Rattiner's Secrets of Financial Planning

Foreword xxi Preface xxiii Acknowledgments xxvii About the Author xxix Chapter 1 Today’s Financial Planning Profession 1 Overview 1 Financial Planner vs. Financial Advisor 3 What Are the “Expectations for Change” in Our Profession? 4 Financial Planning as a “Profession” 5 Landscape 7 Developing Human Capital: Training and Recruiting Techniques for Entering the Profession 10 Specific Ideas for Growing Your Skill Set in Our Profession 13 Compensation 15 Technology 16 Growth and Entry Into Our Profession: Buy vs. Build 18 Change in Regulation 20 Holistic Financial Planning 21 Changing of the Guards: The Expanded Family Base and Addressing Additional Needs 21 Planner Approach: “Cause vs. Effect” 23 Behavior Patterns: Making Sure the Client “Gets” It 24 Communication and People Skills 28 Chapter 2 How to Structure Your Practice 31 Office Procedures Manual 33 Office Expectations Strategies 35 What we expect from each other: 37 Accountability and Monitoring Client Progress 39 Determining the Type of Practice You Are Looking to Run 40 Operational Thoughts 42 The Setup: Establishing Your Business Entity 43 Development and Follow-Through of Your Business Plan 44 Strengths 45 Weaknesses 45 Opportunities 45 Threats 46 Development of a Marketing Plan 47 Life Coaching and Changing Behavior 47 Intellectual Capital/Structuring the Model Firm for the 2020s 50 Marketing 51 Know your target market 52 Set up a professional advisory board 52 Set up a client advisory board 53 Be dedicated in getting to know, understand, and motivate your clients 54 Find a qualified mentor 55 It’s all about referrals! 55 Obtain a professional certification 56 Host a client event 56 Send out birthday cards, personal notes, and thank-you letters 56 Write articles, be featured in industry/trade publications, and speak to industry/trade groups 57 Make your website professional 57 Become an industrywide consumer speaker, starting with local employers 58 Start a blog 58 Chapter 3 Developing a Well-Thought-Out Personal Financial Plan 61 Getting Through to Our Clients: Making Sure We Are on the Same Page 63 Relating with Clients 64 Communicating with Clients 67 Nonverbal Behaviors 67 Listening Skills 68 Steps in the Personal Financial Planning Process 68 1. Learning and Understanding the Client’s Personal and Financial Circumstances 69 Engagement letter 72 Our Tenets: 73 What We Deliver: 74 What We Expect from You: 75 Our responsibilities to you 76 Scope of engagement 77 Your responsibilities to us 78 Other considerations that are part of this engagement letter 78 2. Identifying, Evaluating, and Selecting Objectives 80 3. Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action 84 Statement of financial position 84 Statement of cash flow 85 Effect on Financial Statements 87 4. Developing the Financial Planning Recommendations 91 5. Presenting the Financial Planning Recommendations 93 6. Implementing the Financial Plan 94 7. Monitoring the Financial Plan 95 Chapter 4 Dispensing Advice on Cash Flow Management and Budgeting Concerns 99 Cash Flow Planning 100 Budgeting 102 Change in Cash Flow Alignment 111 Emergency Fund Planning 112 Debt Management Ratios 114 Consumer Debt 115 Housing Costs 115 Total Debt 116 Savings Strategies 116 Debt Management 117 Secured vs. Unsecured Debt 118 Buy vs. Lease/Rent 118 Mortgage Financing 119 Types of Mortgages 120 Home Equity Loan and Line of Credit 122 Refinancing 122 Chapter 5 Dispensing Advice on Insurance 125 Risk Management 126 How much insurance is necessary? 129 Life Insurance 130 Types of term insurance 131 Types of cash value insurance policies 132 Whole life insurance 132 Nonforfeiture options 136 Long-term care rider 137 Settlement options 137 Disability Income Insurance (Individual) 138 Benefit period 140 Elimination period 141 Benefit amount 141 Continuation provisions 143 Taxation of premiums and benefits 143 Health Insurance 144 Long-Term Care Insurance (Individual) 145 ADLs 146 Services covered 146 Benefit period 147 Elimination period 147 Homeowners Insurance 150 Policy coverages 151 Section I Coverages 151 Section II Coverages 151 Homeowner policy types 152 Terminology 154 How much coverage does