Cfp Module 1 Part 1

Front 1

Name the 6 Steps of the Financial Planning Process.

Back 1

Front 2

In step 1 - Establishing and Defining the Client-Planner Relationship, what is involved in “mutually defining”?

Back 2

(1) identifying the service(s) to be provided
(2) disclosing the financial planner’s compensation arrangements
(3) determining the responsibilities of the client and the financial planner
(4) establishing the duration of the engagement
(5) providing any additional information necessary to define or limit the scope of the engagement.

Front 3

That does the savings bond education tax exclusion allow for?

Back 3

The savings bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and I bonds issued after 1989.

Bondholders must be at least 24 years old before the bond’s issue date.

Bondholders must be at least 24 years old before the bond’s issue date.

To qualify for this exclusion, the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent at certain postsecondary educational institutions must incur tuition and other educational expenses.

Persons with incomes above certain thresholds may not be eligible to participate.

Front 4

Eligible educational expenses include.

Back 4

Includes tuition and fees (such as lab fees and other required course expenses) required for enrollment or attendance at an eligible educational institution.

Payments to qualified state tuition programs are also eligible.

Eligible expenses must be incurred during the same tax year in which eligible bonds are redeemed.

The amount of eligible expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance, and other tuition reduction.

Front 5

Eligible educational expenses do not include.

Back 5

Eligible educational expenses do not include expenses relating to any course or other education involving sports, games, or hobbies are eligible only if required as part of a degree or certificate-granting program.

The costs of room and board, as well as books, are not eligible expenses.

The amount of eligible expenses is reduced by the amount of any scholarships, fellowships, employer-provided educational assistance, and other tuition reduction.

Front 6

Education Tax Exclusion Income phaseout

Back 6

$71,100–$86,100 (single) and $106,650– $136,650 (joint) for 2011

Front 7

What are the rules of thumb for the following debt types:
- Consumer debt
- Housing Costs
- Total Debt

Back 7

Consumer debt - 20% or less of net monthly income
Housing costs - 28% or less of gross monthly income
Total debt - 36% or less of gross monthly income

Front 8

Emergency Fund Ratio

Back 8

= cash&cash equivalents / expenses

*the emergency fund should be between 3-6 months of expenses

Front 9

7 Reasons for Using a Budget

Back 9

•To establish specific financial goals, including amounts and time frames
•When it is important to let everyone in the family know why spending is being limited in one area or another
•When the family economics are complex—e.g., when income and/or expenses are widely fluctuating
•When it is important to keep track of spending in one specific area or by specific individuals
•When the family believes it is important to establish financial incentives for its members
•Improving control of household expenses
monitoring performance of specific investments such as securities and real estate meeting savings and wealth accumulation goals such as education funding or vacation, new car, and retirement planning

Front 10

5 Advantages Budgeting

Back 10

•Budgeting may provide motivation to accomplish financial goals.
•Budgeting provides a way to measure financial performance. It is a self-evaluation of progress.
•Budgeting reveals wasteful or inefficient spending patterns.
•Budgeting requires the family to identify and deal with potential financial problems before they arise and consider possible alternative courses of action.
•Budgeting may be used to establish financial goals and determine the feasibility of meeting them.

Front 11

4 Disadvantages Budgeting

Back 11

•If inaccurate information is used to develop the budget, it will be of little or no value.
•Using a budget as an absolute control of spending may preclude a client from taking advantage of opportunities that might aid in the reaching of goals.
•Keeping accurate spending records is often difficult, and some people resent it. However, if the client does not keep accurate spending records, the budgeting process will be wasted and will merely increase the client’s stress.
•For the client who is successfully working toward his or her financial
goals, it may seem like an intrusion or an indication of mistrust.

Front 12

Guidelines for creating a budget (8)

Back 12

1 .Limit the budget period to no more than one year.
2. Keep the budget simple and short.
3. Keep it flexible.
4. Avoid information that won’t add to the process. (i.e. location of purchases)
5. Design the budget with specific goals in mind.
6.Budgets should be consistent in form and content from year to year.
7. Budgets are not only guides to spending and saving, they are tools for self-evaluation.
8.When designing the budget, keep in mind things that may be different than in the past.

Front 13

Steps in creating a budget.

Back 13

Step 1. Identify the client’s financial goals and determine what is required to reach them.
Step 2. Estimate income from all sources. If income sources fluctuate two budgets should be created - 1) expected income 2) more conservative income projections
Step 3. Estimate expenses. (identify fixed and variable)
Step 4. Compare income and expenses to determine if expected expenses are equal to or less than expected income.
Step 5. Make adjustments (if expenses are too high, attempt to identify potential sources of additional income or places where expenses may be reduced or are lower than expected income, apply the excess to the categories of expenses that will bring the family closer to its goals.)
Step 6. Present each category of income and expense as a percentage of the total. (used in year to year comparisons)

Front 14

Consumer Debt

Back 14

short-term debt that is used by consumers to acquire products and services.

Front 15

Secured Debt

Back 15

Secured debt is one for which collateral is used to back the promise to repay.

If the borrower does not repay the loan, the lender can repossess the collateral. An auto loan typically is secured.

Generally interest rates are lower on secured debt than unsecured debt.

Front 16

Unsecured Debt

Back 16

With unsecured debt, no specific property is pledged.

Credit cards are one form of unsecured debt.

Generally interest rates are higher on unsecured debt than secured debt.

Front 17

Leverage

Back 17

The an advantage in using debt to finance an appreciating asset.

Front 18

Additional costs of a mortgage (4)

Back 18

Additional costs of a mortgage include:
1. loan origination fees
2. appraisal fees
3. credit reporting costs
4. title search costs
4. points, which represent prepayment of interest.

Front 19

Mortgage Points

Back 19

-Represent prepayment of mortgage interest.

-Generally tax deductible.

-One point is equal to 1% of the mortgage amount. If the mortgage amount is $100,000 and the lender is charging two points, the cost of the points would be $2,000.

-Typically, the borrower is offered several interest rate and point combinations by the lender.

Higher points will be offered with a lower interest rate, and vice versa.

-If the buyer plans to stay in the house for a short period of time the higher interest rate (low points) may be better because the short-term costs are reduced.

Front 20

Tax Implications of Home Ownership - Mortgages (3)

Back 20

1. Points paid are generally deductible for the buyer of a home. 2. Home mortgage interest is generally deductible.
3. Capital gains on a home are taxed only under certain circumstances.

Front 21

Types of Mortgages (10)

Back 21

- Fixed-rate mortgage
- Biweekly mortgage
- Adjustable rate mortgage
- Interest-only mortgage
- Balloon mortgage
- Graduated payment mortgage
- Conventional mortgages
- VA mortgages
- FHA mortgages
- Reverse mortgage

Front 22

Fixed-rate mortgage.

