Personal Financial Planning

Personal Financial Planning

Authors: G. Victor Hallman and Jerry S. Rosenbloom

Published: May 2003

eISBN: 9780071436410 0071436413 | ISBN: 9780071419444

Copyright

Contents

Preface

PART 1 Coordinated Financial Planning

1 Personal Financial Planning—The Process

What Is Personal Financial Planning?

Focus on Objectives

Need for Personal Financial Planning

Steps in the Planning Process

Use of Financial Planning Statements

2 Setting Financial Planning Objectives

Importance of Setting Objectives

Organizing Objectives

Adjusting Objectives for Inflation and Possible Deflation (Recession or Depression)

Adjusting Objectives to Changing Tax Laws

PART 2 Using Insurance Effectively

3 Personal Insurance Principles and Selecting Insurers

Personal Risk Management

The Insurance Principle

Considerations in Choosing an Insurer

Considerations in Choosing an Agent or Broker

4 Life Insurance and Social Security

Sources of Life Insurance Protection

Social Security

Types of Individual Life Insurance Contracts

Definitions of Life Insurance for Income Tax Purposes

The Life Insurance Contract

Planning and Using Life Insurance

Substandard Risks

Nonmedical Life Insurance

What Actions Can an Uninsurable Person Take?

Group Life Insurance

How Much Life Insurance Is Needed?

5 Health Insurance

Sources of Health Insurance Protection

Disability Income (Loss-of-Time) Coverages

Medical Expense Coverages

Individual Health Insurance Policy Provisions

Medical Savings Accounts

Health Reimbursement Arrangements (HRAs)

6 Long-Term Care Insurance and Medicaid Planning

Nature of Exposure

Basic Planning Approaches

Long-Term Care Insurance and Other Arrangements

Medicaid Planning for Long-Term (Custodial) Care

7 Property and Liability Insurance

Property Insurance

Personal Liability

Homeowners Insurance

Automobile Insurance

Other Property and Liability Policies to Consider

Insurance Companies and Premiums

PART 3 Investments and Investment Planning

8 Basic Investment Principles

The Basic Investment Objective

Investment Directly or Through Financial Intermediaries

Investment and Speculation

Factors in the Choice of Investments

Security of Principal and Income

Rates of Return

Marketability and Liquidity

Diversification

Tax Status

Size of Investment Units (or Denominations)

Use as Collateral for Loans

Callability

Freedom from Care

9 Common Stocks

Characteristics of Common Stocks

Some Measures of Value for Common Stocks

Information About Common Stocks

Diversifying a Common Stock Portfolio

Periodic Review

Decisions Concerning Selling Common Stocks

Dollar-Cost Averaging

The Mechanics of Buying and Selling Common Stocks

Margin Accounts

Selling Short

Securities Investor Protection Corporation

Investment Categories of Common Stocks

Some Theories of Common Stock Investment

Common Stocks and Market Cycles

The Case for Long-Term Investments in Common Stocks

Some Caveats

10 Other Equity Investments

Real Estate

Oil and Gas (Natural Resource) Ventures

Other Tax Shelters

Impact of Passive Activity Loss Rules

Put and Call Options

New Issues or Initial Public Offerings (IPOs)

Commodity Futures Trading

Art, Antiques, Coins, Stamps, Gold, and Other Precious Metals

11 Fixed-Income Investments

Types of Fixed-Income Investments

Ways of Taking Returns from Bonds

Corporate Bonds

Municipal Bonds (Munis)

U.S. Government Obligations

Market Discount Bonds

Zero-Coupon Bonds (Zeros)

Preferred Stocks

Guaranteed Principal Fixed-Income Investments

Liquid Assets

Conversion Privileges in Fixed-Income Securities

Bond Ratings and Investment Quality

Strategies for Investing in Fixed-Income Securities

12 Mutual Funds and Other Investment Companies

Kinds of Investment Companies

Why Invest in Mutual Funds?

