Topic 7

Financial Planning for Special Circumstances

Topic 7: Financial Planning for Special Circumstances

• Learning Objectives – Evaluate the need for and recommend financial

management strategies for clients with special challenges. Examples of these groups include: • single head-of-household families, • non-traditional families, • pre- and post-divorce planning, • pre- and post-mortem planning, • remarriage, • elderly clients, • disabled clients or families with disabled offspring, • business owners, and • athletes/entertainers.

Topic 7: Financial Planning for Special Circumstances

• Life changes such as divorce, disability, terminal illness, job change, and appearance of dependents with special needs can greatly impact and alter the client-planner relationship.

• May need to return to step 1 in the planning process – Identify exactly who the client will be – Discuss client expectations – Communicate the planner’s ability to meet expectations – Explain the services to be provided – Define the scope of the engagement.

Topic 7: Financial Planning for Special Circumstances

• Requires a review of each of the six core areas of financial planning – Fundamentals – Insurance and risk management – Investments – Income taxation – Retirement plan – Estate plan

Topic 7: Financial Planning for Special Circumstances

• “Normal” special circumstances– Divorce – Disability – Terminal illness – Nontraditional families – Job change and job loss – Dependents with special needs – Monetary windfalls – Elderly clients

Topic 7: Divorce – Practice Management Issues

• Evaluate whether the planner is able to continue to represent both husband and wife – Who is the client (in whose best interest do you

act?) – May need to terminate existing engagement and

enter new agreement(s)

Topic 7: Divorce – Reviewing Fundamentals

• Distribution of assets – Equal values of assets may still leave ex-spouses in very

different financial situations based on the type of assets each party receives

• Evaluate after-tax cash flow • Negotiating child support payments – How long payments will continue – Who will pay for private elementary and secondary

school and college tuition • Negotiating alimony

Topic 7: Divorce – Reviewing Insurance and Investments

• Insurance – Assess the need for life insurance to protect

alimony and child support payments – Medical insurance for ex-spouse and children • Who will pay for children’s out-of-pocket medical

expenses

• Investments – Re-evaluate risk tolerance and risk capacity – Consider tax impact of investments

Topic 7: Divorce – Income Tax Issues

• Alimony is taxable to the receiver and tax deductible to the payer

• Child support is not taxable to the receiver and is not tax deductible to the payer

• Property settlements are non-taxable – Property settlements disguised as alimony will

trigger a recapture tax • Tax implications of who will claim the children

as dependents

Topic 7: Divorce – Reviewing the Retirement and Estate Plans

• Retirement – How to determine an equitable division of retirement plan assets – Qualified Domestic Relations Orders (QDRO)

• Ensures that a qualified plan can be divided as part of the property settlement in a divorce, without any negative tax consequences to either spouse

– Discuss spousal right to collect Social Security benefits based on ex-spouse’s earnings

• Estate – Update wills, trusts, POAs, beneficiary designations – Ensure titles to assets get transferred – Name choice of guardian for minor children in the will

Topic 7: Disability – Planning Proactively

• Analyze sources of income and the relevant level of dependency on each income source

• Ensure adequate emergency funds are in place • Assist clients with selecting the appropriate

– Short-term disability plans – Long-term disability plans – Long-term care insurance

• Educate clients regarding Social Security disability benefits and how they may coordinate with group and individual disability insurance income

• Evaluate income tax impact on various disability income benefits • Ensure that the client has executed and updated a durable power of

attorney and durable power of attorney for health care – Sign HIPAA forms at each medical service provider to release information to

the DPOA

Topic 7: Disability – Reviewing the Plan When a Disability Occurs

• Return to step 2 in the planning process to re-evaluate goals, objectives, and time-frames and gather information regarding the new financial situation

• Review disability income sources such as short-term and long-term disability insurance policies, Social Security disability, or the ability to adjust investments to a goal of producing income

• Review cash flow plan and make adjustments as needed – Assess lump-sum cash flow needs such as the need to equip a

home for accessibility • Review and update powers of attorney and advance

medical directives

Topic 7: Terminal Illness • Clients diagnosed with a terminal illness may be concerned

with increasing their cash inflows today in order to pay medical bills or enjoy life during the time they have remaining – Discuss the accelerated death benefits and viatical settlement (An

arrangement in which someone with a terminal disease sells his or her life insurance policy at a discount from its face value for ready cash. The buyer cashes in the full amount of the policy when the original owner dies.)