Back 22

- Most widely used
- The interest rate does not change over the repayment period
- Typically long (25 - 30 years)
- The payment amount is fixed at the outset, based upon the interest rate charged on the loan, the repayment period, and the original loan balance
- Payments include both interest and principle (generally made monthly). Initially the interest portion is larger and reduces over time.

Front 23

Biweekly mortgage

Back 23

- Payments on a fixed-rate mortgage are sometimes structured to be payable on a biweekly basis
- 26 payments are made each year
- Annual amount paid is higher. The additional payment is applied to the mortgage principle.

Front 24

Adjustable Rate Mortgage

Back 24

- Features an interest rate that varies with interest rate changes in the economy
- The payment amount also varies
- Changes in rates are usually tied to changes in a stated economic index.
- Typically feature limits on how often and how much interest rates may change.
- Many have an initial period during which no interest rate changes will occur (e.g., five years).
- Borrowers bear most of the risk of changes in interest rates and therefore generally the initial rates are lower.

Front 25

Interest-only Mortgage

Back 25

- Most are arranged so that interest rates vary with the market.
- Interest rate that is applied to the loan is usually tied to an index such as the LIBOR
- Borrowers make only interest payments for some predetermined period (e.g., five, ten, or twenty years)
- Lower initial payments, significantly higher future payments
- Does not create owner-equity
- Caution should be encouraged when using this type of mortgage

Front 26

Balloon Mortgage

Back 26

- The borrower makes fixed payments, based upon the established interest rate for a long-term mortgage
- Payments are made only for a short duration, frequently five or seven years, and then the borrower is required to pay off the remainder of the mortgage in a lump sum
-Payments with some loans may be limited to interest only.
- Interest rate on a balloon mortgage is usually more favorable than for typical 30-year mortgages
- Balloon mortgage may be appropriate for borrowers who plan to sell their homes before the fixed payment period is over.

Front 27

Graduated Payment Mortgage

Back 27

- Payable over a long time period, such as 30 years, and has a fixed interest rate.
- Payments are lower for the first few years (although they sometimes increase each year), then adjust to a higher fixed payment
- May be appropriate for people who anticipate increases in income with some certainty
- Caution should be used as it may result in the borrower having to come up with additional money when the house is sold.

Front 28

Disadvantages of a Graduated Payment Mortgage

Back 28

- Higher payments during the second period of the loan than if the loan had been a standard fixed-rate loan
- Higher interest costs
- Negative equity buildup in the early years

Front 29

Conventional Mortgages

Back 29

- Made by commercial lenders in the private sector
- aka Conforming Loan - because they conform to Fannie Mae and Freddie Mac dollar limit requirements

Front 30

Conforming Loans

Back 30

- Conventional Mortgages

- Loans that conform to Fannie Mae and Freddie Mac dollar limit requirements

Front 31

Jumbo or Nonconforming Loans

Back 31

- Loans that do not conform to Fannie Mae and Freddie Mac dollar limit requirements
- aka Subprime Loans
- Have higher down payment and/or higher interest rate requirements.
- Loans for those with damaged credit may also be called nonconforming.

Front 32

VA mortgages

Back 32

-Guaranteed by the Department of Veterans Affairs
- Available only to eligible veterans.
- May be fixed-rate or graduated payment mortgages

Front 33

FHA mortgages

Back 33

- Guaranteed by the Federal Housing Administration
- May be fixed-rate or graduated payment mortgages

Front 34

Reverse Mortgage

Back 34

- Making use of the equity in a home to achieve goals
- aka home equity conversion mortgage (HECM— HUD/FHA) or HomeKeeper mortgage (Fannie Mae)
- Allows senior homeowners to receive income from their homes (generally) without having to make any repayments for as long as they remain in the house
- Does not require repayment as long as the home is the borrower’s principal residence
- HUD/FHA guarantees that the maximum loan repayment amount will not exceed the value of the home.

Front 35

Core Requirements for a Reverse Mortgage

Back 35

Core requirements:
1) at least 62 years old
2) must own the home
3) must occupy the home as the primary residence
4) May have to attend a consumer information session given by an approved counselor

Front 36

Properties that qualify for reverse mortgage:

Back 36

1) Single family homes or 1–4 unit homes with one unit occupied by the borrower
2) HUD-approved condominiums
3) Manufactured homes and leased land

Front 37

Reverse Mortgage Amount is based on:

Back 37

The mortgage amount will be based on:
•Age of the youngest borrower
•Current interest rate
•Lesser of appraised value or the FHA insurance limit

Front 38

5 Reverse Mortgage Funding Plans

Back 38

•Tenure. Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
•Term. Equal monthly payments for a fixed period of months selected.
•Line of credit. Unscheduled payments or in installments, at times and in amount of borrower’s choosing until the line of credit is exhausted.
•Modified tenure. Combination of line of credit with monthly
payments for as long as the borrower remains in the home.
•Modified term. Combination of line of credit with monthly payments for a fixed period of months selected by the borrower

Front 39

Tenure Reverse Mortgage Funding Plans

Back 39

Equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

Front 40

Term Reverse Mortgage Funding Plans

Back 40

Equal monthly payments for a fixed period of months selected.

Front 41

Line of credit Mortgage Funding Plans

Back 41

Unscheduled payments or in installments, at times and in amount of borrower’s choosing until the line of credit is exhausted.

Front 42

Modified Tenure Mortgage Funding Plans

Back 42

Combination of line of credit with monthly payments for as long as the borrower remains in the home.

Front 43

Modified Term Mortgage Funding Plans

Back 43

Combination of line of credit with monthly payments for a fixed period of months selected by the borrower

Front 44

TALC

Back 44

- The total annual cost of the loan
- Identifies what the all-inclusive interest rate would be if the lender could only charge interest and not charge any other fees

Front 45

Considerations When evaluating Buying vs. Renting (6)

Back 45

- Length of time the home will be owned (longer the time period the more favorable buying looks)
- Cash outflows resulting from renting (i.e. security deposit, periodic rent payments (assume annual increases), insurance costs, and utility costs)
- Inflows resulting from renting (i.e.return of a security deposit, inflows relating to the increased savings)
- Cash outflows resulting from home ownership (i.e.down payment, closing costs, monthly payment of mortgage principal and interests, property taxes, insurance costs, utilities, and home maintenance costs, expected loss)
- Cash inflows relating to home ownership (i.e. reduction in taxes, rental income and capital gains)
- Marginal tax bracket (higher tax bracket greater tax savings)

Front 46

Refinancing a Home

Back 46

- Allows the homeowner to take advantage of declining interest rates
-Able to reduce their monthly payments, reduce the time period for repayment, or both
- Allows home owner to (potentially) free up some of the equity in the home
- If refinancing to free up equity when interest rates are higher payments may be increased or the time period may be extended.

