Preface xiii Part I Introduction 1. Nature and Objectives of Private Wealth Management 3 Need for Wealth Management Services 3 Wealth Management over a Family's Economic Life Cycle 3 Focus on Objectives and Planning Strategies 4 Financial Planning Process 13 Case Example-Personal Financial Statements 15 Ethics and Wealth Management 20 2. Environment for Wealth Management 23 Institutional Environment 23 Economic Environment and Wealth Management 37 Tax Environment and Wealth Management 51 3. Valuation Concepts in Wealth Management 55 Capital Accumulation Concepts 55 Valuation Factors for Estate Planning and Wealth Transfer 62 Part II Investment Planning and Financial Management 4. Basic Investment Planning and Strategies 69 Investment Theories 69 Factors in the Choice of Investments 81 5. Common Stocks 101 Stock Valuation Concepts 101 Portfolio Development and Analysis 107 Diversifying a Common Stock Portfolio 110 Decisions Concerning Selling Common Stocks 111 Dollar Cost Averaging 111 Types of Orders in Buying and Selling Common Stocks 112 Margin Accounts 112 Selling Short 113 Investment Categories of Common Stock 114 Some Theories (Strategies) of Common Stock Investment 116 The Case for Long-Term Investments in Common Stocks 118 6. Real Estate and Other Equity Investments 123 Real Estate 123 Oil and Gas Ventures 132 Impact of Passive Activity Loss Rules 133 Put and Call Options 134 New Issues or Initial Public Offerings 136 Commodity Futures Trading 136 Gold and Other Precious Metals 137 Art, Antiques, Coins, Stamps, and Other Collectibles 138 7. Fixed-Income Investments 139 Ways of Taking Returns from Bonds 139 Corporate Bonds 141 Municipal Bonds (Munis) 142 U.S. Government Obligations 146 Other U.S. Government and Agency Securities 148 Mortgage- and Asset-Backed Securities (Pass-Through Securities) 148 Floating-Rate Bonds and Funds 149 Market Discount Bonds 149 Zero-Coupon Bonds (Zeros) 150 Preferred Stocks 150 Guaranteed Principal Fixed-Income Investments 151 Cash Equivalents (Liquid Assets) 152 Conversion Privileges in Fixed-Income Securities 153 Bond Ratings and Investment Quality 154 Strategies for Investing in Fixed-Income Securities 155 8. Investment Companies and Alternative Investments 159 Kinds of Investment Companies 159 Why Invest in Mutual Funds? 159 Limitations of Mutual Funds 160 Types of Funds and Planning Considerations 160 Unit Investment Trusts 163 Regulation of Investment Companies 163 Withdrawals from and Redemptions and Exchanges of Mutual Funds 164 Mutual Funds and Their Investment Objectives 164 Index Funds 168 Exchange-Traded Funds (ETFs) 170 Tax-Managed Funds 170 Mutual Fund Performance 171 Mutual Fund Expense Ratios 173 Factors Involved in Selecting Mutual Funds 174 Tax Aspects of Mutual Funds 175 Closed-End Companies 177 Look Out for Buying a Dividend 177 Hedge Funds and Private Equity Funds 177 9. Asset Allocation Strategies and Financial Management 181 Steps in the Asset Allocation Process 181 Financial Management 188 Part III Income Tax Planning10. Income Tax Fundamentals 199 The Federal Income Tax on Individuals 199 The Federal Income Tax on Corporations 214 Pass-Through Business Entities 217 Federal Income Taxation of Trusts and Estates 218 State and Local Income Taxes 220 11. Income Tax Reduction and Management Techniquesfor Individuals 221 Tax Elimination or Reduction 221 Shifting the Tax Burden to Others 226 Allowing Wealth to Accumulate Without Current Taxationand Postponing Taxation 227 Taking Returns as Capital Gains 229 Part IV Financing Education Expenses12. Education Planning 239 Importance as a Financial Objective 239 Nature and Growth of Education Costs 239 Estimating Education Costs 240 Financial Aid Considerations 241 Tax "Breaks" for Education Costs 241 Strategies in Planning for Education Costs 243 Advance Funding for Education Costs 244 Part V Retirement Planning, Stock Compensation,and Other Employee Benefits 13. Retirement Needs Analysis, Social Security,and Employer-Provided Qualified Retirement Plans 259 Retirement Needs Analysis 259 Social Security (OASDHI) 263 Characteristics of Employer-Provided Retirement Plans 269 Regulation of Qualified Retirement Plans 280 Nonqualified Retirement Plans 284 Pension Plans 285 Profit-Sharing Plans 287 Savings (Thrift) Plans 289 Cash or Deferred Arrangements-Section 401(k) Plans 290 Illustration of the Power of Tax Deferral 293 Stock Bonus Plans and Employee Stock Ownership Plans (ESOPs) 296 Hybrid Qualified Retirement Plans 297 Retirement Plans for the Self-Employed (HR-10 or Keogh Plans) 298 14. Other Employer-Provided Retirement Plans and Employee Benefits 303 Other Employer-Provided Retirement Plans 303 Other Employee Benefits 309 15. Individual Retirement Accounts and Annuities (IRAs) 313 Basic Concepts 313 Types of IRAs 313 IRA Rollovers and Direct Transfers 322 Financial Institutions That Offer IRAs 323 IRA Investments 323 Planning Issues for IRAs 323 16. Planning for Taking Distributions from Retirement Plans 329 General Considerations Affecting Planning 329 Taxation of Benefits from Qualified Plans and IRAs 332 Planning for Distributions