Contemporary Planning Flashcards
What are the components of the Code of Ethics/ Responsibility?
o Objectivity o Competence o Fairness o Confidentiality o Professionalism o Diligence
What does a planner do in complex ethical decisions?
- Facts & rational analysis
- Examine existing options & determine new ones
- Evaluate options
What step of the financial plan, may require a team?
analyze & evaluate
What can you do during the scope of engagement?
Terms of confidentiality
Financial planning is an economic discussion of what?
resource allocation & economic constraints
qualitative goal
big picture statement (intangible happiness, success, freedom)
Goal-based planning software
goals independently
Cash-flow planning software
goals within income and expenses
Life insurance illustration
happens independently of comprehensive financial planning
o Loans w/ cash value not subject to income tax
o Dividends are not guaranteed and should be modeled sparingly
o Cash value insurance policy can be used for retirement/ college if will not make it lapse
Complex reallocation goals
pay down debt, make large purchase
Dying without a will
property passes through intestate succession
Effective tax rate
simplifies planning (“on the fly” calculations), predictable/ stable income clients
Lump-sum insurance
o Burial expenses o 6-12 living expenses o Short-term income replacement o Debt repayment o Travel/ bereavement costs o Legacy planning o Inheritance o Buy/sell needs
Cash flow insurance
o Debt payments not covered by lump-sum o Savings needs (retirement, college) o Insurance premiums o Living expenses (ongoing) o Unique/ “gap” expense coverage o Ongoing pledge/ contractual obligations
state laws
community property overrides will, definitely of children, etc.
Testamentary trust
established for benefit of children.
- pour-over trust - proceeds of estate go into the trust
- set up after death
- does not avoid probate (assets push through probate before transferring to the estate)
Estate Plan fact finding
- Gather data
- Key decisions (guardian, executor…)
- Inventory
- Debts
- Business interests
- Desires
Estate plan elements
- Advisor meeting
- Plan
- Documents
- Legal transaction (will ceremony)
- Financial transaction
- Communication
- Monitor
Taxation: • Gift • Wins something • Bequest • Bequest w/ state tax =
- Gift = gift tax
- Wins something = income tax
- Bequest = transfer tax
- Bequest w/ state tax = estate tax & inheritance tax
Irrevocable Life Insurance Trust
•Gift tax– donor can use both annual gift tax exclusion & life time exclusion for gifts of premiums
•Estate tax – outside of gross estate tax
Estate availability – can be structured to lend money to estate or buy assets
Alternate valuation date
6 months after death for estate tax
50-50 rule
50% of date of death value of jointly-held property w/ right of survivorship or tenancy of entirety included
Life insurance included in gross estate
=decedent held any incidents of ownership or payable to individual’s estate
Deductions taken from gross estate
o Funeral
o Administrative expenses
o Debts
Descendent survivor’s unused exemption (DSUE)
executor of descendent files return electing to make unused marital deduction available to survivor (allows deceased estate to use deduction)
Residuary trust planning
2 trusts (1 with exclusion qualifying expenses and 1 with marital deduction)
Section 2503 (c)
special statutory rule for minors & qualify for present interest gift
o Property/ income for minor until 21
o Pass to donee at 21 (if done dies, pass to donor estate)
Federal estate tax steps
- Gross estate
- Adjusted gross estate- subjecting funeral, administrative, debts, taxes & losses from gross
- Adjusted gross estate- subjecting marital, charitable, or state death
Adjusted – estate = tentative tax - Estate tax – gift tax (post-1976 gifts) – tentative tax
5.Federal estate tax
TCJA exclusion
= exclusion has been doubled for a period of years
**date of death important
Grantor Trust
- Assets in trust are removed from grantor’s estate
- Receiving income without paying income tax
- Income tax paid to grantor = gift to donees & not subject to gift taxation
Estate freezing
- Sell a business (subject to value of the sale not date of death value)
- Lifetime gift (calculated as date of gift value not death)
- Charitable remainder trust – split between income and charitable interest
Basis
amount the taxpayer paid + improvements
Adjusted Gross Income (AGI)
base amount used to determine how taxpayer must treat other items
Above-the-line deductions
available to all taxpayers (regardless of taking a standard deduction or itemizing)
Below-the-line deductions
itemized deductions (taken in lieu of standard
ABLE account
= alternative to special needs trust (more flexibility)
- Contributions not tax deductible, made by anyone, limited to $15,000 per year per account
- Earned income is tax-free
- Disbursements for “qualified disability expenses”
- to qualify: disabled before age 26 & already receive SSI/DI
- first $100,000 is not counted as resources for SSI eligibility test (over will cause SSI suspension)
Self-settled SNT
= special needs individual has/ expected significant assets & allow him to qualify for SSI/ Medicaid
- funds not considered income/ assets of bene for SSI/Medicaid qualification supplemental income
- only under age 65 = not appropriate for beneficiary needed SSI/ Medicaid
- payback at death to remainder of beneficiaries (not payback the state)
- corporate trustee required
- terms should prevent distributions of cash directly to special needs bene
ILIT
= third party supplemental needs trust that helps for life insurance of parents, grandparents of special needs bene (quality of life benefits)
- Disposition of trust assets
- Grantor gift tax annual exclusion
- GST exemption
- No estate tax
- No probate
- Liquidity of grantor estate
* at death, remainder distributed to benes without diminishing Medicaid benefits
IRC SEC. 1041
= property transfer is incident to divorce if made 1 year after marriage terminates
- HSA or MSA no taxable transfers
- no gain/ loss recognized (non recognition treatment)
Spousal support
= deducted by payer & included on payee’s income for divorces before 1/1/19
- divorces after 1/1/19 = not deductible & payee cannot claim taxable income
- under divorce, in cash, no designation, cannot live in same household, end at death, not child support, cannot file jointly
IRC Sec. 1031(like-kind exchange)
= to avoid cashing out investments, roll into more expensive property (defer taxable gains)
QTIP (“C trust”)
= allows decedent to qualify a transfer for marital = deduction at death yet still control ultimate disposition of property
o Holds property for benefit of surviving spouse & income distributions
o Blended family – protects parent w/ natural children
Neoclassical Economic theory
= full information, utility maximization & rational preferences
* can infer what people want from how behave w/ their money
Consumption Theory
= in a utility function, the increase in happiness/satisfaction is slightly less than unit before
Best interest requirement
= best interest of plan/ IRA at time of the transaction
*disclose compensation when requested by the client
Level-fee advisor
– no additional compensation may be charged on sale provides investment advisor to a covered entity
3.8% tax on net investment income
= applies to interest, dividends & capital gains (S corporation)
Estate planning for business owner selling the business
o business assets to support lifestyle o transferring control o reduce size of taxable estate at death o disposition to heirs o increase liquidity to owner’s estate
Gross estate of decedent for federal will estate tax
o Property owned at time of death
o Property items transferred within 3 years of death
o Transfers during life in which retained right to
o Property owned with jointly with rights to survivorship
o Benefits from qualified retirement plans
o Property interests w/ general power
o Life insurance
Section 6166
= business value included in gross estate must exceed 35% of adjusted gross estate
* if partnership, LLC or corporation – decedent must owned 20% of business (business no more than 15 owners)
