Bryant - Course 1. Introduction to Financial Planning - Module 14. Monetary Settlements and Special Circumstances Flashcards

Question

Another divorce consideration is the reassessment of coverage for risk management.

Answer 1

A decrease or increase of death benefit may be necessary depending on new insurance needs. The spouse who is receiving the alimony and, if applicable, the child support should consider taking out a life insurance policy on the paying spouse to ensure the support will continue beyond his or her life span. The recipient spouse should also have the power to change the beneficiary designation of the policy. The recipient spouse may also consider disability insurance for the payer spouse in case they become disabled and will no longer be able to work and provide alimony and/or child support.

Answer 2

Sole ownership of property goes through probate at the owner's death and the fair market value is included in the owner's estate, subject to estate taxes. An owner needs to have a will to pass the property to others at his death, or the property is subject to state intestacy laws. This is also similar to a tenancy-in-common form of ownership which can have multiple property owners. Each tenant-in-common must include their fractional interest in the property (one-half ownership, one-fourth ownership etc.) in their gross estate at death, and their property interest must be transferred by will or intestacy, which is subject to probate administration.

Answer 3

1. Joint tenancy with right of survivorship (JTWROS) 2. Tenancy by the entirety. Both forms of ownership avoid probate and only the value of the decedent's property interest is included in their gross estate at death. A joint tenancy with right of survivorship can be held with multiple owners but a tenancy by the entirety can only be owned between husband and wife. Upon a divorce, the property can no longer be held as tenancy by the entirety. If the ex-spouses still want to hold the property together and avoid probate, the closest substitute is a joint tenancy (JTWROS). This will require a change in the deed of the property. The titling of the property can also be changed to a tenancy-in-common, but this form of ownership would not avoid probate at the owner's death. If the property is changed to being held as a tenancy in common, then upon the death of one of the owners, his or her interest in the property (one-half of the property's fair market value) will be included in his or her estate at death.

Answer 4

1. The interest goes to the deceased owner’s spouse Tenancy by entirety is a form of joint tenancy property titling but may only be used by spouses. At the death of one spouse the deceased owner’s interest automatically goes to the deceased owner’s spouse.

Answer 5

Disability insurance brokers boast that a person’s greatest asset is not anything material, rather it is his or her ability to earn an income. This power delivers all other assets. Disabled persons may qualify for social security benefits earlier than retirement. Disability under Social Security is based on the person’s inability to work. Applicants are considered disabled under Social Security rules if they cannot do work that they did before and the Social Security Administration decides that they cannot adjust to other work because of their medical condition(s). The disability must also last or be expected to last for at least one year or to result in death. **Social Security provides two avenues of aid for the disabled: Social Security Disability Insurance and Social Security Supplemental Security Income. ** They both have strict guidelines for qualification. For more details on social security options available, visit SSA.gov. Medicaid is also another source for funding a disabled person’s medical expenses. **However, the best way to avoid losing the Medicaid benefits because of assets owned is to create a Supplemental Needs Trust to hold his or her assets.** A person such as a family member may establish a Supplemental Needs Trust for a disabled individual without jeopardizing the beneficiary's eligibility for Medicaid and other government benefits. Recent changes in federal and state law allow disabled persons to establish the trust with the disabled person's own funds. In risk management and insurance planning, considerable discussion goes into the need for disability insurance. As a rule of thumb, it is recommended that one should have 3 to 6 months worth of take-home salary saved in a cash reserve as emergency funds in case something such as an accident or illness occurs and leaves him or her disabled.

Answer 6

When a family has a child who has special needs or is disabled, the planning is not only for education, but also likely to be living expenses for the remainder of the child’s life. In some severe cases, these children may never have the ability to earn their own income. There are many expenses that may come with supporting a dependent who has special needs. There might be costs for therapy, costs for making the home accessible, and costs for special equipment, such as a wheelchair. Parents of special needs dependents should begin a savings plan for their special needs children as soon as possible to allow the investment to compound. Gifts to minors, in account such as UGMA or UTMA, may help save money for the child, but they may also work against the child’s eligibility to receive government aid later on in life. Concerns and issues for parents with special needs children: - How do you protect a special needs child’s future government benefit eligibility for Social Security Income (SSI) and Medicaid? - What will happen to their child when the parent is no longer able to care them? - What financial resources will the child require? - How do you select a guardian (and successor guardian) and/or trustee (successor trustee) for the child?