– Recommend the creation of a living will to direct how extensively the client wishes to be treated medically when he or she is near death

– A return to step 2 in the planning process will be necessary to adjust goals and time horizons, to review the beneficiary designations, and to ensure all prior implementation recommendations have been completed

Topic 7: Nontraditional Families

• Single head-of-household families – Subject to greater cash flow risk than families with two earners

• Need for additional emergency funds • Increased need for insurance planning

– Life – Disability income – Long-tem care

– Income tax filing status – Retirement planning may prove challenging due to cash flow

constraints, time out of the workforce to care for children or aging parents, and limited availability of qualified plans

– Estate planning documents must be in place and kept up-to-date

Topic 7: Nontraditional Families

• Unmarried couples have special concerns – They will not qualify for the marital deduction for

federal estate planning purposes – Without a properly drafted will, beneficiaries who

are relatives may be entitled to the decedent’s assets before the significant other of the decedent

Topic 7: Nontraditional Families

• Same-sex couples – Many states do not recognize these relationships – Federal laws will recognize the marriage of a

same-sex couple based on the “state of celebration rule” • If the couple is married in a state that recognizes same-

sex marriages, the federal government will recognize it regardless of which state the couple currently resides in • Applies to federal taxation, Social Security benefits,

qualified retirement plans, etc.

Topic 7: Job Change and Job Loss

• Just when things are going smoothly, an unexpected job adjustment may dampen a client’s plans toward saving for long-term objectives

• Financial planners will need to focus on – Retirement accounts – Severance packages – Unemployment compensation

Topic 7: Dependents with Special Needs

• Families with a dependent with special needs will have all of the same goals and planning issues as families without a special needs individual, plus additional challenges and planning needs for the dependent with special needs – In step 2 of the planning process, information-gathering will

be increased to include identification of additional social and government benefit resources such as SSI, Medicaid, vocational rehabilitation, and subsidized housing

– Care must be taken to ensure that any strategies commonly used to achieve traditional planning goals do not impede the availability of government resources to help fund the special needs goals

Topic 7: Dependents with Special Needs – Insurance and Investments Planning

• The usual need to protect the family against premature death or disability of the parent, plus providing for the supplemental lifetime needs of the dependent with special needs – Life insurance on both the wage-earner and the family member

providing care for the individual with special needs – Use care in selecting the type of life insurance (term insurance is

cheaper but the need is permanent) – Do not name the individual with special needs as the beneficiary of any

life insurance death benefits (a special needs trust should be the beneficiary)

• In addition to the typical risk and return assessments done in investment planning, planning for a special needs family will also focus on trust administration and investment management – As a general rule, the individual with special needs should have no

more than $2,000 in his or her name (including custodial accounts and 529 plans)

Topic 7: Dependents With Special Needs – Special Needs Trusts

• Clients who have dependents with special needs should consider creating a special needs trust – These trusts allow the special needs individual to

be the beneficiary of the trust without impacting the individual’s ability to qualify for public assistance programs

Topic 7: Dependents with Special Needs – Income Tax Planning

• Families who itemize deductions on their income tax return are eligible to deduct medical expenses in excess of a 10% floor (10% of the Adjusted Gross Income calculated on their income tax return). Deductible Medical expenses may include: – costs of buying, training, and maintaining a guide dog or other service

animal – fees paid on a doctor’s recommendation for a child’s tutoring by a

teacher specially trained and qualified to work with children who have learning disabilities caused by mental or physical impairments

– cost of tuition, meals, and lodging when attending a school that furnishes special education to help a child to overcome learning disabilities

– admission and transportation to a medical conference concerning the chronic illness of the special needs dependent

– special equipment installed in a home, or for improvements, if their main purpose is medical care

Topic 7: Dependents with Special Needs – Estate Planning

• Family members should have a will to avoid the dependent with special needs receiving assets directly as a result of intestacy law distributions – Assets intended for the individual with special needs should be

directed to the Special Needs Trust to avoid disqualification for government support benefits

• Care-givers should name in their will a guardian for the dependent with special needs – Guardian of the Person and Guardian of the Property need not be

the same individual • Care-givers should draft a Letter of Instruction

– Explains everything a new caregiver should know about the individual with special needs, including information about the child’s daily routine, likes, dislikes, preferred activities, medicines, friends, religious services regularly attended, etc.

Topic 7: Monetary Windfalls

• Financial planners may need to assist with – Evaluating the alternatives of taking a lump-sum

payment or an annuity – Investing the funds wisely – Avoiding irrational exuberance – Income tax issues – Estate tax issues

• First determine whether you need to redefine the scope of the engagement

Topic 7: Monetary Windfalls

• Lump sum vs annuity example – Buck won the Megamillion lottery and was offered

a choice between $20 million today or $800,000 at the beginning of each year for 30 years. What is the IRR on the annuity? • PV = (20,000,000 – 800,000) = -19,200,000 • PMT = 800,000 • N = 29 • FV = 0• Solve for I/Y = 1.31%

Topic 7: Working with Elderly Clients

• Remind elderly clients to keep POA current – Involve the POA in planning so that he/she is aware of clients

wishes should the client become incapacitated – Protects the planner from confidentiality issues in seeking

assistance if the client shows signs of diminished capacity • Assist with housing decisions (CCRCs, downsizing, etc) • Assist with insurance decisions such as Medicare and

Medicare Supplement insurance, and whether long-term care insurance is desirable and affordable

• Communicating Recommendations – Speak slowly and clearly – Split meetings down into shorter, focused segments – Use larger font on printed communications

End of Topic 7