from Qualified RetirementPlans and IRAs 348 17. Individual Investment Annuity Contracts 355 Fundamental Purposes of Annuities 355 Types of Individual Annuities 356 Parties to the Annuity Contract 360 Phases of Annuities 361 Investment Returns on Annuities 361 Expense Charges on Annuities 363 Withdrawals and Loans 364 Exchanges of Annuities 365 Annuity Payout Options 365 Annuity Death Benefits 365 Guaranteed Minimum Benefits Under Variable Annuities 367 Underwriting of Individual Annuities 369 Taxation of Nonqualified Annuities 369 Charitable Gift Annuities 373 Using Life Insurance Values to Provide Retirement Income 373 Planning Issues for Nonqualified Annuities 373 18. Employee Stock Compensation Plans 377 Types of Plans 377 Provisions of Stock Option Plans 384 Valuation of Stock Options 387 Some Caveats Concerning Stock Options and Other Plans 389 Planning Issues Regarding Stock Options and Other Stock Plans 390 Part VI Charitable Giving19. Charitable Giving Techniques 393 Basic Tax Principles 393 Planning Techniques 395 Part VII Insurance Planning and Risk Management20. Basic Insurance Principles and Selecting Insurers 413 Personal Risk Management 413 Basic Insurance Principles 414 Considerations in Choosing an Insurer 414 Considerations in Choosing an Agent or Broker 418 Information about Financial Advisers 418 21. Life Insurance and Social Security 419 Sources of Life Insurance Protection 419 Types of Individual Life Insurance Contracts 421 Definitions of Life Insurance for Income Tax Purposes 436 Single-Premium Life Insurance 437 Some Important Life Policy Provisions 437 Cash Values and Nonforfeiture Options 439 Uses of Policy Dividends 440 Settlement Options 441 Supplementary Benefits Added to Individual Life InsuranceContracts 441 Planning and Using Life Insurance 443 Substandard Risks 444 Nonmedical Life Insurance 445 What Actions Can an Uninsurable Person Take? 445 Group Life Insurance 445 How Much Life Insurance Is Needed? 446 Life Settlement Transactions 449 22. Health and Disability Income Insurance 451 Sources of Health Insurance Protection 451 Disability Income (Loss-of-Time) Coverages 452 Medical Expense (Health) Coverages 458 Health Savings Accounts and Health ReimbursementArrangements 469 23. Long-Term Care Insurance and Medicaid Planning 473 Basic Planning Approaches 474 Long-Term Care (LTC) Insurance and Other Arrangements 474 Medicaid Planning for Long-Term (Custodial) Care 479 24. Property and Liability Insurance 487 Property Insurance 487 Personal Liability 488 Homeowners Insurance 489 Automobile Insurance 493 Other Property and Liability Policies to Consider 496 Part VIII Estate Planning25. Estate Planning Principles 503 Objectives of Estate Planning 503 Methods of Property Disposition 504 Property and Property Interests 504 What Is Meant by the Probate Estate? 511 Gross Estate for Federal Estate Tax Purposes 511 State Death Tax Value 512 The Net Estate to One's Heirs 512 Settling the Estate 514 Trusts in Estate Planning 516 26. The Transfer Tax System 523 Impact of American Taxpayer Relief Act (ATRA) of 2012 523 Applicable Credit Amount (Unified Credit) and Applicable Exclusion Amount 524 Federal Gift Tax 524 Federal Estate Tax 531 Federal Generation-Skipping Transfer (GST) Tax 542 27. Lifetime Giving and Other Intrafamily Techniques 547 Making Lifetime (Inter Vivos) Gifts to Noncharitable Donees 547 Sales Within the Family 561 Loans to Family Members 564 28. Marital Deduction Planning, Postmortem Planning,and Estate Liquidity 565 Marital Deduction Planning 565 Marriage Equality and Tax Planning 580 Postmortem Estate Planning 581 Estate Liquidity 583 29. Life Insurance in Estate Planning 585 Taxation of Life Insurance 585 How to Arrange Life Insurance 591 Gifts of Life Insurance 598 30. Revocable Living Trusts and Property ManagementA rrangements 601 Revocable Living Trusts as a Will Substitute 601 Joint Property with Right of Survivorship 604 Property Management Arrangements to Deal with Physicalor Mental Incapacity 605 Part IX Planning for Business Interests31. Types of Business Entities and Business Planning 611 Potential Issues 611 Characteristics of Closely Held Businesses 612 Types of Business Entities 612 Further Thoughts on the Legal Liability Issue 619 Check-the-Box Regulations 619 Factors in Choice of Entity 621 Disposition of Business Interests 625 Chapter 14 Special Valuation Rules 633 Should a Business Interest Be Sold or Retained for the Family? 633 Estate Liquidity Through Section 303 Redemptions 634 Index 637
G. Victor Hallman is a Lecturer in Financial and Estate Planning in the Insurance and Risk Management Department of the Wharton School, University of Pennsylvania, as well as a member of the Pennsylvania Bar. Jerry S. Rosenbloom is the Frederick H. Ecker Emeritus Professor of Insurance and Risk Management and Academic Director of the Certified Employee Benefit Specialist (CEBS) Program at the Wharton School of the University of Pennsylvania. He is also a Senior Fellow in the Leonard Davis Institute of Health Economics and a Senior Fellow in the Financial Institutions Center at the Wharton School.