self-canceling installment notes (SCIN), 688–689 self-employed plans for retirement, 537, 573–578 self-funded employee health benefits (SEHB), 165–166, 168 self-rewarding plan, 268 short selling, 372 Index simple interest calculation of, 48 definition of, 48 single parents, 776–780 single premium whole life (SPWL) insurance policy, 100–101, 443, 514 small-cap stocks, 337 Social Security Act of 1935, 197, 538 social security disability insurance, 196 social security income, 120, 480, 511, 547, 611, 616, 749 social security system, 6, 14 special use valuation, 694 specialty/sector funds, 342 speculative stocks, 338 split dollar arrangement, 140–141, 684–685 split-dollar life insurance policy, 139–140 spousal insurance, 125–126 sprinkling trusts, 680 Standard & Poor’s (S&P’s) Corporation, 130 Standard & Poor’s Depositary Receipts SPDRs, (SPY), 358 state income tax, 518 state inheritance tax, 91, 647–649 stock redemption agreement, 703 strategy of covered calls, 402–403 student loan interest deduction, 316, 483 student loans, repayment of, 313–315 suitability of insurance policy, 125–127 supplemental insurance, 171, 178–179, 182 surgical insurance, 170–171 survivorship life (SL) insurance policy, 107, 701–702 Swaps, 371–372 systematic savings planning emergency funding strategies, 269–270 goal setting adequate saving scenario, 264 inadequate saving scenario, 264–268 reasons for saving liquidity, 271 return on savings, 271–276 safety, 270–271 savings strategies, 268–269 selection of savings media, 270–276 simplicity and minimum balance requirements, 276–278 starting point, 261–262 target investment portfolio, 19, 443, 457, 460–463 825 tax audit, 501, 530–531 tax credits, 316–318, 492–494, 514 Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), 469 Tax Relief and Health Care Act of 2006, 120, 319 Tax Relief and Job Creation Act of 2010, 315–316 Tax Relief Reconciliation Act of 2001, 315 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, 469 tax shelters, 76–77, 111, 118, 144, 265, 443, 446, 456–457 tax-advantaged investment accounts, 318 tax-exempt income, 479 tax-sheltered annuity (TSA), 566, 572–573 health insurance, 771 tax-sheltered investments, 456–457 Taxpayer Relief Act of 1997, 642 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) study, Technical and Miscellaneous Revenue Act (TAMRA) of 1988, 101 term insurance policies meaning of, 91–95 types of, 95–97 Thomson Reuters, 354 total disability, definition of, 193 traditional index funds advantages of capital gains, 354–355 low cost, 355–356 disadvantages of, 356–357 exchange traded funds, 357–359 objective of, 353–354 transitory couple, 638 Treasury inflation-indexed securities (TIPS), 306, 331 true net cash flow, 807–810 trust estate taxes and, 665–675 forms of, 638–639 irrevocable gift, 675 living, 668 property, management of, 638 purpose of, 639 trustee, selection of, 640 tuition vs savings plan, 300–301 underwriting standards of insurance company, 131–132 Unemployment Compensation Amendments Act of 1992, 570 826 Practicing Financial Planning Uniform Gifts to Minors Act (UGMA), 296–297, 301–302, 305, 734 Uniform Transfers to Minors Act (UTMA), 296, 301–302, 305, 325, 734 universal life (UL) insurance policies, 102–105 unlisted stocks, 338 unmarried couples definition of, 764 joint or separate finances, 764–767 planning by estate planning, 769–771 health insurance, 771 to avoid default, 767–768 unavailable benefits, 771–772 value stocks, 337 variable annuities (VA) contract benefits of, 363–364 check points for investor, 365 drawbacks of, 364 features of, 365 size of US market, 363 variable immediate annuity, 365–366 variable installment plan (VIP), 401–402 variable life insurance, 105–107, 367–368 variable universal life, 107, 368–369 vision insurance, 172 Welfare Benefit Trust (WBT), 146 whole life insurance policies, 100–102, 124, 128, 133, 280 widows, planning for differences among, 748–751 educating, 759 financial planning, 755–756 nonfinancial advice, 760 similarities among widows, 751 special areas of concern, 760 to assist in long-term financial goals, 760 winning widows among clients, 751–753 working with widows, 753–755 will, the absence of, 626–627 drafting, 627–628 durable power of attorney, 631–633 importance of, 625–626 letter of last instructions, 629 personal representative, appointment of, 630–631 power of attorney, 631 structure of, 628–629 Women’s Health and Cancer Rights Act of 1998 (WHCRA), 177–178 workers’ comp, 195 workers’ compensation insurance, 195 World Equity Benchmark Shares (WEBS), 361 yield to maturity (YTM), 334, 383 wage-earner plan, 290 wealth replacement trust (WRT), 678–680 Weiss Ratings, Inc., 130 zero coupon option, 305 ... Accountancy, Financial Planning, Journal of Financial Planning, Personal Financial Planning, and American Economic Review xxviii Practicing Financial Planning Anandi P Sahu is a Professor and Chair... Practicing Financial Planning: For Professionals and CFP® Aspirants, I was truly honored and instantly said, “Yes.” Having read and used multiple past editions and written a number of prior forewords... e-book Practicing Financial Planning For Professionals and CFP® Aspirants Sid Mittra, Ph.D., CFP® Emeritus Professor of Finance,Oakland University, Michigan Anandi P Sahu, Ph.D Professor and Chair