Essentials of Personal Financial Planning

Susan M. Tillery, CPA/PFS, is President and CEO of Paraklete Financial Inc. Paraklete provides integrated fee-for-service financial planning without asset management or product sales. The firm acts as an Advocate in Financial Services for its clients with a disciplined focus on independence and objectivity. Susan is also a co-founder and president of Financial Planning Advocate LLC, a provider of continuing education for CPAs, financial advisers, universities and colleges.Ms. Tillery’s experience at Harris myCFO, a multi-family office where she was responsible for the development and delivery of comprehensive family office solutions to affluent families, together with her work at Arthur Andersen, Ronald Blue & Co and other financial firms, provides the framework for Paraklete.Susan earned both her bachelor’s and master’s degrees in accounting from the University of Georgia. Susan is a member of the American Institute of CPAs (AICPA) and the Georgia Society of CPAs (GSCPA). In addition, she is chair of the AICPA Personal Financial Planning Credential Committee. Susan also serves on the Board for The National Center for Stewardship and Generosity.Susan has over 30 years of experience in tax, philanthropy and financial planning, as well as in the administrative and compliance areas encountered by affluent individuals and families. Ms. Tillery speaks on the topics of: Financial Planning, CPAs and Financial Planning, Financial Issues Facing Women, Responsibilities of Wealth, Charitable Giving and Stewardship.Thomas Neal Tillery, CFP, AEP, CLU, ChFC, CRPC, LUTCF is Vice President and Chief Compliance Officer of Paraklete Financial Inc. Tom also is a co-founder and Vice President of Financial Planning Advocate LLC, a provider of continuing education for CPAs, financial advisers, universities and colleges.Tom earned a M.S. in financial services from The American College and an M.A. in education from The Southern Baptist Theological Seminary. He is an active member of AICPA (Non-CPA Associate), the Atlanta Estate Planning Council and the Society of Financial Service Professionals. He also serves on the Board for The National Center for Stewardship and Generosity.With more than 30 years of experience in personal financial planning, Tom is a frequent speaker and writer on all topics relating to personal financial planning. He has written personal financial planning curriculum for several universities and online providers. Tom has been a provider of continuing education for attorneys, CPAs and investment and insurance professionals for over 30 years.Susan, Tom and their family reside in Kennesaw, GA.

• Introduction xiiiChapter 1: Personal Financial Planning 1Introduction 2Phases of the Personal Financial Planning Engagement 2Engage 3Discover 4Analyze 5Recommend 5Expanded or Additional Engagements 6Behavioral and Psychological Methods of Building Client Rapport 8Active Listening 8Behavioral Biases and Heuristics 9Socratic Questioning 9Application of Behavioral Techniques to Client Relationships 10Gathering Data: Quantitative Versus Qualitative Data 12Quantitative Data 12Qualitative Data 13Risk Tolerance 14Life Planning and the Personal Financial Planning Process 14Chapter Review 16Chapter 2: The Statement on Standards in Personal Financial Planning Services No. 1 19Introduction 20The Pathway to Standards in PFP 21A Timeline of Personal Financial Planning in the United States 21Statement on Standards in Personal Financial Planning Services 23Personal Financial Planning Services 24Applicability 26Requirements of the Member 27Steps in a Personal Financial Planning Engagement 27Planning the PFP Engagement 27Selecting Other Service Providers 28Obtaining and Analyzing Information 28Developing and Communicating PFP Recommendations 29Other Types of Personal Financial Planning Engagements 29Implementation Engagement 29Monitoring Engagement 30Updating Engagement 30Chapter Review 30Chapter 3: Time Value of Money Concepts 35Introduction 36Tools for Calculating Time Value of Money 36Efficiency 37Establishing Realistic Expectations 37Fundamental Time Value of Money Functions 38Present Value 39Periods (n) 39Interest (i) 40Payment (PMT) 41Future Value (FV) 42Mode 