Answer 7

1. Guardianship Appointment: It is important to appoint a guardian who will be a committed advocate for the child. Also, the best guardian may not be the best trustee, as the role of the trustee will be to manage and administer the trust. Sometimes the best caregiver is not the best person to manage or make decisions about money. 2. Will: Allows parent(s) to name a guardian/successor guardian for the child/children. If a will is not drawn at the time of death, there will be no guardian appointment. The appointment will be left to a judge to make. 3. Letter of Intent: This is not a legally binding document, but it can provide insight as to a parent’s vision regarding their child’s future care and quality of life. The content may include names of doctors, known allergies, medicines, therapies, hobbies, likes/dislikes, and a parent's desires for the child when he or she is no longer living. **Since money and assets should not be left directly to a special needs child, it is important to be sure that the child is not named as a beneficiary of a life insurance policy, annuity, or retirement plan.**

Answer 8

If the disability looks to continue into the child's adult life, a supplemental or Special Needs Trust can be created for the child. **This trust is created to provide for a special needs child while preserving government benefit eligibility, as the assets held in trust do not belong to the beneficiary.** The drafting of the trust is extremely important because the benefits of the trust are not supposed to supplant, but instead** supplement government benefits that provide food, shelter and clothing.** **A special needs trust cannot pay for room and board, but can pay for the following needs:** * medical/dental expenses * annual checkups * transportation and vehicle purchase * equipment * training programs * education * insurance * rehabilitation * vacations, and * a home health aide. A special needs trust is **irrevocable** and must be set up by parents or a third party. The trustee has discretion to use assets for the benefit of the disabled person and must handle all distributions from the trust. When the disabled person dies, unused assets can go to other siblings or family members. If parents feel their child might be able to handle their own finances as an adult, they can allow the trustee to evaluate competency. The assets can then be transferred to the child. Funds of the trust may come from a structured settlement. It can also come from life insurance. **A survivorship, or second-to-die policy covers both parents and pays out on the death of the second. The special needs trust can be named as the beneficiary.** Practitioner Advice: A Special Needs Trust should be drafted by an Estate Planning Attorney because of the intricacies of the law in this area and the potential loss of government benefits if not properly drafted.

Answer 9

Adequate estate planning ensures assets are properly distributed in a timely fashion. An estate-planning attorney can review wills and trusts and make any necessary changes and additions to those documents. **It is also the time to identify how property is owned, how bank accounts are titled, and review life insurance policies and retirement accounts to make sure the correct beneficiaries are named. ** **If a person chooses to receive money from an insurance policy to spend on the last days, either for pleasure or for medical expenses, he or she may be able to obtain a viatical policy. This allows the person to receive all or part of the life insurance policy proceeds while he or she is still alive. ** **Many life insurance policies now provide a feature in their policies called an Accelerated Death Benefit or Living Benefits Endorsement. This feature allows the insured to receive a portion of the death benefit if the insured is terminally ill.** **Another option is to assign ownership of your policy to a viatical settlement company and receive a percentage of the face amount of that policy. **The proceeds received by the policyholder as a result of a viatical sale are not taxable, though the viatical company may have a tax liability when the policy is paid. A viatical settlement falls under the "transfer for value" rules which will be discussed in subsequent courses.