a homeowner need? 155 Calculation for benefits paid from partial coverage paid from a loss 155 Automobile Insurance 156 Coverages 156 Personal Umbrella Liability Insurance 159 Professional liability 161 Directors and Officers (D&O) Liability 161 Chapter 6 Dispensing Advice on Investing 163 Investment Risk 165 Systematic risk 165 Unsystematic risk 168 Standard deviation 169 Covariance 170 Semi-variance 171 Other Issues That May Impact Investment Decisions 171 Tax risk 171 Investment manager risk 171 Liquidity and marketability 172 Risk tolerance 173 Time horizon 173 Diversification 173 Appropriate benchmarks 174 Investor Returns 174 Expected return 174 Realized or actual return 175 Total return 175 Taxable equivalent yield (TEY) 175 Correlation coefficient (R) 176 Coefficient of determination (R2) 176 Use of R2 in portfolio evaluation 177 Risk-Adjusted Performance Measures 178 Minimum required rate of return 178 Capital asset pricing model (CAPM) 179 Sharpe ratio 180 Sharpe Performance Index (Si) 181 Treynor ratio 182 Treynor Performance Index (Ti) 182 Jensen ratio (aka “alpha”) 183 Jensen Performance Index (𝛼, alpha) 183 Investment Policy Statements 184 Asset Allocation and Portfolio Diversification 186 Strategic asset allocation 187 Rebalancing 188 Practical Approaches 188 Modern Portfolio Theory (MPT) 188 Efficient Market Hypothesis (EMH) 189 Behavioral finance 189 Strategies for concentrated portfolios 190 Bond duration 190 Capitalized earnings 191 Fundamental analysis 192 Probability analysis/Monte Carlo simulation 193 Passive investing/indexing 193 Buy and hold 194 Dollar cost averaging 194 Dividend reinvestment plans (DRIPs) 195 Tax Efficiency 195 Wash sale rule 197 Qualified dividends 197 Tax-free income 197 Chapter 7 Dispensing Advice on Income Tax 199 Filing Status Issues 200 Tax implications of marriage 200 Seven Steps to Calculating Income Tax Liability 203 Step 1: Gross income 203 Step 2: Adjustments to income: above-the-line deductions 205 Steps 3 and 4: Determine the higher of the standard deduction or itemized deductions 206 Step 5: Tax liability is calculated, credits are a way of reducing that liability 207 Step 6: Tax credits 208 Step 7: Comparing amounts paid in through estimated payments or federal withholding tax against tax liability will determine gains and losses 211 Business Entities 211 Section 199A deduction for qualified business income 211 Sole proprietorship 212 Advantages: 212 Disadvantages: 213 Partnership 213 Advantages: 214 Disadvantages: 214 Limited partnership 214 Advantages: 215 Disadvantages: 215 Limited liability company (LLC) 215 Advantages: 215 Limited liability partnership (LLP) 216 Advantages: 216 S corporation 216 Advantages: 216 Disadvantages: 217 C corporation 219 Advantages: 220 Section 1244 stock (small business stock election) 220 Advantages: 221 Disadvantages: 221 Personal capital gains and losses 222 Basis 222 Section 179 Deduction 223 Tax Planning Strategies 225 Accelerated deductions 225 Deferral of income 226 Like-Kind Exchanges 227 Section 1031 227 Sale of personal residence 229 Vacation homes 231 Income Recognition 231 Cash vs. accrual basis taxpayer 232 Active income 232 Passive income 232 Portfolio income 234 Installment sales 234 Chapter 8 Dispensing Advice on Retirement Planning 237 Shift in The Definition of Retirement Planning 238 The Stages of Retirement 240 Retirement Needs Analysis 240 Accumulation Stage 244 Types of retirement plans 244 Qualified Plans 245 Differences between defined benefit and defined contribution plans 245 Relevant factors and limitations affecting contributions or benefits 246 Multiple plans 247 Defined benefit plan 248 Cash balance plan 249 Defined contribution plan 250 Money purchase plan 251 Target benefit plan 251 Profit-sharing plan 252 Section 401(k) retirement plan 252 Solo 401(k) plan 254 Age-based (profit-sharing) plan 255 Stock bonus plan 256 Employee stock ownership plan (ESOP) 256 New comparability plan 257 Thrift (or savings) plan 257 Personal Retirement Plans 258 Traditional IRAs 258 Deductibility 258 Roth IRAs 259 Converting a traditional IRA into a Roth IRA 259 Five-year rule 260 Simplified employee pension IRAs (SEP IRAs) 261 SIMPLEs 262 