42Examples 43Unequal Cash Flows 46Present Value 47Net Present Value 48Internal Rate of Return 48Serial Payments 48Examples 49Chapter Review 52Chapter 4: Fundamentals of Personal Financial Planning 57Introduction 58Personal Financial Planning Assumptions 58Personal Statement of Financial Position 60Spending Plan 62Financial Ratios 65Debt-to-Income Ratio 65PITI Ratio 66Savings Ratio 66Emergency Fund 69Financing Strategies 69Automobile Purchase or Lease 70Home: Purchase or Rent 70Bankruptcy 74Consumer Protection Issues 74The Fair Credit Reporting Act and Identity Theft 74Electronic Fund Transfer Act 75Fair Credit Reporting Laws 75Chapter Review 76Chapter 5: Estate Planning Basics 79Introduction 80Fundamentals of Estate Planning 80The Unified Tax System 81Generation Skipping Transfer Tax 81Credits, Deductions, and Other Tax Reductions 81Step Up In Basis 83Probate and Intestacy 83Expatriate Issues 84Impact of Property Ownership and Beneficiary Designations 84Community Property and Common Law 84Basic Estate Planning 85Data Gathering 86State Estate Tax 87Estate Tax Filing Requirements 87Gross Estate 88Adjusted Gross Estate 88Prior Transfer Credit 88Sources for Estate Liquidity 89Estate Planning Documents 89Wills 89Powers of Attorney 90Advance Medical Directives 90Beneficiary Forms 91Trusts 91Crummey Power 92Testamentary Trust 92Powers of Appointment 92Chapter Review 93Chapter 6: Charitable Gift Planning Basics 97Introduction 98What is a Charity? 98Types of Gifts 99Real Estate 100Personal Property 100Charitable Trusts and Planning Tools 101Charitable Lead Trust 101Charitable Remainder Trust 102Wealth Replacement Trust 104Pooled Income Fund 104Other Charitable Vehicles 104Taxation and Income Tax Planning 105Application of Limitations 105Carryovers of Excess Charitable Contributions 106Tax Impacts of Transfers 107Qualified Charitable Distributions 108Chapter Review 109Chapter 7: Principles of Risk and Insurance 113Introduction 114Risk Management Concepts 114Risk 114Peril and Hazard 115The Law of Large Numbers and Adverse Selection 115Self-Insurance 116Managing Risk 116Controlling Risk 116Financing Risk 117The Risk Management Process 117Risk Management Matrix 118Insurance Policy and Company Selection 119Types of Insurance 120Life/Health/Disability 121Property Risk and Insurance 121Legal Aspects of Insurance 123Offer and Acceptance 123Adequate Considerations 124Competent Parties 124Legal Purpose 124Legal Form 124Chapter Review 125Chapter 8: Insurance Planning Basics, Part I 129Introduction 130Life Insurance 130Life Insurance Types 131Term Life Insurance 132Permanent Life Insurance 132Additional Life Insurance Policy Considerations 134Contractual Provisions of Life Insurance 134Riders 135Nonforfeiture Options 136Settlement Options 137Advanced Death Benefits 138Health Insurance 139Hospital, Surgical, and Physician’s Expense Insurance Plans 139Managed Care Plans 140Medicare (Parts A, B and D) 141Medicare Supplement Insurance (MEDIGAP) 142Medicare Advantage Plan (Part C) 142Medicaid 142Tricare 143Health Savings Accounts and Other Tax-Favored Health Plans 143Health Savings Accounts (HSA) 143Health Flexible Spending Arrangements (FSA) 144Health Reimbursement Arrangements (HRA) 144Chapter Review 144Chapter 9: Insurance Planning Basics, Part II 149Introduction 150Annuities 150Deferred Fixed, Variable, or Equity-Indexed Annuity 150Taxation 151Payment Options 151Disability Insurance 152Own Occupation Versus any Occupation 152Continuance Provisions 153Additional Provisions 154Long-term Care Insurance 155Qualified Care 155Taxation and Income Tax Planning 156Medicare Limitations 156Property and Casualty Insurance 157Homeowners Insurance 157Personal Auto Insurance 161Umbrella Liability Insurance 164Chapter Review 164Chapter 10: Investment Basics 169Introduction 170Securities Defined 170The Role of the Personal Financial Planner and Compensation 170Business Models 172Broker-Dealer Model 172Registered Investment Adviser (RIA) Model 172Dual-License Model 173CPA Disclosure Requirements 173The Investment Planning Process 174The Planning Phase 174Determine and Prioritize Client’s Specific Financial Goals 175Client’s Financial Condition 175Assessing Risk Tolerance 175Identify Unique Needs 176Identify Potential