Answer 10

Non-traditional families typically consist of unmarried couples who may or may not have children. Estate planning should have explicit instructions about who should receive assets from the estate because there is no surviving spousal protection. In addition, financial planning software can also be limiting when applied to non-traditional families. **Regulations no longer prohibit unmarried partners from receiving Social Security survivor benefits **eliminating the general absence of advantages traditional married couples enjoy, such as Medicaid coverage for a spouse's nursing home stay. In addition, it’s important that retirement accounts and life insurance policies have accurate beneficiaries named and periodically updated to reflect the wishes of the non-traditional family member. Also, pension options might not allow for a non-spousal beneficiary. These considerations need to be factored into retirement planning for non-traditional family members. Long-term care insurance may help with this dilemma. For estate planning, the goal is to ensure the partners’ assets go to the people they designate. A will and/or a trust is necessary to make that happen, otherwise the state would distribute an unmarried decedent’s assets to their next of kin. Should your client want his or her partner to oversee decisions regarding medical and financial matters should he or she becomes incapacitated, it would be important to establish a Durable Power of Attorney and Health Care Proxy as the choice of an appointee may not be an obvious one. It is imperative that formal documents be established to avoid probate court. Gift taxes may be an issue if partners are not contributing equally to accounts. **Long-term care insurance could also be a valuable strategy in estate planning as a lien could be placed on a jointly owned home of a non-married couple should a partner require the assistance of Medicaid. ** Even though normal divorce rules do not apply, non-traditional families may have the same troubles deciding on an equitable division of assets. **A written contractual agreement, called a millennium family agreement or co-partnership agreement can help settle how assets, such as 401(k) and other retirement plans, should be divided if the couple decides to split up.** Practitioner Advice: **A domestic partnership agreement can create a framework for the partners to list their wishes on how to transfer the ownership of their assets.** It is redundant to a Will but it may help to avoid a contest of the will in a situation where family members might not be supportive. **For example, a couple may contribute unevenly to the purchase of their residence. The couple agrees that, initially the ownership should reflect each party’s proportional contribution, but that, over time, things should balance out to 50/50. This can be accomplished by drafting a sliding scale into the agreement. **

Answer 11

1. Roll the funds into the future employer’s qualified retirement plans: Request for a direct rollover, where the check is made out to the plan administrator of the new company. 2. Keep the funds in the old plan: In the event the new employer does not sponsor a retirement plan, and the participant’s account is larger than $5,000, then it may make sense to leave the plan where it is. 3. Roll the money over to an IRA account: Open an IRA at a financial institution. Keeping the funds separate from other IRA moneys will allow it to be transferred to another employer-sponsored plan later on.

Answer 12

* Assess the security of the job position * Identify the severance policy * Establish an emergency fund of three to six months' worth of fixed and variable expenses **The difference between being laid-off and being fired would be the availability of a severance package.** There are a number of things that a company may do to assist employees who are being laid-off.

Answer 13

Depending on the job, companies typically will carry over for a short period certain benefits after a layoff: * Medical Insurance * Life Insurance * Pension Credit * Long-Term Disability * Short-Term Disability * Tuition Reimbursement * Vacation Accrual * Use of Office

Answer 14

There are many special circumstances, such as divorce, that require the services of specialized financial planners. As a financial planner, it is important to understand the emotional side of the special circumstances to better serve clients. There are many web-based calculators and financial planning software available that may help determine one’s needs in cases such as divorce or disability. In this lesson, we have covered the following: Divorce: Division of assets, establishing alimony and child support can be done through mediation, arbitration or by court order. Division of assets is dictated by either community property state laws or through an equitable division. Alimony and child support are determined based on the need of the spouse with custody. Disability: Government aid for people with disabilities is available from Social Security and Medicaid. If the person had a disability insurance policy, then the proceeds would help with the person's expenses. A prolonged disability may necessitate the creation of a supplemental income trust that can hold assets to pay for living expenses not covered by governmental aid. It will also ensure that government aid such as Social Security and Medicaid is not limited. Dependents with Special Needs: Planning must provide the child with not only education needs, but living expenses that can extend beyond the death of the parents. A special needs trust can be established to pay for expenses not covered by governmental aid for a dependent with special needs. Terminal Illness: Planning for medical expenses for the remainder of the terminally ill person's life, as well as the cost of carrying out the person's wishes for his or her last days. If sufficient funds are available already for funeral and estate expenses, life insurance could be sold to supplement the expenses of the last days. Non-traditional Families: Unmarried couples may not have the same regulatory protection and tax advantages that married couples have. Their estate planning instructions need to be more explicit. They will need more to fund retirement since surviving spouse benefits are not available. Also written agreements to assets would facilitate a division of assets in case the couple decides to separate. Job Change: The most important part of planning for a job change is to determine what to do with the money held in a qualified employer sponsored retirement plan. Keeping the money in the existing plan, or a direct rollover into an IRA or another employer plan will maintain the tax deferred status without penalties. Taking the money out and not reinvesting it into a retirement plan within 60 days will incur a 10% penalty if the person was younger than 59 1/2. Also the entire distribution would become taxable at the person’s income tax bracket. Job Loss: Unemployment insurance and severance packages help alleviate living expenses until a new job is found. Emergency fund planning ahead of time will help as well.