Disadvantages of Mutual Funds

Types of Funds—Some Planning Considerations

Regulation of Investment Companies

How to Invest in Mutual Funds

Distributions from and Exchanges of Mutual Funds

Getting Information About Mutual Funds

Mutual Fund Performance

Mutual Fund Expenses

Factors Involved in Selecting Mutual Funds

Planning Considerations for Mutual Funds

Tax Aspects of Mutual Funds

Exchange-Traded Funds

Hedge Funds

13 Asset Allocation Strategies and Models

Fundamentals of Asset Allocation

Steps in the Asset Allocation Process

Personal Factors and Asset Allocation

Investment Objectives

Investment Policies

Possible Asset Classes to Be Considered

Investment Vehicles to Be Considered

Return-Risk Considerations

Allocations Within Asset Classes

How Investments (Asset Classes) Should Be Held

Illustrations of Asset Allocation Strategies

PART 4 Income Tax Planning

14 Income Tax Fundamentals

The Federal Income Tax on Individuals

The Federal Income Tax on Corporations

Pass-Through Business Entities

Federal Income Taxation of Trusts and Estates

State and Local Income Taxes

15 Basic Income Tax Saving Techniques for Individuals

Eliminating or Reducing Taxes

Shifting the Tax Burden to Others

Allowing Wealth to Accumulate Without Current Taxation and Postponing Taxation

Taking Returns as Capital Gains

Taxation and the Capital Gains Lock-in Problem

Tax-Planning Caveats

16 Charitable Giving

Basic Tax Principles

Planning Techniques

PART 5 Planning for Retirement and Capital Accumulation Plans

17 Employer-Provided Qualified Retirement Plans and Social Security Benefits

Economic Problems of Retirement Years

Steps in Planning for Retirement Income

Sources of Retirement Income

Characteristics of Employer-Provided Retirement Plans

Pension Plans

Profit-Sharing Plans

Savings (Thrift) Plans

Stock Bonus Plans and Employee Stock Ownership Plans (ESOPs)

Hybrid Qualified Retirement Plans

Retirement Plans for the Self-Employed (HR-10 or Keogh Plans)

18 Other Employer-Provided Retirement Plans and Other Employee Benefits

Other Employer-Provided Retirement Plans

Other Employee Benefits

19 Individual Retirement Accounts and Annuities (IRAs)

Basic Concepts

Types of IRAs

Other Aspects of IRAs

Planning Issues for IRAs

20 Planning for Taking Distributions from Qualified Retirement Plans and IRAs

General Considerations

Taxation of Benefits from Qualified Plans and IRAs

Planning for Distributions from Qualified Retirement Plans and IRAs

21 Individual Investment Annuity Contracts

Fundamental Purposes of Annuities

Types of Individual Annuities

Parties to the Annuity Contract

Phases of Annuities

Investment Returns on Annuities

Expense Charges on Annuities

Withdrawals and Loans

Exchanges of Annuities

Annuity Distribution (Payout)Options

Annuity Death Benefits

Split-Funded Annuities

Taxation of Nonqualified Annuities

Other Individual Annuity Arrangements

Using Life Insurance Values to Provide Retirement Income

22 Employee Stock Compensation Plans

General Considerations

Types of Plans

Statutory Plans

Nonstatutory Plans

Provisions of Stock Option Plans

Valuation of Stock Options

Some Caveats Concerning Stock Options and Other Plans

Planning Issues Regarding Stock Options and Other Stock Plans

PART 6 Estate Planning

23 Estate Planning Principles

Objectives of Estate Planning

Methods of Property Disposition

Property and Property Interests

What Is Meant by the “Estate”?

Settling the Estate

Trusts in Estate Planning

24 The Transfer Tax System

Impact of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA)

Applicable Credit Amount (Unified Credit) and Applicable Exclusion Amount

Federal Gift Tax

Federal Estate Tax

Federal Generation-Skipping Transfer (GST) Tax

25 Lifetime Giving and Sales Within the Family

Making Lifetime (Inter Vivos) Gifts to Noncharitable Donees

Sales Within the Family

Loans to Family Members

26 Marital Deduction Planning, Postmortem Planning, and Estate Liquidity

Marital Deduction Planning

Postmortem Estate Planning

Gifts of Life Insurance

27 Life Insurance in Estate Planning

Taxation of Life Insurance

How to Arrange Life Insurance

Gifts of Life Insurance

28 Revocable Living Trusts, Other Will Substitutes, and Property Management Arrangements

Revocable Living Trusts as a Will Substitute

Joint Property with Right of Survivorship

Property Management Arrangements to Deal with Physical or Mental Incapacity

29 Financing Education Expenses

Importance as a Financial Objective

Nature and Growth of Education Costs

Estimating Education Costs

Financial Aid Considerations

Tax “Breaks” for Education Costs

Strategies in Planning for Education Costs

30 Planning for Business Interests

Potential Issues

Characteristics of Closely Held Businesses

Types of Business Entities

Check-the-Box Regulations

Income Tax Basis in Business Interests

Factors in Choice of Entity

Disposition of Business Interests

Retention of Business Interests

Index