- ISBN: 9781945498237 | 1945498234
- Cover: Paperback
- Copyright: 3/27/2017
ESSENTIALS OF PERSONAL FINANCIAL PLANNING
Essentials of Personal Financial Planning was written to challenge the status quo by promoting personal financial planning (PFP) as a profession, not as a sales tool to gather assets under management or facilitate sales of insurance products. The book takes a comprehensive and integrated approach to PFP for accounting students, allowing them to view the profession through the lens of a CPA – with integrity and objectivity. This book systematically introduces the essentials of all the major PFP topics (estate, retirement, investments, insurance, and tax), as well as:
- The PFP process, concepts and regulatory environment.
- Professional responsibilities of a CPA personal financial planner and the requirements of the Statement on Standards in PFP Services.
- Time value of money concepts.
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 xiii
Chapter 1: Personal Financial Planning 1
Introduction 2
Phases of the Personal Financial Planning Engagement 2
Engage 3
Discover 4
Analyze 5
Recommend 5
Expanded or Additional Engagements 6
Behavioral and Psychological Methods of Building Client Rapport 8
Active Listening 8
Behavioral Biases and Heuristics 9
Socratic Questioning 9
Application of Behavioral Techniques to Client Relationships 10
Gathering Data: Quantitative Versus Qualitative Data 12
Quantitative Data 12
Qualitative Data 13
Risk Tolerance 14
Life Planning and the Personal Financial Planning Process 14
Chapter Review 16
Chapter 2: The Statement on Standards in Personal Financial Planning Services No. 1 19
Introduction 20
The Pathway to Standards in PFP 21
A Timeline of Personal Financial Planning in the United States 21
Statement on Standards in Personal Financial Planning Services 23
Personal Financial Planning Services 24
Applicability 26
Requirements of the Member 27
Steps in a Personal Financial Planning Engagement 27
Planning the PFP Engagement 27
Selecting Other Service Providers 28
Obtaining and Analyzing Information 28
Developing and Communicating PFP Recommendations 29
Other Types of Personal Financial Planning Engagements 29
Implementation Engagement 29
Monitoring Engagement 30
Updating Engagement 30
Chapter Review 30
Chapter 3: Time Value of Money Concepts 35
Introduction 36
Tools for Calculating Time Value of Money 36
Efficiency 37
Establishing Realistic Expectations 37
Fundamental Time Value of Money Functions 38
Present Value 39
Periods (n) 39
Interest (i) 40
Payment (PMT) 41
Future Value (FV) 42
Mode 42
Examples 43
Unequal Cash Flows 46
Present Value 47
Net Present Value 48
Internal Rate of Return 48
Serial Payments 48
Examples 49
Chapter Review 52
Chapter 4: Fundamentals of Personal Financial Planning 57
Introduction 58
Personal Financial Planning Assumptions 58
Personal Statement of Financial Position 60
Spending Plan 62
Financial Ratios 65
Debt-to-Income Ratio 65
PITI Ratio 66
Savings Ratio 66
Emergency Fund 69
Financing Strategies 69
Automobile Purchase or Lease 70
Home: Purchase or Rent 70
Bankruptcy 74
Consumer Protection Issues 74
The Fair Credit Reporting Act and Identity Theft 74
Electronic Fund Transfer Act 75
Fair Credit Reporting Laws 75
Chapter Review 76
Chapter 5: Estate Planning Basics 79
Introduction 80
Fundamentals of Estate Planning 80
The Unified Tax System 81
Generation Skipping Transfer Tax 81
Credits, Deductions, and Other Tax Reductions 81
Step Up In Basis 83
Probate and Intestacy 83
Expatriate Issues 84
Impact of Property Ownership and Beneficiary Designations 84
Community Property and Common Law 84
Basic Estate Planning 85
Data Gathering 86
State Estate Tax 87
Estate Tax Filing Requirements 87
Gross Estate 88
Adjusted Gross Estate 88
Prior Transfer Credit 88
Sources for Estate Liquidity 89
Estate Planning Documents 89
Wills 89
Powers of Attorney 90
Advance Medical Directives 90
Beneficiary Forms 91
Trusts 91
Crummey Power 92