Answer 15

Depending on how it is handled, a monetary settlement can be a blessing or a curse. Many people who come across a monetary windfall have expressed that their fortune was not worth the aggravation that they experienced after winning. The problem with coming across a large sum of money is the many charities, friends, and families that will wish for a portion of the proceeds. However, those who come across monetary settlements who diligently seek financial and legal advice tend to become more comfortable with receiving the money. One way to determine whether or not a lump sum from a structured settlement is more suitable is to determine the discount rate used to arrive at the lump sum and evaluate whether a better rate can be found for the investment. In this lesson, we have covered the following: Legal settlement: Tort remedies that defendants owe to plaintiffs by court order or agreement. Insurance and ownership planning can help defendants handle such occasions and limit the exposure of personal assets. Plaintiffs who are awarded the settlement will need to determine how to best use the funds as a remedy for injuries. Structured settlement: A stream of tax-free cash flows used to fulfill legal settlement rather than a lump sum. Often used for cases where on-going care is necessary as a remedy. The amount can be sold to receive a lump sum for part or all of the cash payments. Lottery winnings and monetary windfall: Taxes are withheld before distribution takes place. Taking a lump sum is preferred for estate planning. Winners can sell their stream of cash flows in order to receive a lump sum. Lump sum retirement distributions: A one-time payout of the entire account balance of a qualified retirement plan. The payout must be for a qualified reason such as attainment of age 59 ½, death, disability, or for separation of service. Distributions are generally taxed as ordinary income, but may also be deferred by rolling the balance into an IRA or another qualified retirement plan. Insurance proceeds: Generally paid to the beneficiary as: 1.) a lump sum (one payment which is income tax free) or 2.) an annuity payment (each payment is partially taxed at the ordinary income tax rate with a tax-free return of the basis component).

Answer 16

The financial planning process can be valuable in many life situations. Beyond the intricacies of dealing with normal life cycle planning are a variety of special situations where financial planning may be essential. Financial planning can guide selection of the most suitable way to receive monetary settlements. It can also serve to identify all the potential pitfalls under special circumstances. If a financial plan exists, all of the circumstances discussed in this module should trigger an immediate re-evaluation of the plan and prompt necessary adjustments. The important points to take away from this module are: Monetary Settlements: Can be paid in a lump sum or structured payments. Depending on the source, the payments may be taxable. It is important to consider estate planning when deciding which method of payment to choose. Monetary settlements can come from legal disputes, insurance policies, retirement plans, lottery or monetary windfalls. Special Circumstances: Financial planning combined with legal and tax advisors are important in most special circumstances to make sure the client fully complies with the law, exhausts all available government aid, and takes the best course of action to ensure all parties are taken care of financially. Special circumstances can include divorce, disability, dependent with special needs, terminal illness, job change, and job loss.

Answer 17

Directly roll the funds into the Acme, Inc. qualified retirement plan. You correctly checked this. Keep the funds in the ABC, Inc. plan. You correctly checked this. Rollover the money to an IRA account. You correctly checked this. Wait and withdraw the funds when he turns 59 ½. You should have checked this. Jason could take any of the actions listed above and not be subject to tax.

Bryant - Course 1. Introduction to Financial Planning - Module 14. Monetary Settlements and Special Circumstances Flashcards

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