Client Investment Constraints 177Chapter Review 178Chapter 11: Investment Planning 181Introduction 182Capital Markets 182Types of Investment Vehicles 183Cash and Cash Equivalents 183Guaranteed Investment Contract 185Bond 185Stock 190Mutual Fund 190Exchange Traded Fund 191Real Estate 192Alternative Investments 192Investment Valuation 193Investment Strategies 194Market Timing 194Dollar-Cost Averaging 194Systematic Withdrawal Plan 195Bond Ladder 195Option Strategies 195Short Selling 195Margin Account 196Chapter Review 197Chapter 12: Planning for Retirement and Financial Independence 199Introduction 200PFP Assumptions for Financial Independence 201Inflation 201Life Expectancy 202Financial Independence Spending Plan 203Modeling Techniques 204Investment Returns 204Income Sources 205Time Value of Money and Inflation-Adjusted Return 208Mini Case Study 208Chapter Review 210Chapter 13: Planning Vehicles for Retirement 215Introduction 216Social Security Benefits 216Eligibility and Benefits 217Spousal Benefits 218Working After Retirement 218Taxation of Benefits 219Government Pension Offset 219Railroad Employees 219Employer-Sponsored Retirement Plans 219ERISA: Overview of Qualified Plan Rules 221Vesting 223Defined Benefit Plans 224Defined Contribution Plans 226Other Retirement Plans 232Additional Employer-Sponsored Retirement Plans 234Individual Retirement Accounts 234Spousal IRA 235Nondeductible IRA 235Roth IRA 235Roth IRA Conversions 236Chapter Review 236Chapter 14: Elder Planning Basics 239Introduction 240Nonfinancial Factors 240Types of Care 241Communicating with Cognitively Impaired Clients 242Incapacity and Incompetency 242Financial Decisions 243Financial Fraud 243Housing Decisions 244Health Care Options 245Government Programs 245Veterans Benefits 247Funding Sources for Elder Care 248Taxation and Income Tax Planning 250Filing a Tax Return 250Medical Expenses 250Home Care 251Long-Term Care 251Integration and Application of Elder Planning with Personal Financial Planning 251Estate Planning 251Advance Directives 252Health Care Proxy 252Power of Attorney and Durable Power of Attorney 252Chapter Review 254Chapter 15: Education Planning Basics 257Introduction 258Funding Methods 258Qualified Tuition Programs (529 Plans) 258Coverdell Education Savings Accounts 260Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) 261Education Savings Bond Program 261Financial Aid 262Federal Student Aid 262Scholarships 264Loans 264Taxation and Income Tax Planning 265Taxation of Scholarships and Grants 265Credits 265Deductions 266Educational Assistance Program 267Integratuion and Application of Education Planning with PFP 267Risk Management and Insurance Planning 267Retirement Planning 267Estate Planning 268Investment Planning 268Education Needs Analysis Case Study 268Step One—Calculate the Future Value of One-Third of the Cost of College 269Step Two—Calculate the Present Value of the Serial Payments Need to Fund College 269Step Three—Calculate the Total Amount Needed 270Chapter Review 270Chapter 16: Applications in Estate Planning 273Introduction 274Trusts Revisited 274Credit Shelter Trust 274Marital Trust 275Qualified Terminable Interest Property Trust 275Disclaimer Trust 275Additional Trust Types 276Gifting Strategies 277Interest-Free Loans 277Installment Sales to Family Members 277Self-Cancelling Installment Note 278Additional Tax Issues 278Generation-Skipping Transfer (GST) Tax 278Income in Respect of the Decedent 279Closely Held Business Issues 280Special Valuation Under Section 2032(A) Farm and Real Estate 280Section 6166 Deferrals of Estate Tax 280Buy-Sell Agreement 281Section 303 Redemption 282Other Estate Planning Considerations 283Qualified Domestic Trust 283Planning for Blended Family Relationships 283Cohabitation 284Integration and Application of Estate Planning with PFP 284Life Insurance 284Retirement Planning 285Private Foundation 285Chapter Review 285Chapter 17: Applications in Risk Management 289Introduction 290Life Insurance Applications 290Life Insurance Illustrations 290Settlements 291Modified Endowment Contracts 293Transfer for Value Rules, Section 101(A)(2) 293Section 1035 Exchanges 294Impact on Other Aspects of Personal Financial Planning 294Annuities 296Medical Insurance 296Taxation and