Testamentary Trust 92
Powers of Appointment 92
Chapter Review 93
Chapter 6: Charitable Gift Planning Basics 97
Introduction 98
What is a Charity? 98
Types of Gifts 99
Real Estate 100
Personal Property 100
Charitable Trusts and Planning Tools 101
Charitable Lead Trust 101
Charitable Remainder Trust 102
Wealth Replacement Trust 104
Pooled Income Fund 104
Other Charitable Vehicles 104
Taxation and Income Tax Planning 105
Application of Limitations 105
Carryovers of Excess Charitable Contributions 106
Tax Impacts of Transfers 107
Qualified Charitable Distributions 108
Chapter Review 109
Chapter 7: Principles of Risk and Insurance 113
Introduction 114
Risk Management Concepts 114
Risk 114
Peril and Hazard 115
The Law of Large Numbers and Adverse Selection 115
Self-Insurance 116
Managing Risk 116
Controlling Risk 116
Financing Risk 117
The Risk Management Process 117
Risk Management Matrix 118
Insurance Policy and Company Selection 119
Types of Insurance 120
Life/Health/Disability 121
Property Risk and Insurance 121
Legal Aspects of Insurance 123
Offer and Acceptance 123
Adequate Considerations 124
Competent Parties 124
Legal Purpose 124
Legal Form 124
Chapter Review 125
Chapter 8: Insurance Planning Basics, Part I 129
Introduction 130
Life Insurance 130
Life Insurance Types 131
Term Life Insurance 132
Permanent Life Insurance 132
Additional Life Insurance Policy Considerations 134
Contractual Provisions of Life Insurance 134
Riders 135
Nonforfeiture Options 136
Settlement Options 137
Advanced Death Benefits 138
Health Insurance 139
Hospital, Surgical, and Physician’s Expense Insurance Plans 139
Managed Care Plans 140
Medicare (Parts A, B and D) 141
Medicare Supplement Insurance (MEDIGAP) 142
Medicare Advantage Plan (Part C) 142
Medicaid 142
Tricare 143
Health Savings Accounts and Other Tax-Favored Health Plans 143
Health Savings Accounts (HSA) 143
Health Flexible Spending Arrangements (FSA) 144
Health Reimbursement Arrangements (HRA) 144
Chapter Review 144
Chapter 9: Insurance Planning Basics, Part II 149
Introduction 150
Annuities 150
Deferred Fixed, Variable, or Equity-Indexed Annuity 150
Taxation 151
Payment Options 151
Disability Insurance 152
Own Occupation Versus any Occupation 152
Continuance Provisions 153
Additional Provisions 154
Long-term Care Insurance 155
Qualified Care 155
Taxation and Income Tax Planning 156
Medicare Limitations 156
Property and Casualty Insurance 157
Homeowners Insurance 157
Personal Auto Insurance 161
Umbrella Liability Insurance 164
Chapter Review 164
Chapter 10: Investment Basics 169
Introduction 170
Securities Defined 170
The Role of the Personal Financial Planner and Compensation 170
Business Models 172
Broker-Dealer Model 172
Registered Investment Adviser (RIA) Model 172
Dual-License Model 173
CPA Disclosure Requirements 173
The Investment Planning Process 174
The Planning Phase 174
Determine and Prioritize Client’s Specific Financial Goals 175
Client’s Financial Condition 175
Assessing Risk Tolerance 175
Identify Unique Needs 176
Identify Potential Client Investment Constraints 177
Chapter Review 178
Chapter 11: Investment Planning 181
Introduction 182
Capital Markets 182
Types of Investment Vehicles 183
Cash and Cash Equivalents 183
Guaranteed Investment Contract 185
Bond 185
Stock 190
Mutual Fund 190
Exchange Traded Fund 191
Real Estate 192
Alternative Investments 192
Investment Valuation 193
Investment Strategies 194
Market Timing 194
Dollar-Cost Averaging 194
Systematic Withdrawal Plan 195
Bond Ladder 195
Option Strategies 195
Short Selling 195
Margin Account 196
Chapter Review 197
Chapter 12: Planning for Retirement and Financial Independence 199
Introduction 200
PFP Assumptions for Financial Independence 201
Inflation 201
Life Expectancy 202
Financial Independence Spending Plan 203
Modeling Techniques 204
Investment Returns 204
Income Sources 205
Time Value of Money and Inflation-Adjusted Return 208
Mini Case Study 208
Chapter Review 210
