Private Wealth Management: The Complete Reference for the Personal Financial Planner

769 Pages·2009·6.15 MB·English

by  G. Victor Hallman

Private Wealth
Management
The Complete Reference for
the Personal Financial Planner
G. Victor Hallman, Ph.D., J.D.
Member of the Pennsylvania Bar
and Lecturer, Wharton School,
University of Pennsylvania
Jerry S. Rosenbloom, Ph.D.
Frederick H. Ecker Emeritus Professor of Insurance
and Risk Management, Wharton School,
and Academic Director of the Certified
Employee Benefit Specialist Program,
Wharton School, University of Pennsylvania
Eighth Edition
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Contents
Preface xi
Part I Introduction
1. Nature and Objectives of Private Wealth Management 3
Need for Wealth Management Services 4
Wealth Management over a Family’s Economic Lifecycle 4
Focus on Objectives and Planning Strategies 5
Financial Planning Process 15
Case Example – Personal Financial Statements 17
Ethics and Wealth Management 24
2. Environment for Wealth Management 27
Institutional Environment 28
Economic Environment and Wealth Management 43
Tax Environment and Wealth Management 61
3. Valuation Concepts in Wealth Management 65
Capital Accumulation Concepts 66
Valuation Factors for Estate Planning and Wealth Transfer 73
Part II Investment Planning and Financial Management
4. Basic Investment Planning and Strategies 81
Basic Investment Objective 82
Investment Theories 82
Investment, Speculation, and Gambling 95
Factors in the Choice of Investments 96
iii
iv Contents
5. Common Stocks 121
Characteristics of Common Stocks 122
Stock Valuation Concepts 122
Portfolio Development and Analysis (The Investment
Process) 129
Diversifying a Common Stock Portfolio 133
Decisions Concerning Selling Common Stocks 133
Dollar-Cost Averaging 133
Types of Orders in Buying and Selling Common Stocks 134
Margin Accounts 135
Selling Short 136
Investment Categories of Common Stock 136
Some Theories of Common Stock Investment 139
The Case for Long-Term Investments in Common Stocks 140
6. Real Estate and Other Equity Investments 147
Real Estate 147
Oil and Gas Ventures 157
Other Tax Shelters 157
Impact of Passive Activity Loss Rules 157
Put and Call Options 159
New Issues or Initial Public Offerings 161
Commodity Futures Trading 161
Gold and Other Precious Metals 162
Art, Antiques, Coins, Stamps, and Other Collectibles 163
7. Fixed-Income Investments 165
Types of Fixed-Income Investments 166
Ways of Taking Returns from Bonds 166
Corporate Bonds 168
Municipal Bonds (Munis) 169
U.S. Government Obligations 173
Market Discount Bonds 176
Zero Coupon Bonds (Zeros) 177
Preferred Stocks 178
Guaranteed Principal Fixed-Income Investments 179
Cash Equivalents (Liquid Assets) 180
Conversion Privileges in Fixed-Income Securities 181
Bond Ratings and Investment Quality 182
Strategies for Investing in Fixed-Income Securities 183
Contents v
8. Other Investment Companies and Alternative Investments 187
Kinds of Investment Companies 187
Why Invest in Mutual Funds? 188
Limitations of Mutual Funds 188
Types of Funds and Planning Considerations 188
Unit Investment Trusts 191
Regulation of Investment Companies 191
How to Invest in Mutual Funds 192
Withdrawals from and Redemptions and Exchanges
of Mutual Funds 192
Mutual Funds and Their Investment Objectives 193
Index Funds 198
Exchange-Traded Funds (ETFs) 199
Tax-Managed Funds 200
Other Types of Funds 200
Mutual Fund Performance 201
Mutual Fund Expense Ratios 203
Transaction Costs 204
Factors Involved in Selecting Mutual Funds 204
Tax Aspects of Mutual Funds 205
Closed-End Companies 208
Look Out for Buying a Dividend 208
Hedge Funds and Private Equity Funds 208
9. Asset Allocation Strategies and Financial Management 211
Fundamentals of Asset Allocation 211
Steps in the Asset Allocation Process 212
Investment Policy Statements 212
Financial Management 225
Part III Income Tax Planning
10. Income Tax Fundamentals 237
The Federal Income Tax on Individuals 237
The Federal Income Tax on Corporations 254
Pass-Through Business Entities 257
Federal Income Taxation of Trusts and Estates 258
State and Local Income Taxes 260
11. Income Tax Reduction and Management Techniques
for Individuals 261
Tax Elimination or Reduction 261
Shifting the Tax Burden to Others 267
vi Contents
Allowing Wealth to Accumulate without Current Taxation and
Postponing Taxation 269
Taking Returns as Capital Gains 271
Taxation and the Capital Gains Lock-In Problem 271
Part IV Financing Education Expenses
12. Education Planning 283
Importance as a Financial Objective 283
Nature and Growth of Education Costs 284
Estimating Education Costs 284
Financial Aid Considerations 285
Tax “Breaks” for Education Costs 286
Strategies in Planning for Education Costs 288
Advance Funding for Education Costs 289
Part V Retirement Planning, Stock Compensation,
