Bryant - Course 1. Introduction to Financial Planning - Module 14. Monetary Settlements and Special Circumstances

Question 1

What is a tort?

Answer 1

A tort is an instance of wrongdoing that leads to civil legal liability.

Question 2

Structured Settlement

Answer 2

A structured settlement is a method of compensating injury victims which is voluntarily agreed upon between an injury victim and the defendant.
An injury victim receives a stream of payments rather than a lump sum to meet future medical expenses and basic living needs.

Structured settlement brokers, typically working for an insurance company, will calculate the annuity amount. Upon mutual agreement or court order, the defendant will likely assign the payment to a qualified assignee such as an insurance company. Having an insurance company pay out the annuity helps the defendant by closing out his or her books on the transaction and alleviates him or her from further responsibilities for the payment.

One advantage of structured settlements is that the federal government has passed regulations that make the payments tax-free to the victim.

At some point in the future, if a recipient of a structured settlement needs a large amount of money, he or she may be able to sell all or a portion of the structured settlements to a structured settlement broker, in exchange for a lump sum amount.

Question 3

What types of cases are more likely to result in structured settlements?

Answer 3

Temporary or permanent disability
Guardianship for minors or incompetents
Workers’ compensation
Wrongful death where the surviving family members need monthly or annual income
Severe injuries resulting in need for long-term medical care, living expenses, and support of family

Question 4

Lottery Winnings and Monetary Windfalls

Answer 4

Acceptance of the prize:
- If an individual won the lottery, it may make sense to transfer the ownership of the ticket into an irrevocable trust before accepting the prize. This would keep the prize money in the trust in case the person dies rather than going to an estate and be subject to heavy taxes.
- If a group won the lottery together, it may make sense to create a partnership to accept the prize.
- Otherwise, if one person accepts the prize, he or she could be responsible for all the taxes associated with the winnings.

Income tax liabilities:
Lottery winnings are taxed up to 37%, and 24% will automatically be withheld for federal tax purposes. In addition, state taxes will likely be withheld prior to distribution.

Gift tax liabilities: Of course, you want to be generous with your money. The most you can give away is $17,000 or $34,000 per year for a married couple to an unlimited number of people without incurring a gift tax. This annual gift tax exclusion amount will help when time comes to pay estate taxes on the winner’s assets.

Estate tax liabilities: If there is a choice to elect lump sum versus annuity payments, in the interest of estate planning, it may be more prudent to take the lump sum, so that the taxes are paid off, and a financial planner can help the winner to allocate the funds in a manner most suitable for estate tax planning. Otherwise, if the winner passes away while there are still payments outstanding, the estate may be the subject of a hefty estate tax bill before realizing any of the benefits.

Selling the settlement: Again, some states now allow the winner to sell the payments to obtain a lump sum. They can find a structured settlement broker to facilitate that transaction. In the case where the heir would be paying more in estate taxes than the annual payout amounts, the heir should consider this as an option to pay off the estate taxes owed all at once.

Question 5

Lump sum retirement distributions

Answer 5

Lump sum retirement distributions are payouts from qualified retirement plans that represent the entire account balance of the plan participant.** To be considered a lump sum distribution, the distribution must be for a qualified reason such as the attainment of age 59 ½, death, disability, or for separation of service.**

Lump sum distributions are **generally taxed to the payee as ordinary income **though the taxation can be further deferred by rolling the balance into an IRA or another qualified retirement plan.

Question 6

Lottery jackpot winner - Lump Sum vs. Stream of Payments

Answer 6

The **time value of money **can be used to explain the difference between the lump sum payment versus the gross amount of the annual payments. In reality, part of the equation has to do with the present value of an annuity. If you discount the annual payments to their present value and add them up, you will receive the present value of the jackpot. The tricky part is determining the appropriate rate to use for discounting. The discount rate will factor in a reasonable amount of return that can be earned as well as inflation.

Question 7

Lottery jackpot winner - Lump Sum vs. Stream of Payments Example - Calculator Keystrokes:

Answer 7

Juan wins a lottery jackpot for $20 million. If the jackpot is to be paid out over 25 years, Juan will receive an annual payment before taxes of $800,000. If the lottery commission offered Juan a pre-tax lump sum amount of $7,261,632.02, what was the discount rate?

**Using the formula for the present value of an annuity:

PV = PMT(PVIFAn,i) **

or $7,261,632.02 = $800,000(PVIFA25,i)

You will determine that the discount rate used was 11.466%.

Keystrokes (HP 12C)
g BEG 7261632.02 CHS PV 25 n 800000 PMT i
The Calculator Returns: 11.466

Question 8

Question

Question
In the previous example, the solved-for discount rate is 10%. Which of the following statements is correct in regards to the impact on the lump-sum amount if the discount rate changes?

Answer 8

a) If the discount rate changes to 15%, the lump-sum amount will increase.
**b) If the discount rate changes to 5%, the lump-sum amount increases.
**c) A change in the discount rate will not change the lump-sum amount.