Chapter 13: Planning Vehicles for Retirement 215
Introduction 216
Social Security Benefits 216
Eligibility and Benefits 217
Spousal Benefits 218
Working After Retirement 218
Taxation of Benefits 219
Government Pension Offset 219
Railroad Employees 219
Employer-Sponsored Retirement Plans 219
ERISA: Overview of Qualified Plan Rules 221
Vesting 223
Defined Benefit Plans 224
Defined Contribution Plans 226
Other Retirement Plans 232
Additional Employer-Sponsored Retirement Plans 234
Individual Retirement Accounts 234
Spousal IRA 235
Nondeductible IRA 235
Roth IRA 235
Roth IRA Conversions 236
Chapter Review 236
Chapter 14: Elder Planning Basics 239
Introduction 240
Nonfinancial Factors 240
Types of Care 241
Communicating with Cognitively Impaired Clients 242
Incapacity and Incompetency 242
Financial Decisions 243
Financial Fraud 243
Housing Decisions 244
Health Care Options 245
Government Programs 245
Veterans Benefits 247
Funding Sources for Elder Care 248
Taxation and Income Tax Planning 250
Filing a Tax Return 250
Medical Expenses 250
Home Care 251
Long-Term Care 251
Integration and Application of Elder Planning with Personal Financial Planning 251
Estate Planning 251
Advance Directives 252
Health Care Proxy 252
Power of Attorney and Durable Power of Attorney 252
Chapter Review 254
Chapter 15: Education Planning Basics 257
Introduction 258
Funding Methods 258
Qualified Tuition Programs (529 Plans) 258
Coverdell Education Savings Accounts 260
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) 261
Education Savings Bond Program 261
Financial Aid 262
Federal Student Aid 262
Scholarships 264
Loans 264
Taxation and Income Tax Planning 265
Taxation of Scholarships and Grants 265
Credits 265
Deductions 266
Educational Assistance Program 267
Integratuion and Application of Education Planning with PFP 267
Risk Management and Insurance Planning 267
Retirement Planning 267
Estate Planning 268
Investment Planning 268
Education Needs Analysis Case Study 268
Step One—Calculate the Future Value of One-Third of the Cost of College 269
Step Two—Calculate the Present Value of the Serial Payments Need to Fund College 269
Step Three—Calculate the Total Amount Needed 270
Chapter Review 270
Chapter 16: Applications in Estate Planning 273
Introduction 274
Trusts Revisited 274
Credit Shelter Trust 274
Marital Trust 275
Qualified Terminable Interest Property Trust 275
Disclaimer Trust 275
Additional Trust Types 276
Gifting Strategies 277
Interest-Free Loans 277
Installment Sales to Family Members 277
Self-Cancelling Installment Note 278
Additional Tax Issues 278
Generation-Skipping Transfer (GST) Tax 278
Income in Respect of the Decedent 279
Closely Held Business Issues 280
Special Valuation Under Section 2032(A) Farm and Real Estate 280
Section 6166 Deferrals of Estate Tax 280
Buy-Sell Agreement 281
Section 303 Redemption 282
Other Estate Planning Considerations 283
Qualified Domestic Trust 283
Planning for Blended Family Relationships 283
Cohabitation 284
Integration and Application of Estate Planning with PFP 284
Life Insurance 284
Retirement Planning 285
Private Foundation 285
Chapter Review 285
Chapter 17: Applications in Risk Management 289
Introduction 290
Life Insurance Applications 290
Life Insurance Illustrations 290
Settlements 291
Modified Endowment Contracts 293
Transfer for Value Rules, Section 101(A)(2) 293
Section 1035 Exchanges 294
Impact on Other Aspects of Personal Financial Planning 294
Annuities 296
Medical Insurance 296
Taxation and Income Tax Planning 296
Affordable Care Act 297
Healthcare Marketplace—Individual and Small Employer 298
Premium Tax Credits 298
Individual Shared Responsibility Provision 298
Employer Shared Responsibility Provision 298
Disability Insurance 299
Long-term Care Insurance 299
Taxation and Income Tax Planning 299
Retaining the Risk—The Self-Insurance Option 300
Integration and Application of Long-Term Care Insurance with Personal Financial Planning 301
Property and Casualty Insurance 301