Front 47

Considerations When Refinancing

Back 47

- Costs
- New appraisal may be necessary
- Same costs as original mortgage (i.e. closing costs)
- Expected length of time the home will be owned

Front 48

Home Equity

Back 48

- The difference between the market value of the home and the principal balance of the mortgage
- It is an asset that can be used to
achieve goals
- State law may preclude the use of home equity loans for any purpose unrelated to the home.

Front 49

Second mortgage

Back 49

- The amount of credit is based on a percentage of the individual’s equity in the home, such as 70%, 75%, or 80%.
- Secured debt
- Home equity loan
- Second mortgage holder gets paid second if there is enough money any remaining balance on the loans is still owed by the borrower.

Front 50

Home Equity Line Of Credit

Back 50

- The amount of which is based upon the equity in the home
- line of credit that may be accessed at any time once it has been established
- No repayment obligation exists until funds from the line of credit are accessed
- Interest is generally tax deductible (restrictions apply)
- Using an equity line of credit in conjunction with consumer credit can be a powerful financial management tool.

Front 51

Steps for planning for special goals (8):

Back 51

Step 1: Define Goals in Terms of Dollar
Amounts and Time Frames
Step 2: Determine Existing Resources
Step 3: Determine if Additional Resources Are Needed
Step 4: Consider Potential Strategies/Products for Achieving Goals
Step 5: Consider Client Constraints Affecting Selection of Vehicles and Strategies
Step 6: Select Appropriate Vehicles and Strategies
Steps 7 and 8: Implement the Action Plan, and Schedule and Monitor Results

Front 52

Types of Leases

Back 52

- Closed-end lease
- Open-end lease

Front 53

Closed-End Lease

Back 53

- aka fixed-cost lease
- The lessee agrees to pay a stated monthly fee for the use of the asset for a specified period of time
- May be an automatic adjustment for inflation for long-term leases
- At the end of the lease period the lessee can walk away from the asset
- Usually have no additional costs at the end of the lease (may have damage provision)
- More often used for businesses to acquire equipment
- An option for consumers wanting to get an automobile

Front 54

Open-End Lease

Back 54

- aka finance or equity lease
- Generally has a lower monthly payment
- At the end of the lease lessee may owe the lessor additional money if the asset rents or sells for an amount that is less than the value projected at the time the lease was initiated
- Often used for consumer automobile acquisition

Front 55

Considerations in the Lease versus Buy Decision -
Consider Leasing an Automobile if (6):

Back 55

- Wants to have a new car every two to four years
- Doesn’t like to borrow money
- Does not have the funds for the 20% or more down payment
-Will not drive the car more than 12,000 to 15,000 miles per year
- Uses his or her car for business
- Needs a lower monthly car payment and is willing to give up ownership for the lower payment

Front 56

Considerations in the Lease versus Buy Decision -
Consider Buying an Automobile if (4):

Back 56

-Keeps a car for many years
-Drives well over 15,000 miles per years
- Carries the state minimum of liability insurance
- Wants to stop making payments eventually

Front 57

Considerations / Issues when Leasing - Automobile (6)

Back 57

- Leasing companies often require higher limits of liability

- In some states, the cost of
registering a leased vehicle is higher than that for registering a purchased vehicle.

- At the end of a leasing period, any mileage over a stated amount and any damage or apparent abuse will result in additional costs.

- Leasing generally does not affect any other lines of credit a client may have.

- Leases often require a damage or security deposit. (Opportunity cost of not having these funds available)

- Some lease agreements require a “capitalized cost reduction” payment at the inception of the lease. This is a nonrefundable payment that serves to reduce the remaining value of the asset that is used to determine the lease payments. It is essentially a down payment on an asset that is to be rented.

Front 58

Considerations in the Lease versus Buy Decision -
Consider Leasing an Home if (5):

Back 58

- Does not have the funds for a down payment
- Has temporary housing need
- Expects his or her housing needs to change substantially in the foreseeable future and does not now own a home
- Is looking for a job or changing careers, which would likely require him or her to move within a few years
- Is not willing to deal with the general maintenance requirements of ownership

Front 59

Considerations in the Lease versus Buy Decision -
Consider Buying a Home if (4):

Back 59

- Intends to live in an area for many years
- Wants to improve the appearance or structure of the residence
- Can benefit from the income tax advantages of ownership

Front 60

Considerations / Issues when Leasing - Home (6)

Back 60

- Income tax considerations. Generally, the interest portion of the monthly mortgage payment for a residence is deductible from income.
- Property taxes paid are generally
deductible for tax purposes.
- A renter who improves a rental
unit may do so at his or her expense; however, when the renter leaves, the owner of the unit benefits from the improvement. If anything was attached to the structure by the renter, generally the renter must leave it as a fixture, and it becomes the property of the owner.

Front 61

Annual inflation rate of college costs over the past 30 years

Back 61

8%,

Front 62

Section 529 Plans

Back 62

- Called qualified tuition programs by the IRS
- Vary by state
- Allow a substantial amount of money to be saved for college on a tax-free basis
- Many allow out-of-state contributions, and do not require attendance at an in-state college.
- Account owner controls distribution of the funds
- Distributions made to pay for qualified educational expenses are tax free
- Distributions that do not pay for qualified expenses taxable as ordinary income and may also be subject to a 10% penalty


- Fees associated with plans should be evaluated

Front 63

Qualified Educational Expenses include:

Back 63

- Tuition
- Mandatory fees
- Books
- Supplies
- Equipment required for enrollment or attendance
- Room and board expenses may also be eligible.

Front 64

Transfer Rules for Section 529 Plans

Back 64

- Can be transferred to: a child or grandchild, a stepchild, siblings and their children, parents and step-parents, “in-laws,” spouses
of the preceding people, and a child’s first cousin.

- May be rolled into another 529 plan.

Front 65

Coverdell Education Savings Accounts

Back 65

- Originally created by Congress in 1997
- aka Education IRA
- EGTRRA increased the annual contribution limit to $2,000 (subject to modified adjusted gross income limits)
- Distributions may be used for elementary, secondary or education expenses for special needs students
- Must be used by the time the beneficiary reaches age 30
- Accounts may be owned by the student or the student’s parent.
- Beneficiaries may change
- MAGI phaseouts for contributions to a Coverdell plan: $95,000–$110,000 (single) and $190,000–$220,000 (joint).

Front 66

MAGI phaseouts for contributions to a Coverdell plan:

Back 66

$95,000–$110,000 (single) and $190,000–$220,000 (joint).

