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CFP 3/17 > Financial Planning Process > Flashcards

Financial Planning Process Flashcards

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1
Q

Methods to value a business

A
  1. Book Value
    Uses balance sheet
    book value assets- book value liabilities = net worth of business
  2. Capitalization of Income
    Projected flow of income converted to PV
    Income/Capitalization rate (given) = Capitalized Value
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2
Q

Pro Forma Statement

A

projects the expected results over the next year for business
estimates excess income over expenses
like a budget

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3
Q

Emergency Fund

A

3 months married jt income
6 months single or single income (alimony, trust income, very wealthy)

can consist of:
checking (current months expenses must be subtracted from value)
gov money market
CD's < 90 days
laddered CD's < 6 months
savings accounts

Emergency fund ratio (EFR) = liquid assets ÷ nondiscretionary monthly expenses

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4
Q

Current Ratio

A

Current Ratio= Current Assets/Current Liabilities

Ability to meet short term obligations 1 or higher is good
(always use credit card debt even if paid off monthly)
(only use taxes when material says “taxes due” or “taxes payable”
(mortgage if say current amount due)

current assets can be converted to cash in 1yr or less

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5
Q

Housing Cost Ratio

A

aka Housing Expense Ratio (PITI)

Principal interest, taxes, insurance/ gross monthly income

< or = 28%

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6
Q

Debt to Income Ratio

A

Consumer and housing debt/ gross monthly income

< or = 36%

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7
Q

Consumer Debt Ratio

A

non housing monthly payments (no PITI) / NET monthly income

(not gross income like other ratios)

< or = 20%

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8
Q

Savings Ratio

A

Savings per Yr/ Gross Income

5-8% increasing with age

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9
Q

Behavioral Finance Stages

A

Denial
Ambivalence - use charts, graphs and spreadsheets to teach consequences for behavior)
Preparation
Action

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10
Q

Banks

A

Establishment that performs financial transactions like receiving, investing and lending money.

3 federal agencies oversee
1. Comptroller of Currency (fed and national banks)
(state banks are subject to authority in that state)
2. Federal Reserve
3. Federal Deposit Insurance Corp (FDIC)

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11
Q

Savings and loan (S&L or Thrift)

A

Acquire funds through time deposits

Regulated by FDIC and Federal Home Bank Board

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12
Q

FDIC - Deposit Insurance Fund

A

Coverage depends on titling
$250,000 per titling not account

Trust $250,000 per bene unless trustee can direct funds elsewhere

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13
Q

Negotiable CD’s

A

marketable deposit
holder receives deposit plus interest at maturity
can be sold before maturity

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14
Q

Credit Union

A

non profit financial organization
members have common affiliation
National Credit Union Insurance Fund (like FDIC)
most do not offer commercial loans

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15
Q

Insurance Companies

A

Mechanism for risk sharing and risk transfer

also:
underwriting, rate making, reinsurance, investing, claims adjusting.

regulated by the state

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16
Q

Regulation of insurance Companies

A

3 branches of State Gov:

  1. maintain solvency
  2. protect policyholders
  3. maintain competition
  4. assure coverage is avail to all who want it

regulate licensing, policy forms, rebating, insolvencies and liquidation, competence, reserves, twisting and access

Federal - COBRA/HIPPA, Standardization of Medicare Policy, Taxation

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17
Q

Securities Act 1933

A

Purchasers of New Issues need to be provided a prospectus. Full and Fair disclosure

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18
Q

Securities Act 1934

A

Provides regulation of secondary market trading.

Created SEC to enforce securities law.

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19
Q

Investment Company Act 1940

A

Authorized by SEC to regulate (through FINRA):
Unit Investment Trusts (UIT)
Investment companies (closed end and open end)
Variable Life Insurance

20
Q

Securities Investor Protection Act 1970

A

Established SIPC insurance

limited protection against failure of brokerage firms

21
Q

Trust companies

A

Regulated by the State

Organization that acts as trustee, fiduciary or agent for individuals.

Engage in fiduciary investment management, estate planning, administration, stock registration and transfer, etc..

Can be named as executor or representative in will

22
Q

Inflation Adjusted Rate

A

((After tax rate/Inflation rate)-1)x 100
Example
((1.09/1.06)-1)x100= 2.8302%

23
Q

Home Sale Exclusion

A

Married $500,000

Single $250,000

24
Q

Alimony

A

Deductible by payor
Taxable to Payee

Can’t file joint tax return or live together
Can’t be used in place of child support
End at recipient spouse death or when court mandated

No transfers of non cash items, services, property or use of property, or promissory notes

Payments to maintain property owned (PITI) by payor and used by payee are not alimony i.e Mortgage unless owned by payee.

Premium Payments of life insurance owned by payee and payee is bene- on life of payor are alimony if made under divorce decree. Payor can’t own!

Tuition and rent pursuant to divorce decree qualify

25
Q

Child Support

A

Not deductible by Payor
Not taxable to Payee

Payments that continue after occurrence or contingency tied to a child end are not child support
example: $1000 mo until child is 18 then $400. $400 is alimony.

26
Q

Divorce Property Settlements

A

Gift tax free

Basis is carried over

27
Q

Dependency Exemption after Divorce

A

Awarded to custodial parent or parent having custody longer. More than 1/2 support from parent unless divorce decree says otherwise.