Using a discount rate 15%, the lump-sum amount is $5,171,319.

Using a discount rate of 5%, the lump-sum amount is $11,275,156.

This illustrates that the higher the discount rate, the lower the amount of the lump-sum, and vice versa.

Question 9

Insurance Proceeds

Answer 9

When insurance proceeds are received, there are generally two options on how the proceeds can be paid to the beneficiary.

One option is a lump sum. Life insurance proceeds paid via a lump sum are income tax free.

The proceeds can also be paid via an annuity where each payment would be partially taxable. Each payment would have an income portion (taxed at ordinary income tax rates) and a tax-free return of basis component.

Question 10

Section One Summary

Answer 10

One way to determine whether or not a lump sum from a structured settlement is more suitable is to determine the discount rate used to arrive at the lump sum and evaluate whether a better rate can be found for the investment.

In this lesson, we have covered the following:

Legal settlement: Tort remedies that defendants owe to plaintiffs by court order or agreement. Insurance and ownership planning can help defendants handle such occasions and limit the exposure of personal assets. Plaintiffs who are awarded the settlement will need to determine how to best use the funds as a remedy for injuries.

Structured settlement: A stream of tax-free cash flows used to fulfill legal settlement rather than a lump sum. Often used for cases where on-going care is necessary as a remedy. The amount can be sold to receive a lump sum for part or all of the cash payments.

Lottery winnings and monetary windfall: Taxes are withheld before distribution takes place. Taking a lump sum is preferred for estate planning. Winners can sell their stream of cash flows in order to receive a lump sum.

Lump sum retirement distributions: A one-time payout of the entire account balance of a qualified retirement plan. The payout must be for a qualified reason such as attainment of age 59 ½, death, disability, or for separation of service. Distributions are generally taxed as ordinary income, but may also be deferred by rolling the balance into an IRA or another qualified retirement plan.

Insurance proceeds: Generally paid to the beneficiary as: 1.) a lump sum (one payment which is income tax free) or 2.) an annuity payment (each payment is partially taxed at the ordinary income tax rate with a tax-free return of the basis component).

Question 11

Section 1. Monetary Settlements Quiz Question

One of your clients has won the state lottery. She can either have $5,000,000 in a lump sum or receive payments of $400,000 per year for the next 25 years. Your client has expressed an interest in receiving the payments over the next 25 years and giving half of each payment to her children. Which of the following are issues you should discuss with your client associated with taking equal payments over 25 years and giving half to her children? (Select all that apply)

Answer 11

** Advise your client that if she passes away while there are still payments outstanding, her heirs may have to pay estate taxes before receiving the money.
** Advise your client that $400,000 per year will yield more than the lump sum of $5,000,000.
** Advise your client that gifting half of the yearly payment will result in gift tax.
** Advise your client that $5,000,000 will yield more than 25 yearly payments of $400,000.

If an individual is receiving an annual payout and passes away, her heirs may be subject to estate tax on funds that have yet to be received.

Also, gifting half of $400,000 per year to your children will result in a gift tax because it exceeds the $13,000 annual limit.

Finally, there is not enough information to know whether the lump sum or the annual payments are a better option for this client.

Question 12

Section 1. Monetary Settlements Quiz Question

Please select the true statements related to structured settlements listed below. (Select all that apply)

Answer 12

• They are a remedy that defendants owe to plaintiffs by court order or agreement. You shouldn’t have checked this.
  *** They are a method of compensating injured victims voluntarily agreed upon between an injury victim and the defendant. You correctly checked this.
• They are tax-free to the recipient. You correctly checked this.
• They are taxable to the recipient.

A structured settlement is a method of compensating injury victims voluntarily agreed upon between an injury victim and the defendant.
One advantage of structured settlements is that the federal government has passed regulations that make the payments tax-free to the victim.

Question 13

Financial planner’s role in divorce

Answer 13

Here the financial planner’s role is to help identify the assets available for distribution and to help the client create a new budget after the settlement is determined.

Cancel joint bank accounts and open an individual account
Cancel joint credit cards and get an individual credit card account
Non-residents of community property states should create a list of marital assets versus individual assets.
Consult a financial planner for financial advice, an attorney for legal advice and a tax accountant for tax advice.

Question 14

Divorce: Division of Assets

What states have community property laws?

Answer 14

Idaho, Washington, Wisconsin, California, Nevada, Arizona, New Mexico, Texas and Louisiana have community property laws, while the remaining states have equitable distribution laws.

Question 15

What is community property?

Answer 15

Community property laws proclaim that all property owned by the couple is marital property and will give the spouses half of all the property owned.

Question 16

What is equitable division?

Answer 16

Equitable division law declares certain properties (such as gifts, inheritances, and property owned prior to marriage) are owned by spouses separately and are therefore not subject to division.

Question 17

What is Marital property?

Answer 17

Marital property is any property acquired or accumulated by either spouse while they were married.

If assets were acquired after the separation date, but purchased through marital property, they can be counted as marital property as well.

Also, assets that increased in value due to action of the other spouse during the marriage can be partially deemed as marital property as well.