Front 67

Hope Tax Credit

Back 67

- Up to $1,800

- 100% of $1,200 plus 50% of the next $1,200 per student only for the first two years of college

- Cannot claim both the Hope and Lifetime Learning credits in the same tax year for the same student

- Has been superseded by the American Opportunity Credit

Front 68

Lifetime Learning Tax Credit

Back 68

- Up to $2,000
- 20% of $10,000 per tax return in any year with qualified education expenses

- Cannot claim both the Hope and Lifetime Learning credits in the same tax year for the same student

Front 69

Education Expense Tax Deduction (provided by EGGTRA)

Back 69

- Extended through 2010
- The allowable deduction is either $4,000 or $2,000, depending on AGI.

Front 70

MAGI phase out for education tax credits

Back 70

- MAGI is between $50,000 and $60,000 for single filers or $100,000 and $120,000 for joint filers

- Completely phased out when MAGI is over $60,000 for single filers and $120,000 for joint filers.

Front 71

MAGI phaseout for Education Tax Deduction

Back 71

- The $4,000 higher education expense deduction is eliminated at an AGI of $65,000/$130,000 (single/joint)

- $2,000 deduction is eliminated at an AGI of $80,000/$160,000 (single/joint).

Front 72

The American Opportunity Tax Credit

Back 72

- Passed in February 2009, and has been extended for 2011 and 2012

- Credit of $2,500 (100% of the first $2,000 of expenses and 25% of the next $2,000) is available for college years 1-4.

- Use of this credit would eliminate the ability to use the standard Hope tax credit during years 1 and 2or the Lifetime Learning Credit in years 3 and 4. Expenses after year four would potentially qualify for the Lifetime Learning Credit.

Front 73

MAGI phaseout for The American Opportunity Tax Credit

Back 73

- Income phaseout is $80,000–$90,000 for single filers $160,000–$180,000 for joint filers

Front 74

Two elements of structuring a college savings plan.

Back 74

1. Maintaining the funds in a manner that will take maximum advantage of tax deferral opportunities and
2. Selecting proper investment vehicles to achieve the greatest possible return consistent with preservation of the funds

Front 75

The savings bond education tax exclusion permits:

Back 75

- Permits qualified taxpayers to exclude from their gross income all or a portion of the interest earned on the redemption of eligible Series EE and I bonds issued after 1989

- Bondholder must be at least 24 before the bonds issue date
- The taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent must incur educational expenses
- A child can be named as a beneficiary
- Only valid owners may be the tax payer or spouse
- Persons with incomes above certain thresholds may not be eligible to participate. years old before the bond’s issue date

Front 76

MAGI phaseout for The savings bond education tax exclusion

Back 76

The income phaseout range for 2011
$71,100–$86,100 (single) and $106,650– $136,650 (joint)

Front 77

Custodial Education Accounts

Back 77

Uniform Gifts to Minors Act (UGMA)

Uniform Transfers to Minors Act (UTMA)

- involve naming an individual as the manager of property belonging to a minor child

- Some states may not allow for both

- UGMA may limit the type of investments that can be used

- The child/ beneficiary must be given the right to possession of the property on reaching the age of majority (age 18 in most states)
- relatively inflexible in avoiding the so-called kiddie tax

Front 78

Concerns with UGMA /UTMA accounts (2)

Back 78

1) The child/ beneficiary must be given the right to possession of the property on reaching the age of majority (age 18 in most states)

Child may not use the funds for education.

2) Relatively inflexible in avoiding the so-called kiddie tax

Front 79

Kiddie Tax

Back 79

- Applies to unearned income greater than $1,900 (indexed annually for inflation) received by children under age 19 or under age 24 if a full-time student
- taxed at the child’s marginal tax rate

Front 80

Three basic forms of trusts used in college education funding:

Back 80

• Minor's Trust- established under the provisions of Internal Revenue Code (IRC) Section 2503(c)

•Current Income Trust - structured according to the terms of IRC Section 2503(b)
• A demand, or Crummey invasion, trust

Front 81

Minor’s trust [2503(c)]

Back 81

- Designed to use the $13,000 ($26,000 for a married couple) annual gift tax exclusion

- May permit accumulation of income on behalf of the child

- Provides that a gift to an individual under 21 will not be considered a gift of a future interest as long as the property and its income are payable to the child at 21

-Permits income to escape the kiddie tax by allowing the trustee to accumulate more income at the trust’s separate tax bracket

-Income retained in trusts being taxed at the highest personal rate, even at relatively low levels

Front 82

Current income trust [2503(b)]

Back 82

- Income must be paid out at least annually to the beneficiary with no discretion left to the trustee to accumulate income
- The trust property, or principal, need not be distributed to the child at any specified age.
- Ensures the segregated funds are used only for the purpose they were intended
- Important to invest in appreciating assets that do not pay out income

Front 83

Crummey trust

Back 83

- Transfers money from one individual to a trust for the benefit of another

- Avoids gift taxes and keep the money out of the estate of the person making the gifts

- Permits the beneficiary to withdraw from the trust an amount equal to the lesser of the annual addition to the trust or the annual gift tax exclusion

- Allows distribution at any age chosen by the grantor

- If the demand trust accumulates income and it is taxed to the trust itself, the tax rates are high.

Front 84

How can a retirement plan be used to fund college expenses:

Back 84

- 72(t) distributions
- Funds withdrawn to pay for qualified higher education expenses for the taxpayer, spouse, children, or grandchildren may qualify for an exemption from the 10% penalty (taxed as ordinary income)

Front 85

IRC Section 72(t)

Back 85

- “substantially equal payment” exception
- Avoids the 10% penality as long as the participant withdraws roughly equal amounts from his retirement plan annually for at least five years or until reaching age 591/2 (whichever is later)
- retirement money can be used for any reason.

Front 86

General rule for selecting investment vehicles to fund a savings program for college

Back 86

- Investments that generate growth of principal should be more heavily relied on for a child who may be subject to the kiddie tax.

- If the kiddie tax is not a consideration, investments producing a high current yield may be sought.

Front 87

Considerations when using annuities to fund education.

Back 87

- Considered during the growth period of college funding
-The parent may maintain ownership, and tax advantages still can be achieved.
- Tax-deferred growth
- Payments geared toward the child’s college entry date
- If the money is taken out before the annuity owner is 591/2, there is a 10% penalty tax on any amounts above original basis/investment.
- Gain in value is taxable

Front 88

Considerations when using insurance to fund education.