Income Tax Planning 296Affordable Care Act 297Healthcare Marketplace—Individual and Small Employer 298Premium Tax Credits 298Individual Shared Responsibility Provision 298Employer Shared Responsibility Provision 298Disability Insurance 299Long-term Care Insurance 299Taxation and Income Tax Planning 299Retaining the Risk—The Self-Insurance Option 300Integration and Application of Long-Term Care Insurance with Personal Financial Planning 301Property and Casualty Insurance 301Additional Insured Endorsement 301Taxation and Income Tax Planning 302Business Owners Insurance 302Chapter Review 303Chapter 18: Applications in Investment Planning 307Introduction 308Perform Financial Analysis 308Investment Risk 308Taxation and Income Tax Planning 309Assess Impact of Constraints 309Asset Class Allocation Strategy 310The Investment Policy Statement 310The Monitoring and Updating Phase 315Measuring Performance and Goal Achievement 316Reevaluation of the IPS 317Integration and Application of Investment Planning with PFP 317Risk Management and Insurance Planning 317Planning for Financial Independence 318Estate Planning 318Charitable Planning 318Chapter Review 319Chapter 19: Applications in Planning for Retirement 323Introduction 324Employer Considerations 324Contribution Limits 325Defined Benefit Plans 325Defined Contribution Plans 327Retirement Distribution Optimization Planning (Income Management) 328Avoiding Early Withdrawal Penalties 329Employer Stock and Net Unrealized Appreciation (NUA) 330Required Beginning Dates and Minimum Distributions 332Annuity Options 333Lump-Sum Distributions 334Qualified Domestic Relations Order 335Income Tax Issues 336Incorporating Tax Rate Diversification in the Choice of Retirement Savings Vehicles 336Impact of Tax-Loss Harvesting in the Retirement Planning Process 336Investment Management During Retirement 338Withdrawal Rates 339Asset Allocation 339Integration and Application of Retirement Planning in the PFP Process 340Life Expectancy 340Asset Protection 340Chapter Review 341Chapter 20: Applications in Employee Benefits Planning 345Introduction 346Group Insurance Benefits 346Group Disability Insurance 346Group Life Insurance 347Group Medical Insurance 348Section 125 Cafeteria Plans 350Group Long-Term Care Insurance 351Group Dental Insurance 351Group Vision Insurance 351Other Employee Benefits 352Fringe Benefits 352Adoption Assistance Program 353De Minimis Benefits 353Employee Achievement Awards 353Educational Assistance Program 354Prepaid Legal Services 354Retirement Planning Services 354Job Placement or Outplacement Services 354Meals 354On-Premise Athletic Facilities 355Qualified Moving Expenses 355Chapter Review 355Chapter 21: Applications in Executive Compensation Planning 359Introduction 360Executive Compensation Agreements 360Employment Agreement 360Severance Agreement 360Noncompete Agreement 360Other Arrangements 361Nonqualified Deferred Compensation 363Funded and Unfunded Plans 364Types of Nonqualified Deferred Compensation Plans 364Equity Compensation Plans 365Restricted Stock Plan 366Phantom Stock Plan 366Qualified Employee Stock Purchase Plan 367Incentive Stock Option and Nonqualified Stock Option 367Stock Appreciation Right 368Section 83(B) Election 368Top-Hat Plan 369Chapter Review 369Chapter 22: Applications in Personal Financial Planning in Special Circumstances 373Introduction 374Housing 374Sale of Principal Residence 374Vacation Home 376Household Employees 376Closely Held Business Basics 378Entity Selection Process 378Application of Trusts 382Employing Spouse or Children and FICA Taxes 382Business Applications of Insurance 382Divorce 383Income Tax Considerations 384Statement on Standards in Personal Financial Planning and Conflicts of Interest 385Chapter Review 385Chapter 23: Delivery Models and Regulatory Issues 389Introduction 390Regulatory Landscape 390Regulatory Bodies 390Significant Federal Legislation 391Significant State Legislation 392Financial Services Industry Regulations and Requirements 393Securities Licensing 393Insurance Licensing 394Regulatory Investment Reporting 395Delivery Platforms (Business Models) 395Investment Advisers 395Registered Investment Adviser 397Broker-Dealer 398Insurance Company 398Trust Company 398Chapter Review 399