and Other Employee Benefits
13. Retirement Needs Analysis, Social Security,
and Employer-Provided Qualified Retirement Plans 305
Retirement Needs Analysis 306
Social Security (OASDHI) 311
Characteristics of Employer-Provided Retirement Plans 317
Regulation of Qualified Retirement Plans 329
Investment Considerations for Retirement Plans 332
Nonqualified Retirement Plans 336
Pension Plans 337
Profit-Sharing Plans 340
Savings (Thrift) Plans 341
Cash or Deferred Arrangements [Section 401(k) Plans] 342
Illustration of Before-Tax Contributions (Investing) Compared
with After-Tax Investing (or the Power of Deferral) 346
Stock Bonus Plans and Employee Stock Ownership Plans
(ESOPs) 350
Hybrid Qualified Retirement Plans 351
Retirement Plans for the Self-Employed (HR-10
or Keogh Plans) 352
14. Other Employer-Provided Retirement Plans
and Employee Benefits 357
Other Employer-Provided Retirement Plans 357
Other Employee Benefits 364
Contents vii
15. Individual Retirement Accounts and Annuities (IRAs) 367
Basic Concepts 368
Types of IRAs 368
Planning Issues for IRAs 380
16. Planning for Taking Distributions from Retirement Plans 385
General Considerations Affecting Planning 386
Taxation of Benefits from Qualified Plans and IRAs 388
Planning for Distributions from Qualified Retirement Plans and
IRAs 406
17. Individual Investment Annuity Contracts 415
Fundamental Purposes of Annuities 416
Types of Individual Annuities 416
Parties to the Annuity Contract 419
Phases of Annuities 419
Investment Returns on Annuities 420
Expense Charges on Annuities 422
Withdrawals and Loans 424
Exchanges of Annuities 424
Fixed or Variable Annuity (Payout) Options 424
Annuity Payment Options 424
Annuity Death Benefits 425
Guaranteed Minimum Benefits Under Variable Annuities
(VAs) 426
Underwriting of Individual Annuities 428
Taxation of Nonqualified Annuities 428
Other Individual Annuity Arrangements 431
Using Life Insurance Values to Provide Retirement
Income 431
18. Employee Stock Compensation Plans 433
Types of Plans 434
Nonstatutory Plans 437
Provisions of Stock Option Plans 442
Valuation of Stock Options 445
Some Caveats Concerning Stock Options
andOther Plans 448
Planning Issues Regarding Stock Options
and Other Stock Plans 448
viii Contents
Part VI Charitable Giving
19. Charitable Giving Techniques 453
Basic Tax Principles 454
Planning Techniques 456
Part VII Insurance Planning and Risk Management
20. Basic Insurance Principles and Selecting Insurers 475
Personal Risk Management 475
Basic Insurance Principles 476
Considerations in Choosing an Insurer 477
Considerations in Choosing an Agent or Broker 480
Information about Financial Advisers 480
21. Life Insurance and Social Security 483
Sources of Life Insurance Protection 484
Types of Individual Life Insurance Contracts 486
Definitions of Life Insurance for Income Tax Purposes 503
Planning and Using Life Insurance 510
Substandard Risks 511
Nonmedical Life Insurance 512
What Actions Can an Uninsurable Person Take? 512
Group Life Insurance 512
How Much Life Insurance Is Needed? 514
Life Settlement Transactions 517
22. Health and Disability Income Insurance 519
Sources of Health Insurance Protection 520
Disability Income (Loss-of-Time) Coverages 520
Medical Expense Coverages 527
Individual Health Insurance Policy Provisions 539
Health Savings Accounts and Health Reimbursement
Arrangements 541
23. Long-Term Care Insurance and Medicaid Planning 545
Nature of Exposure 545
Basic Planning Approaches 546
Long-Term Care (LTC) Insurance and Other
Arrangements 547
Medicaid Planning for Long-Term (Custodial) Care 552
Contents ix
24. Property and Liability Insurance 561
Property Insurance 562
Personal Liability 562
Homeowners Insurance 564
Automobile Insurance 568
Other Property and Liability Policies to Consider 571
Part VIII Estate Planning
25. Estate Planning Principles 579
Objectives of Estate Planning 580
Methods of Property Disposition 580
Property and Property Interests 581
What Is Meant by the “Estate”? 588
Settling the Estate 592
Trusts in Estate Planning 594
26. The Transfer Tax System 603
Impact of Economic Growth and Tax Relief Reconciliation
Act (EGTRRA) 604
Applicable Credit Amount (Unified Credit) and Applicable
Exclusion Amount 604
Federal Gift Tax 605
Federal Estate Tax 613
Federal Generation-Skipping Transfer (GST) Tax 622
Possible Estate Tax Changes 628
27. Lifetime Giving and Other Intrafamily Techniques 629
Making Lifetime (Inter Vivos) Gifts to Noncharitable
Donees 630
Sales within the Family 646
Loans to Family Members 649
28. Marital Deduction Planning, Postmortem Planning,
and Estate Liquidity 651
Marital Deduction Planning 651
Postmortem Estate Planning 665
Estate Liquidity 668
29. Life Insurance in Estate Planning 671
Taxation of Life Insurance 671
How to Arrange Life Insurance 678
Gifts of Life Insurance 686