Back 88

- Considered during the growth period of college funding
- Costs associated with a life insurance policy that likely will reduce potential net returns
- Consider a permanent life insurance policy only when there is a need for the insurance—i.e., a death benefit
- The parent may maintain ownership, and tax advantages still can be achieved.
- Loans may be taken against the policy’s accumulated cash value and used to pay college expenses

Front 89

Scholarships

Back 89

- Gifts of money applied toward a student’s education

- Full or partial scholarships

- Two types:
1) Available for academically or athletically gifted students
2) Based on financial need

- Scholarship funds may reduce monies available from other sources

Front 90

Types of Federal Education Grants

Back 90

- Pell grants
- Federal Supplemental Educational Opportunity Grants (FSEOGs)
- (SMART Grant)
- Teacher Education Assistance for College and Higher Education (TEACH) Grant Program

Front 91

Federal Grants

Back 91

- Federal grants are gifts by the federal government to a student to be applied toward education funding

- The student is not required to pay back the sum that the government provides.

Front 92

Pell grants

(type/desc, eligibility and amount)

Back 92

- Federal Grant
- Distributed on the basis of severe financial need

Eligibility:
- Undergraduate students only
- Part-time and Full-time

Amount:
- Current maximum is $5,550
- Amount varies year to year
- Part time students are eligible for reduced grants.

- Seldom (if ever) be enough to completely pay tuition expenses

Front 93

Federal Supplemental Educational Opportunity Grants (FSEOGs)

(type/desc, eligibility and amount)

Back 93

- Funded by the federal government but are administered by individual schools
- Needs based
-Pell grant recipients are given highest priority in receiving FSEOGs.

Eligibility:
- Undergraduate students only
- Part time or full time students

Amount:
- Awards are limited based on the amount available
- Current amounts range from $100 to $4,000

Front 94

Academic Competitiveness Grant

(type/desc, eligibility and amount)

Back 94

- Created in 2006
-
- Provided in addition to the Pell Grant

Eligibility:
- Full-time students only
- Must be eligible for the Pell Grant

Amount:
- up to $750 for the first year of undergraduate studies
- up to $1,300 for the 2nd year

Front 95

National Science and Mathematics Access to Retain Talent Grant

(eligibility)

Back 95

- New Grant

Eligibility:
- Full-time students only
- Must be eligible for the Pell Grant

Front 96

SMART Grant

(type/desc, eligibility and amount)

Back 96

-New Grant

Eligibility:
- upper-division students
- majoring in physical, life, or computer sciences; mathematics; technology; engineering; or in a foreign language
- Min 3.0 GPA

Amount:
- Update to $4,000 for years 3 and 4 in an undergraduate program.

Front 97

Teacher Education Assistance for College and Higher Education (TEACH) Grant Program

(type/desc, eligibility and amount)

Back 97

- New Grant
- Established as part of the College Cost Reduction and Access Act of 2007


Eligibility:
- Students who intend to teach in a public or private elementary or secondary school that serves students from low-income families
- recipients must agree to serve as a full-time teacher in a high-need field in a public or private elementary or secondary school that serves low-income students

Amount:
- up to $4,000 per year
- reduced amounts for part-time students

- Failure to complete this service obligation will result in a conversion of all amounts received to a Federal Direct Unsubsidized Stafford Loan

Front 98

Types of Federally Funded Education Loans

Back 98

- Perkins Loan
- Stafford Loan
- Parent Loans to Undergraduate Students (PLUS)
- Direct Consolidation Loans

- All loans come directly from the U.S. Department of Education

Front 99

Perkins loans

(type/desc, eligibility and amount, rate and repayment)

Back 99

- Low interest rate loans funded by the federal government but administered by individual schools

Eligibility:
- available both to undergraduate and graduate students
- need-based
- available to students who are attending on at least a half-time basis and who have an exceptional financial need

Amount:
- Limits apply to the amount of funds that may be borrowed.

Rate:
- 5% interest rate
- Not charged during the period that the individual is a student.

Repayment:
- Graduates are not charged interest until nine months following graduation, leaving school, or dropping to less than half time, at which time repayment begins
- typically for 10 years

Front 100

Stafford loans

Back 100

- aka William D. Ford Direct Stafford Loans
- Include both direct subsidized and direct unsubsidized loans
- Loans may be partially subsidized
- Loans based on financial need are generally subsidized

Rate:
- 6.8% fixed rate
- for undergraduates first disbursed
between:
July 1, 2010, and July 1, 2011, have a 4.5% rate
- July 1, 2011, and July 1, 2012, have a 3.4% rate
-
Repayment:
- Various repayment options and term extensions are available
- Typically 10 year repayment

Front 101

Parent Loans to Undergraduate Students (PLUS)

Back 101

- Parents may borrow funds for their children’s undergraduate studies
- Not needs based
- Graduate and professional students can borrow money directly (called Grad Plus)
Eligibility:
- Full-time students only
- Students enrolled in programs shorter than an academic year are eligible for reduced loans
- Sourced by private lenders
- Origination fees and possibility insurance are added

Rate:
- Fixed rate 7.9%

Amount:
- Only limit is the total of all aid received cannot be higher than the total cost of schooling

Repayment:
- Begins within 60 days of taking out the loan
- Repayment may be delayed until the student is out of school (interest builds during this time)

Front 102

Direct Consolidation Loans

Back 102

- Allows for the combination of multiple student loans into one loan
- Parent loan cannot be consolidated with student loans

Rates:
- Interest rate varies depending on the weighted average of the loans
- Cannot exceed 8.25%

Front 103

Federal Grants and Loans available for under-graduate students.

Back 103

- Pell Grant
- Federal Supplemental Educational Opportunity Grants
- Academic Competitiveness Grant
- Smart Grant
- TEACH Grant
- PLUS (parent loans)
- Perkins Loans
- Stafford Loans

Front 104

Federal Grants and Loans available for graduate students.

Back 104

- TEACH Grant
- PLUS (parent loans)
- Perkins Loans
- Stafford Loans

Front 105

Federal Grants and Loans available for Part-Time students.

Back 105

- Pell Grant
- Federal Supplemental Educational Opportunity Grants

Front 106

Federal Grants and Loans available for Half-Time students.

Back 106

- Pell Grant
- Federal Supplemental Educational Opportunity Grants
- TEACH Grant
- PLUS (parent loans)
- Perkins Loans
- Stafford Loans

Front 107

Federal Grants and Loans available for Full-Time students.

Back 107

- Pell Grant
- Federal Supplemental Educational Opportunity Grants
- Academic Competitiveness Grant
- Smart Grant
- TEACH Grant
- PLUS (parent loans)
- Perkins Loans
- Stafford Loans

Front 108

College Work-Study Programs

Back 108

- Eligible students are provided employment, which may be on- or off-campus
- Limit on the number of hours worked, which is based on course load and academic progress.

