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Private Wealth Management


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Table of Contents

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 Planning 10. 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 Techniques for Individuals 221
Tax Elimination or Reduction 221
Shifting the Tax Burden to Others 226
Allowing Wealth to Accumulate Without Current Taxation and Postponing Taxation 227
Taking Returns as Capital Gains 229
Part IV Financing Education Expenses 12. 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 Retirement Plans 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 Giving 19. Charitable Giving Techniques 393
Basic Tax Principles 393
Planning Techniques 395
Part VII Insurance Planning and Risk Management 20. 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 Insurance Contracts 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 Reimbursement Arrangements 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 Planning 25. 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 Management Arrangements 601
Revocable Living Trusts as a Will Substitute 601
Joint Property with Right of Survivorship 604
Property Management Arrangements to Deal with Physical or Mental Incapacity 605

Part IX Planning for Business Interests 31. 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

About the Author

G. Victor Hallman (Philadelphia, PA) is a lecturer at the Wharton School of the University of Pennsylvania. Jerry S. Rosenbloom (Philadelphia, PA) is a professor and department chairman at the Wharton School of the University of Pennsylvania.

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