Assignment 12 - Wealth Management and Distribution Planning

Question 1

**a process for managing resources that seeks to meet an indiv.’s needs and achieve their obj. by integrating a diverse range of services

• use of the holistic approach
• if managed correctly, should result in greater asset accumulations, less overall fin. risk, reductions in tax liabilities, cost reductions in mgmt of resources and efficiency of cash flows and reducing debt

Answer 1

wealth management

Question 2

a method of regular, systematic investing in which an indiv. invests the same dollar value on a periodic basis in equity inv.

• regardless of current mkt value of the investment

Answer 2

dollar cost averaging

Question 3

• No fixed assumptions
• vary assumptions
• yield probabilities of success or failure depending on repeated iterations of the model
• use statistical techniques

Answer 3

Stochastic models

Question 4

**in a qualif’d retirement plan, the distrib. of a partic’s entire acct balance or of the entire amt of the partic’s accrued benef. as a singe cash pmt

• EE’s death, attainment of 59 1/2, or separation from service

Answer 4

lump sum distribution

Question 5

1. use set of fixed assumptions
2. illustrate risk

• by running model several times
• varied assumptions

EXP= model projects asset accum. based on current holdings and an assumed savings rate given assumptions about inv. return and slry increases

Answer 5

Deterministic Models

Question 6

occurs when a deceased person was entitled to items that would have created gross income for the year of death.

• no step-up in basis
• treated as gross income to the recipient
• subject to substantial taxation
• can create substantial wealth for recipient

Answer 6

income in respect of decedent (IRD)

Question 7

**Distrib. from retirement plans must commence by April 1 following year of attaining age 70 1/2 after terminating employment

Answer 7

Required Minimum Distribution (RMD)

Question 8

how does WM link asset accum. w/ distrib. planning?

Answer 8

• positions retirement resources so they conform to future planned obj.
• assets are configured to produce retirement income when distrib. phase of retirement commences.

Question 9

Forces that have served to support a shift to WN approach

Answer 9

1. Chg in ER-EE employment contract: move to DC plans and indiv. responsibility
2. chg in gov’t policy: more uniformity to plans; increased protability; indiv. responsibility
3. mktplace forces and competition by mkt partic.: new products and services; move to using external vendors for admin
4. enhancements in tech. and recordkeeping services

Question 10

decision elements for accum. and distrib. wealth to support retirement needs

Answer 10

1. developing the retirement resource target
2. assessing the efficiencies of fundign structures
3. examining the funding structures
4. investment selection, risk mgmt and strat. allocation of resources
5. dsitrib. planning and execution
6. monitoring excesses or deficiencies relative to retirement income needs
7. final disposition of excesses or curtailment of deficiencies

Question 11

(3) models used by fin. advisors to target retirement resource needs

Answer 11

1. deterministic model
2. stochastic model
3. mixed model

Question 12

• mixture = fixed (deterministic) assumptions adn variable assumptions (stochastic)
• allow a certain set of assumption to vary
• attempt to gauge probabilities of success or failure
• EXP = Monte Carlo simulation

Answer 12

Mixed Models

Question 13

Factors for assessing the efficiences of retirement savings structures

Answer 13

• assessing tax efficiencies
• costs assoc. w/ the inv. products
• risks of either asset classes or specific inv.

Question 14

Universal WM principles

Answer 14

• diversification
• attainable efficiencies - taxes and costs
• eliminate duplication of benefits
• question traditional assumptions

Question 15

Wealth building opportunities

Answer 15

• means to diversification
• dollar cost averaging
• risk transfer at favorable pricing
• strategic asset positioning
• preemptive tax planning
• beneficiary planning
• balance b/w active and passive mgmt

Question 16

Distribution Options

Answer 16

1. annuity pmt options
2. periodic pmts
3. intermittent (nonperiodic) pmts
4. lump-sum distrib.
5. lump-sum w/ rollover into IRA
6. combining various pmt options

Question 17

Annuity Pmt (distrib. option)

Answer 17

*guarantee of lifetime income by the plan or the insurer

*indiv. can’t outlive the income source

Types: immediate life; deferred life; fixed; variable

Question 18

This decision requires retirement plan annuities to use unisex mortality tables to make pmts for men and women the same based on the same age

Answer 18

Arizona Governing Committee v. Norris

Question 19

Key difference b/w annuities offered directly through a retirement plan versus annuities offered through an insurer outside a plan

Answer 19

• directly through retirement plan - must use unisex mortality tables with pmts same for men and women who have attained same age (Arizone Governign Comm. v. Norris)
• sold by insurers outside plan - may use different annuity tables for men and women b/c women’s life expectancies exceed those of men

Question 20

important considerations for retirement income strat.

Answer 20

• assess retirement income needs
• know ongoing expenses that will incur during retirement
• assess risks and possibility of expenses associated w/ those risks
• costs and tax implications

Question 21

• simplest form of WM models and easy to do
• plug in some key items to determine how much you need for retirement: current age, slry, age when you plan to retire, what you currently have saved

Answer 21

deterministic models

Question 22

**added on to the deterministic models approach

• how much you will need in retirement (%age)
• assumed interest rate
• assumed tax rate
• assumed inflation rate

Answer 22

Stochastic Models

Question 23

EE’s cost basis in a retirement plan includes:

Answer 23

• aggregate of prior ins. costs (PS-58)
• any A/T contribs. made by EE
• defaulted loans that have been treated as taxable distribs.

Question 24

amt of premium costs that a partic. must include as taxable income

Answer 24

PS-58 costs