- Federal funds are used by individual schools to administer the program.

- Undergraduate students are paid by the hour.
- Graduate students may be paid by the hour or by salary.

Eligibility:
- Based on financial need
- Undergraduate and graduate
- Full and part-time

Front 109

State-Funded Financial Aid for Education

Back 109

- Types of aid available vary from state to state

Front 110

Divorce/Remarriage Planning

3 Major Areas of Concern with Divorce Planning

Back 110

1. Income
2. Property distribution
3. Child custody.

Front 111

Divorce/Remarriage Planning

Income Concerns / Topics

Back 111

- Income that was available to support one household must now be used, in some manner, to support two households.

- The divorce agreement often provides maintenance for the spouse who earned less income during the marriage and adequate financial support for any minor children.

- Social Security Concerns
- If the couple was married for ten years or more, each person may choose between their own Social Security retirement benefits or 50% of those of the ex-spouse.
- If there has been more than one ten-year marriage for one or both of the divorcing spouses, each individual may choose the spouse’s benefits or their own, whichever is greater.

Front 112

Recommendations that will ease the transition of divorce a Financial Planner can make:

Back 112

- Each person have at least one credit card in his or her name to establish a personal credit history

- Each person should have a liquid cash account in his or her name instead of having all accounts in both names.

- Each spouse should be involved in the month-to¬month finances of running the home

Front 113

Remarriage Issues

Back 113

- The names of beneficiaries on life insurance policies obtained during a prior marriage may have to be changed.
- Many divorce settlements require that certain amounts of life insurance be maintained for the ex-spouse or for child support obligations.

- Changing property titles to include a new spouse, or to balance the estate and minimize estate taxes, may result in a loss of premarital property

- Lack of estate planning may disinherit an individual's children

Front 114

Charitable Planning

Back 114

- Charitable giving is an important part of some clients’ financial plans.
- Requires provisions in the will, and may require specialized trust documents as well.
- help the client balance charitable giving with the need to meet basic family financial obligations.

Front 115

Needs of the Dependent Adult or Disabled Child

Back 115

- clients who support dependent adults or disabled children need to plan for their care in the event of death
- Families establish special trusts to take care of dependent individuals for as long as they live.
- A trust that meets certain requirements may still allow the dependent person to receive state-provided support without having to be totally impoverished.
- Recommend an attorney to prepare trusts.

Front 116

Closely Held Business Planning

Back 116

- Succession planning is key

Front 117

6 Ways to Fund Education

Back 117

1. Direct transfer of funds
2. Custodianship
3. Minor’s trust
4. Current income trust
5. Crummey invasion trust
6. Scholarships

Front 118

Provide examples of information that is gathered the GENERAL INFORMATION section of the survey form and how it is used (6)

Back 118

Items collected:
1. Name, address, telephone number
2. Date prepared
3. Dates of birth for all family members
4. Social Security numbers
5. Health problems
6. Remarks

Hint 118

1. Name, address, telephone number - Identification purposes

2. Date prepared
- Identifies date at which data is correct; used in constructing financial statements

3. Dates of birth for all family members
- Helps in determining time remaining before retirement, children’s education funding, insurability, life expectancies, insurance needs with regard to planning for dependents, etc.

4. Social Security numbers
- Identification purposes, tax purposes, to determine SS benefits available, etc.

5. Health problems
- Management of personal risks, insurability, care of an incapacitated dependent in the event of a provider’s disability or death, etc.

6. Remarks
- Indicate special needs of client or dependents

Front 119

Provide examples of information that is gathered the OTHER ADVISORS section of the survey form and how it is used.

Back 119

- Information for:
accountant,attorney, banker, broker, insurance agents, trust officer, and other advisors

Items collected:
1. Names
2. Addresses
3. Telephone numbers

Front 120

Provide examples of information that is gathered the ASSETS section of the survey form and how it is used (6).

Back 120

Items collected:
1. Title of Assets
2. Date property was acquired
3. Cost or basis
4. Current fair market value
5. Encumbrances
6. Current yield

Hint 120

1. Title of Assets
- Estate planning

2. Date property was acquired
- Income and estate tax purposes
- Evaluating the performance of the investment

3. Cost or basis
- Income and estate tax purposes
- Evaluating the performance of the investment

4. Current fair market value
- Evaluating performance of invested assets
- Estate tax implications
- Value used in the statement of financial position

5. Encumbrances
- Assess the level of debt
- income tax implications
- debt balances presented on statement of financial position
- debt payments presented on cash flow statement

6. Current yield
- Evaluating performance and appropriateness of investments
- Inflows from investments are presented on the cash flow statement

Front 121

Provide examples of information that is gathered the DEBT section of the survey form and how it is used (6).

Back 121

Items collected:
1. Date incurred
2. Original amount
3. Current balance
4 Payments
5. Maturity
6. Interest rate

Hint 121

Used to:
- Assess expenses and level of debt, estate reduction, duration of expense, etc.
- Debt balances are presented on the statement of financial position

- Past payments to reduce debt are presented on the cash flow statement

- Future payments are presented on
projected cash flow statements or budgets

Front 122

Provide examples of information that is gathered the LIFE INSURANCE section of the survey form and how it is used (8).

Back 122

1. Type of policy
2. Ownership
3. Insured
4. Beneficiary
5. Premium and Dividend Option
6. Current cash value
7. Policy loan outstanding
8. Face amount

Hint 122

1. Type of policy
- Evaluate appropriateness of policy type
- Identification of pertinent features

2. Ownership
- Estate taxation
- Determination of rights

3. Insured
- Determine life covered

4. Beneficiary
- Evaluation of estate distribution consistent with client wishes

5. Premium and Dividend Option
- Evaluate appropriateness of policy
- Determining expenses and income

6. Current cash value
- Determine financial resources potentially available to achieve goals
- Estate tax implications for policies owned on others
- Cash Values presented on the statement of financial position

7/ Policy loan outstanding
- Determine adequacy of distributions to beneficiary in accordance with client’s wishes
- Policy loans are deducted from the face amount of insurance prior to distribution to a beneficiary

8. Face amount
- Determine adequacy/appropriateness of
distributions to beneficiary

Front 123

Provide examples of information that is gathered the INCOME section of the survey form and how it is used (2).

Back 123

1. Income sources type
- Salary, self- employment income, other; active, passive, or portfolio
2. Income Source Amounts

Hint 123

Assess:
- Importance of particular income
- Whether such income is source to client
- Whether expected to continue
- Basis for planning future consumption and savings to
enable achievement of goals
- Whether the income is active, passive,
and portfolio designations are important for
tax purposes; income is presented on the
cash flow statement

Front 124

Provide examples of information that is gathered the OUTLAY DATA section of the survey form and how it is used (2).