Additional Insured Endorsement 301
Taxation and Income Tax Planning 302
Business Owners Insurance 302
Chapter Review 303
Chapter 18: Applications in Investment Planning 307
Introduction 308
Perform Financial Analysis 308
Investment Risk 308
Taxation and Income Tax Planning 309
Assess Impact of Constraints 309
Asset Class Allocation Strategy 310
The Investment Policy Statement 310
The Monitoring and Updating Phase 315
Measuring Performance and Goal Achievement 316
Reevaluation of the IPS 317
Integration and Application of Investment Planning with PFP 317
Risk Management and Insurance Planning 317
Planning for Financial Independence 318
Estate Planning 318
Charitable Planning 318
Chapter Review 319
Chapter 19: Applications in Planning for Retirement 323
Introduction 324
Employer Considerations 324
Contribution Limits 325
Defined Benefit Plans 325
Defined Contribution Plans 327
Retirement Distribution Optimization Planning (Income Management) 328
Avoiding Early Withdrawal Penalties 329
Employer Stock and Net Unrealized Appreciation (NUA) 330
Required Beginning Dates and Minimum Distributions 332
Annuity Options 333
Lump-Sum Distributions 334
Qualified Domestic Relations Order 335
Income Tax Issues 336
Incorporating Tax Rate Diversification in the Choice of Retirement Savings Vehicles 336
Impact of Tax-Loss Harvesting in the Retirement Planning Process 336
Investment Management During Retirement 338
Withdrawal Rates 339
Asset Allocation 339
Integration and Application of Retirement Planning in the PFP Process 340
Life Expectancy 340
Asset Protection 340
Chapter Review 341
Chapter 20: Applications in Employee Benefits Planning 345
Introduction 346
Group Insurance Benefits 346
Group Disability Insurance 346
Group Life Insurance 347
Group Medical Insurance 348
Section 125 Cafeteria Plans 350
Group Long-Term Care Insurance 351
Group Dental Insurance 351
Group Vision Insurance 351
Other Employee Benefits 352
Fringe Benefits 352
Adoption Assistance Program 353
De Minimis Benefits 353
Employee Achievement Awards 353
Educational Assistance Program 354
Prepaid Legal Services 354
Retirement Planning Services 354
Job Placement or Outplacement Services 354
Meals 354
On-Premise Athletic Facilities 355
Qualified Moving Expenses 355
Chapter Review 355
Chapter 21: Applications in Executive Compensation Planning 359
Introduction 360
Executive Compensation Agreements 360
Employment Agreement 360
Severance Agreement 360
Noncompete Agreement 360
Other Arrangements 361
Nonqualified Deferred Compensation 363
Funded and Unfunded Plans 364
Types of Nonqualified Deferred Compensation Plans 364
Equity Compensation Plans 365
Restricted Stock Plan 366
Phantom Stock Plan 366
Qualified Employee Stock Purchase Plan 367
Incentive Stock Option and Nonqualified Stock Option 367
Stock Appreciation Right 368
Section 83(B) Election 368
Top-Hat Plan 369
Chapter Review 369
Chapter 22: Applications in Personal Financial Planning in Special Circumstances 373
Introduction 374
Housing 374
Sale of Principal Residence 374
Vacation Home 376
Household Employees 376
Closely Held Business Basics 378
Entity Selection Process 378
Application of Trusts 382
Employing Spouse or Children and FICA Taxes 382
Business Applications of Insurance 382
Divorce 383
Income Tax Considerations 384
Statement on Standards in Personal Financial Planning and Conflicts of Interest 385
Chapter Review 385
Chapter 23: Delivery Models and Regulatory Issues 389
Introduction 390
Regulatory Landscape 390
Regulatory Bodies 390
Significant Federal Legislation 391
Significant State Legislation 392
Financial Services Industry Regulations and Requirements 393
Securities Licensing 393
Insurance Licensing 394
Regulatory Investment Reporting 395
Delivery Platforms (Business Models) 395
Investment Advisers 395
Registered Investment Adviser 397
Broker-Dealer 398
Insurance Company 398
Trust Company 398
Chapter Review 399
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