28
Q

Disability Insurance Options

A 
Disability Insurance Policy (employer or private)
Long Term Care Ins
SSI Disability
Worker Compensation
Medicare/Medicaid
29
Q

Compensatory Damages

A

Generally tax free

Discrimination award-taxable

Damages up to medical cost for emotional distress is tax-free

Nothing vague like headaches or stomach disorders. Need details of auto accident to prove comensatory

30
Q

Punitive Damages

A

Taxable
punish wrongdoing

wrongful death-tax free

31
Q

Prizes and Awards

A

full value included in gross income

if annuity is over 10 years or more then taxable as recieved

32
Q

Long Term vs Short Term Debt

A

Long term - all non-consumer and auto debt; i.e. Home equity, mortgage

Short term- auto loan, line of credit, credit card balance

Collateralized…something backing it…home, car, business

33
Q

Buying vs Renting

A

Buying
Advantages - higher marginal tax bracket, tax deduction, cap gains on sale over exemption

Disadvantages- Down payment, closing costs, PITI, utilities, maintenance.

Renting
Advantages - Rent is lower than mortgage; favor shorter time periods; no closing costs, lower maintenance and utilities

Disadvantages- security deposit, no ultimate ownership

34
Q

FHA Loan

A

Guaranteed by government but not originated by gov. If borrower defaults FHA makes good on the loan.

Typically lower income borrowers who lack sufficient down payment.

VA loan - similar but for veterans (less stringent than traditional mortgage)

35
Q

Qualified Residence Interest Deduction

A

Home indebtedness $1M
Home Equity Indebtedness $100K

interest over indebtedness limit is not deductible

1/2 if married filing seperately

36
Q

Refinancing

A

Consider: length of time will remain in home and cash flow.

37
Q

Reverse Mortgage

A

Accessing equity in home until death, event or conclusion of term.

Nursing home - not a barrier under $500,000.
Is sold to satisfy reverse mortgage-remaining cash proceeds are barrier.

If distributed as annuity may be consider income for SSI

Better to do line of credit

Rules:

  1. 62 or older
  2. no income qualifications
  3. property is re-titled and can still live there as long as needed
  4. No mortgage payments during life of loan(can still have mortgage)
  5. Tax free proceeds
  6. Amt depends on age, value, interest rates, reverse mortgage selected
  7. No repaid until move out of home
  8. Repayment can’t exceed home value
  9. Any remaining equity distributed to homeowner or estate
38
Q

Registered Investment Advisor

A 
Investment Advisor Act 1940
<100M Assets Register in state office of domicile
May need to register in several states
Registers with ADV $150min
Records kept 5 years

Definition: All 3
Person who provides Advice
Is in the Business of providing advice
Provides advice for Compensation

Exceptions:
Bank
Lawyer, Engineer, Teacher, Accountant - incidental
Broker dealer- incidental to broker dealer business- no compensation
Publisher - newspaper
Advice in Gov securities

Exemptions:
intrastate adviser - unlisted securities
insurance companies
family office
venture capital funds
Foreign advisers outside US
39
Q

Family Office

A

Advice only to family members (trusts and charities)
Wholly controlled by family
Does not hold itself out as advisor

40
Q

FINRA Must be notified in writing…..

A

Must be notified in writing PROMPTLY if firm or advisor:

  1. violated securities law
  2. written customer complaint -theft, misappropriation or forgery
  3. defendant or respondent in any lawsuit alleging violation of Securities Act by regulatory authority
  4. indicted, convicted, or pleads guilty to criminal offense.
41
Q

Contract

A

Agreement between 2 or more parties

Offer and acceptance
Consideration (something of value)
Principal must have legal capacity to execute
can’t be incompetent or intoxicated (can be voided by incompetent party)
minors (food, shelter and clothing only)
can’t be illegal
If does not meet above it is void

42
Q

Chapter 11

A

Chapter 11 -Those that don’t qualify for chapter 13

43
Q

Chapter 13

A

Chapter 13- Reorganization-payments are reduced. Creditors can’t harass, usually not required to relinquish assets

44
Q

Chapter 7 Exemptions

A

Chapter 7- NOT 13 or 11 - can claim federal or state exemptions
33 States have opted out

State Law exemptions:

  • Homestead (house adjacent to land)
  • Limited amount personal property
  • Wages due to head of family-providing more than 1/2 support to child
  • Limited equity in MV
  • ERISA plans
  • Cash value life ins/proceeds annuity
  • Disability benefits/unemployment/workers comp
  • Property held TIE

Federal Exemptions
-Civil Service retirement benefits/ railroad pensions/ veterans benefits.

45
Q

Bankruptcy

A

Not canceled by bankruptcy:

  • student/government loans
  • 3years back taxes
  • Wage withholding FICA and income taxes
  • Child support/alimony
46
Q

Chapter 7

A 
Mean Test-
Average monthly (60months) net income >10,000 Chapter 7 not an option

Average monthly (60months) net income <6000 chapter 7 not allowed

completed consumer credit counseling w/in 6 months

Must provide:
tax returns
detailed earning projections
Retirement account info
ESA and 529 - can be protected if opened for 2 years

SEP/SIMPLE/ERISA/DC generally protected
Traditional and Roth Exempt to 1M
Unlimited Rollover Exemption

IRA’s not exempt if exceeds debtors need

CFP 3/17 (48 decks)

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