Back 124

1. Savings and investment allocations
2. Budgeting

Hint 124

1. Savings and investment allocations
- Reinforce need to “pay yourself first” to achieve goals
- Assess client’s predisposition toward saving and ability to meet savings goals

2. Budgeting
- Establishes whether clients would like to have a budget constructed
- Existing budget information enables the planner to assess values and determine client’s
discipline with regard to saving and
consumption goals

Front 125

Provide examples of information that is gathered the SUBJECTIVE INVESTMENT DATA section of the survey form and how it is used (6).

Back 125

1. Client’s satisfaction with current/
previous investments
2. Level of comfort with various investments
3. Risk tolerance
4. Investment goals
5. Decision-making process used for selecting investments
6. Earmarking of assets

Hint 125

Helpful in constructing investment portfolio consistent with client’s needs, goals, and risk tolerance level

Front 126

Provide examples of information that is gathered the ESTATE PLANNING DATA section of the survey form and how it is used (6).

Back 126

1. Existence of wills and/or trusts
2. Receipt of trust income by client
3. Potential for receipt of property via remainder interests, inheritances
4. Specific wishes of client Regarding estate distribution;
needs (financial and otherwise) of
dependents in the event of client’s
death
5. Client’s projections of inflation, investment return anticipated
6. Information on gifts made

Hint 126

1. Existence of wills and/or trusts
- Assess whether estate distribution plans are current and consistent with client wishes

2. Receipt of trust income by client
- Provides understanding of income received
- reported on cash flow statement

3. Potential for receipt of property via remainder interests, inheritances
- Assess future ability to achieve financial goals


4. Specific wishes of client Regarding estate distribution;
needs (financial and otherwise) of
dependents in the event of client’s
death
-Assess whether current distribution plans are appropriate
- determine if support required for
dependents is consistent with client goals

5. Client’s projections of inflation, investment return anticipated
- Establish planning assumptions to make projections

6. Information on gifts made
- Estate taxation purposes

Front 127

Provide examples of information that is gathered the RETIREMENT PLANNING DATA section of the survey form and how it is used (2).

Back 127

1. Client’s plans for retirement (timing,
lifestyle, income needed)
2. Sources of income

Hint 127

1. Client’s plans for retirement (timing lifestyle, income needed)
- Determine what resources will be needed at retirement

2. Sources of income
- Determine what resources are currently in place to fund retirement (vested benefits from pension plans are included in the statement of financial position)

Front 128

Provide examples of information that is gathered the MISCELLANEOUS FINANCIAL GOALS section of the survey form and how it is used (4).

Back 128

Special goals that the client wishes to achieve as a result of financial
planning:
1. Type
2. Amount
3. Timing
4. Importance

Hint 128

Inclusion in analysis, development of
recommendations

Front 129

Provide examples of information that is gathered the DISABILITY INSURANCE section of the survey form and how it is used (2).

Back 129

1. Anticipated income required/desired by client in the event of disability

2. Potential sources of income available in the event of disability

Hint 129

1. Anticipated income required/desired by client in the event of disability
- Determine disability income needs

2. Potential sources of income available in the event of disability
- Determine if resources in place are adequate

Front 130

Provide examples of information that is gathered the MEDICAL INSURANCE section of the survey form and how it is used (1).

Back 130

Information on medical expense plan currently held

Hint 130

Determine:
- If medical expense coverage is adequate/appropriate

- Impact on expenses

Front 131

Provide examples of information that is gathered the EDUCATION DATA section of the survey form and how it is used (2).

Back 131

1. Potential cost
2. Steps already taken to prepare for costs

Hint 131

Enables planner to focus on most important goals of the client, particularly in cases where all goals cannot be achieved within the client’s
desired time frame

Front 132

what types of documents typically are gathered from the client before
constructing a comprehensive financial plan (10)?

And why obtain them?

Back 132

1. Wills
2. Instructions to executor
3. Trust agreements
4. Past three tax returns
5. Insurance policies
6. Employee benefit booklets
7. Retirement plans
8. Bank statements/cancelled checks
9. Investment statements
10. Prospectuses

Hint 132

1. Wills
- Verify that wills in place match client desires

2. Instructions to executor
- Establish currency of information

3. Trust agreements
- Analyze current documents to verify consistency with client desires

4. Past three tax returns
- Analyze and verify client’s income and tax trends

5. Insurance policies
- Evaluate specific provisions of each policy

6. Employee benefit booklets
- Verify and analyze current client benefits

7. Retirement plans
- Verify and analyze current value of plan benefits

8. Bank statements/cancelled checks
- Identify spending patterns; verify income and expenses

9. Investment statements
- Obtain current valuation, basis, etc.

10. Prospectuses
- Analyze and understand existing portfolio

Front 133

Identify items that typically are placed under the CASH AND CASH EQUIVALENT asset category on the statement of financial position (6).

1. Cash/cash equivalents
2.

Back 133

1. Cash
2. Checking account
3. Savings account
4. Money market fund
5. Cash surrender value of life insurance (could also be investment asset - esp. variable life)
6. certificates of deposit (if close to maturity or if penalty for early withdrawal is low)

Front 134

Identify items that typically are placed under the INVESTED ASSETS asset category on the statement of financial position (9).

Back 134

1. Stocks
2. Bonds
3. Collectibles for investment purposes
4. Real estate other than residence
5. IRAs
6. Vested pension benefits
7. Mutual funds
8. CDs
9. Life Insurance cash value

Front 135

Identify items that typically are placed under the USE ASSETS asset category on the statement of financial position (4)

Back 135

1. Residence
2. Automobiles
3. Personal property
4. Collectibles for personal enjoyment, etc.

Front 136

Identify items that typically are placed under the INFLOWS category in the cash flow statement (9).

Back 136

1. Gross salaries
2. Interest income
3. Dividend income
4. Withdrawals from savings
5. Liquidation of investments
6. Funds received as a result of borrowing
7. Trust income
8. Alimony received
9. Insurance proceeds received

Front 137

Identify items that typically are placed under the FIXED OUTFLOWS category in the cash flow statement (4).

Back 137

Predictable, recurring outflows

1. Mortgage Payments
2. Insurance premiums
3. Car loan payments
4. Some income taxes may be put here

Front 138

Identify items that typically are placed under the VARIABLE OUTFLOWS category in the cash flow statement (6).

Back 138

1. Food
2. Transportation
3. Entertainment
4. Household expenses
5. Clothing
6. Some income taxes

Front 139

How might the stability of income and number of sources of income
affect a client’s overall financial condition?