Section 403(b) plans (aka “tax sheltered annuity” or TSA) 264 Section 457 plans 264 Nonqualified deferred compensation 265 Conservation Stage 266 Distribution Stage 266 Distribution options 267 Premature distributions 267 Reverse mortgages 268 Required minimum distributions (RMDs) 269 Inherited IRAs 269 Qualified domestic relations orders (QDROs) 269 Net unrealized appreciation (NUA) 270 Social Security 270 The basics 271 Eligibility and benefit 272 Retirement benefits 272 Disability benefits 273 Survivor benefits 273 Family limitations 274 How benefits are calculated 274 Working after retirement 274 Taxation of Social Security benefits 275 Chapter 9 Dispensing Advice on Estate Planning 277 Estate Planning Mistakes 281 Property Titling 283 Community property versus noncommunity property 283 Common law 284 Community property 284 Quasi-community property 286 Sole ownership 286 Joint tenancy with right of survivorship (JTWROS) 286 Tenancy-by-the-entirety 287 Tenancy-in-common 287 Probate 288 Ancillary probate 289 Wills 289 Types of wills 289 Modifying or revoking a will 290 Avoiding will contests 290 Contents xvii Powers of Attorney 291 Trusts 291 Simple and complex 292 Revocable and irrevocable 292 Types and basic provisions (of trusts) 294 Marital Trust (Type A) 294 Bypass Trust (Type B) 294 Qualified Terminable Interest Property (QTIP) Trust (Type C) 294 Pour-over trust 295 Spendthrift trust 296 Special needs trust 296 Qualified domestic trust (QDOT) 296 Sprinkling provision 296 Trust beneficiaries: income and remainder 297 Estate and gift taxation 297 Gifting strategies 298 Inter-vivos Gifting 298 Gift-giving techniques and strategies 299 Tax Implications 300 Income 300 Gift 300 Estate 301 Education and medical exclusions 301 Marital and charitable deductions 301 Gross Estate 302 Inclusions 302 Exclusions 303 Sources for Estate Liquidity 303 Sale of assets 303 Life insurance 304 Loan 304 Valuation Issues 304 Estate freezes 304 Minority (interest) discounts 305 Marketability discounts 305 Blockage discounts 306 Key person discounts 306 Powers of Appointment 306 General and special (limited) powers: 5 and 5 power 307 Crummey power 307 Distributions for an ascertainable standard (HEMS standard) 307 Deferral and Minimization of Estate Taxes 308 Exclusion of property from the gross estate 308 Lifetime gifting strategies 308 Inter-vivos and testamentary charitable gifts 309 Charitable Transfers 309 Outright gifts 309 Charitable remainder trusts (CRTs) 309 Unitrusts (CRUTs) 309 Annuity trusts (CRATs) 310 Charitable lead trusts (CLTs) 310 Generation-Skipping Transfer Tax (GSTT) 310 Intra-Family and Other Business Transfer Techniques 311 Installment note 311 Self-canceling installment note (SCIN) 312 Private annuity 312 Intentionally defective grantor trust 312 Intra-family loan 313 Bargain sale 313 Gift or sale-leaseback 314 Family limited partnership 314 Limited liability company 314 Asset protection 314 Grantor retained annuity trusts (GRATs) (qualified interest trusts) 315 Grantor retained unitrusts (GRUTs) 315 Qualified personal residence trusts (QPRTs or house-GRITs) 315 Postmortem Estate Planning Techniques 317 Alternate valuation date (AVD) 317 Qualified disclaimer 318 Deferral of estate tax (IRC Section 6166) 318 Corporate stock redemption (IRC Section 303) 319 Special use valuation (IRC Section 2032A) 319 Chapter 10 Dispensing Advice on Niche Planning 321 Education Planning 322 Analyzing the education issues 322 Education needs analysis 324 Education savings vehicles 325 529 Plans (Qualified Tuition Programs (QTPs)) 325 Advantages: 325 Coverdell Education Savings Account 326 Divorce 327 Analyzing the divorce issues 328 Alimony and child support 330 Pre-2019 Alimony Deductibility Criteria 330 Property settlements per IRC Section 1041 330 Marriages, cohabitation, and remarriages 330 Prenuptial agreement (marital property agreement) 331 Closely-Held Business Owner (CHBO) 331 Analyzing the CHBO issues 331 Buy-sell agreements 332 Buy-sell agreements – estate planning context 333 Buy-sell disability income insurance funding 334 Key-employee life insurance 335 Split-dollar life insurance 335 Strategies for closely-held business owners 336 Index 339