Back 139

The greater the stability of income and the greater the number of sources of income, the stronger the client is financially.
- The more diverse the income, the more flexibility there is in budgeting.
- Emergency fund amount reflects the stability of the client’s income sources

Front 140

The rule of thumb suggested in regard to saving and investing income
is _______ of ______ income.

Back 140

The rule of thumb suggested in regard to saving and investing income
is 5–10% of gross income.

Front 141

What symptoms frequently are present if clients are not living within
their means (4)?

Back 141

1. Heavy consumer debt and/or borrowing to make ends meet
2. Withdrawals from savings to meet regular living expenses
3. High miscellaneous expenditures
4. Inability to save

Front 142

Current Ratio

Back 142

- The current ratio measures a firm’s ability to satisfy current liabilities
with current assets.

Front 143

Acid Test Ratio

Back 143

- The acid test ratio measures a firm’s ability to satisfy current liabilities
with its most liquid assets (i.e., without liquidating inventory).

Front 144

What are some uses for budgeting?

Back 144

1. To control and monitor household expenses
2. Accomplish wealth accumulation and savings goals
3. Monitor investment performance

Front 145

Rules of thumb that may be used to assess whether Housing debt is excessive.

Back 145

- No more than 28% of
the owners’ gross income.

(includes principal, interest, taxes, insurance)
association fees, etc.)

Front 146

Rules of thumb that may be used to assess whether Total monthly debt payments are excessive.

Back 146

- No more than 36% of gross monthly income.

Front 147

Rules of thumb that may be used to assess whether Consumer Debt payments are excessive.

Back 147

- should not exceed 20% of net monthly income

(total income minus FICA and state, federal, and any local taxes)

Front 148

Grace period (credit card)

Back 148

A specified period for which no interest is charged on a new purchase.

Front 149

Costs associated with a Consumer Debt (2)

Back 149

1. Interest charges
2. Fees

Front 150

Costs associated with a Home mortgage (5)

Back 150

1. Loan origination fees
2. Appraisal fees
3. Credit reporting costs
4. Title search costs
5. Interest charges

Front 151

Benefits of Consumer Debt (2)

Back 151

1. Ability to purchase products and services immediately
2. Convenience

Front 152

Benefits of a Home mortgage

Back 152

1. Allows people who would not otherwise be able to afford a home to purchase a home
2. Tax benefits
3. May appreciate in value

Front 153

Home equity is one potential source of funding for financial goals.

What means may be used to access home equity?

Back 153

1. Reverse mortgage
2. Home equity loan
3. Selling the home

Front 154

Explain the difference between open-end and closed-end leases.

Back 154

An open-end lease includes the possibility that the lessee may face additional expense at the termination of the lease.

In a closed-end lease, the lessee generally is free to walk away from the leased asset at the end of the lease without being assessed any additional costs.

Front 155

Funding College Education

Characteristics of DIRECT TRANSFER OF FUNDS

Back 155

1. Simple
2. Inexpensive
3. Avoids taxation of income at parents’ rate (with the exception of the kiddie tax)
4. Works best using investment vehicles that defer taxation, i.e., Series EE bonds

Front 156

Funding College Education

Characteristics of CUSTODIANSHIP

Back 156

1. No administrative costs
2. Involves naming manager of property for minor
3. Nearly any type of property may be involved (though some
restrictions may apply in states that have adopted only the
UGMA)
4. Child has right to receive property upon attaining the age of
majority, to use as he or she chooses
5. Does not avoid kiddie tax

Front 157

Funding College Education

Characteristics of MINOR'S TRUST

Back 157

1. Designed to use annual gift tax exclusion ($13,000 for individuals,
$26,000 for married couples)

2. Gift to individual under age 21 is not considered a gift of a future interest if property and income are payable to child at age 21

3. Escapes kiddie tax but is taxed at trust’s rate, which is a punitive one

Front 158

Funding College Education

Characteristics of CURRENT INCOME TRUST

Back 158

1. Income must be paid out to beneficiary at least annually
2. Trustee has no discretion regarding accumulation of income
3. More difficult to avoid kiddie tax
4. Trust property need not be distributed to child at a specified age

Front 159

Funding College Education

Characteristics of CRUMMEY INVASION TRUST

Back 159

1. Beneficiary may withdraw an amount equal to the annual addition
to the trust or the annual gift tax exclusion, whichever is less, during intervals specified in the trust agreement

2. Trust property is distributed to the beneficiary at the age chosen by the grantor

3. Accumulated income is taxed at the trust’s rates

Front 160

Funding College Education

Characteristics of SCHOLARSHIPS

Back 160

1. Generally for academically or athletically gifted students

2. May be need-based

3. Available through colleges, businesses, foundations, community groups, etc.

4. Continued receipt of monies may be contingent upon fulfilling requirements of provider

5. Receipt of scholarship monies may reduce funds that may be
available from other sources, such as the federal government

Front 161

How might a parent’s qualified retirement plan be used to fund a
child’s college education?

Back 161

- Funds may be borrowed without a premature distribution penalty being assessed. (some plans)

- 72t distributions

Front 162

What are key issues that arise when planning for a permanently disabled child or adult?

Back 162

1. financial support
2. living arrangement
3. physical support

Front 163

What is involved in “mutually defining” the scope of the engagement with between the financial planner and client?

Back 163

(1) identifying the service(s) to be provided;
(2) disclosing the financial planner’s compensation arrangements;
(3) determining the responsibilities of the client and the financial planner;
(4) establishing the duration of the engagement;
(5) providing any additional information necessary to define or limit the scope of the engagement. The scope can include one or more financial planning subject areas (e.g., estate planning, income tax planning, etc.), and it may change by mutual understanding as the engagement proceeds.

Front 164

Rule of thumb for the amount of an emergency reserve?

Back 164

A good rule of thumb is that the client should have the equivalent of three to six months of fixed and variable expenses in liquid accounts for emergencies.

This would exclude the expense of income-related taxes and contributions to savings and investments.

Front 165

Opportunity Funds

Back 165

Liquid or semiliquid accounts available for large purchases of a nonemergency nature that the client may wish to make, such as jewelry, furniture, or travel. Such funds would prevent the client from having to borrow to attain these items.

Front 166

2 Rules of thumb in assessing whether a home mortgage will be offered to a prospective borrower.

Back 166

• Monthly housing costs (including principal, interest, taxes, fees, and insurance) should be no more than 28% of the prospective borrower’s gross income.
•Total monthly payment on all debts should be no more than 36% of gross monthly income. According to the underwriting guidelines for Fannie Mae, this includes:
- monthly housing expense (including taxes and interest)
- monthly payments on installment/revolving credit
- monthly mortgage payments on non-income-producing property
- monthly alimony, child support, or maintenance payments