Question 18

What are considered separate assets in a divorce?

Answer 18

Separate assets are items such as, inheritance, premarital acquisitions, and gifts to one spouse from third-party.

Question 19

Spousal Support: Alimony

Answer 19

Alimony is an amount paid by a person to a spouse or former spouse under a divorce or separation agreement.

It is based on the need of one spouse and the ability of the other spouse to pay.

Child support payments or property settlement amounts are separate from alimony.

The amount paid is not deductible for the payer and is not considered income for the recipient.

Need for support = total financial needs of the spouse - (the income from separate and marital property + the income from actual and imputed employment + income from any other source)

Alimony generally terminates either at the death or remarriage of the recipient.

The payments must be made in cash and the ex-spouses must not live together.

The amount of the alimony can be reduced if the recipient moves in with a new partner.

The recipient should consider taking out a life insurance policy on the supporting spouse since alimony will cease upon his or her death.

Question 20

Spousal Support: Alimony - tangible assets versus not intangible assets

Answer 20

Post-divorce disparity happens when courts look at tangible assets and not intangible assets.

Tangible assets include home, cars, pension plans, and corporate benefit packages.

Intangible Assets are the education, skills, and career experience that will increase in value over the years.

In marital situations where both partners invest more heavily in the intangible assets of the other partner, the lower wage earners could be more impacted financially from a divorce since they may not have focused on their own intangible assets. This can create situations whereby their inability to earn income may prevent them from living lifestyles they had been accustomed to. Although the division of property may be equal, it may not be equitable because it doesn’t take into account the career asset.

Alimony Example:

Consider Jane who supported her husband financially through medical school, and then quit her promising career to care for the children. Jane not only gave up finances in support of her husband’s career, but also stopped the progression of her career because her husband pressured her to stay home with her children once he became a doctor.

A divorcee under this scenario must address the long-term impact of a settlement, projecting their financial resources over the next 10, 20, 30 years. Engaging the services of a professional such as a financial planner may be necessary to evaluate this impact. In the case of Jane, the impact of her loss in career assets should be factored into her alimony payments and/or the tangible assets she receives.

Question 21

Child Support

Answer 21

Only about half of all court-ordered child support is paid and only about half of that is paid in full.

If child support is part of a divorce agreement, the parent is legally obligated to pay.

Both biological and adoptive parents are required to support their children until they reach the age of majority (usually 18 years old) and longer if they have special needs such as a disability.

Both parents have a right to receive child support if they have custody of the child(ren). Non-custodial parents are obligated to pay child support even if they are denied visitation by the other parent.

Child support is not tax-deductible by the payor, nor is it taxable as income for the payee.

A solution to ensure that child support and alimony is paid for is to purchase an annuity in the name of the custodian parent (the ex-spouse). This will pass the responsibility of the payments to an insurance company (the annuity provider).

Practitioner Advice: Quick tips and suggestions to protect your client’s financial security:

• Stay involved in financial decisions and become knowledgeable about family finances.
• Avoid co-mingling inherited property into joint accounts as it would be deemed marital property.
• Deal with custody issues first. The emotional aspects of divorce can affect long–term settlements.
• Inquire about the other spouse’s spending habits and debts acquired prior to separation. Marital debt can be incurred without the other party’s knowledge.
• Do not file a joint tax return if divorce is pending.

Question 22

Qualified Domestic Relations Order (QDRO)

Answer 22

A Qualified Domestic Relations Order (QDRO) is used to divide retirement assets of ex-spouses.

Pension plans and qualified plan assets can be split using QDROs.
The recipient spouse is called the “alternate payee.”
The person whose interest is being transferred is called the “participant.”

Retirement plans that are subject to ERISA (Employee Retirement Income Security Act) are required to honor QDROs.
However, many military and government plans are not.
The plan administrator can verify the existence of marital division for the plan.

A QDRO can be simple, straightforward, and inexpensive for the transfer of assets in a defined contribution plan maintained by a large employer.

A QDRO can be complicated and expensive for assets held in a defined benefit plan. Since pensions are estimated based on a formula, it may be more difficult to value the exact amount to pay out to a recipient spouse.

A QDRO is not needed for the transfer of funds from one spouse’s IRA to the other’s IRA. However, roll over distribution rules (taxable income and penalty for premature distribution if under 59 1/2) apply for distributions that are not put into the recipient’s IRA within 60 days.

Question 23

Social Security
An ex-spouse can collect Social Security retirement benefits even if the other ex-spouse remarried and is still working if:

Answer 23

• The marriage lasted over 10 years
• The ex-spouse who is seeking the benefit is 62 or older
• The ex-spouse who is seeking the benefit is unmarried
• The ex-spouse who is seeking the benefits is not entitled to benefits or is entitled to lower benefits based on his or her own earnings record.

If the spouse is 65 years old, he or she will receive 50% of the worker spouse’s benefit (known as the “primary insurance amount”).

However at the age of 62, he or she would only be entitled to receive 37 ½% of the working spouse’s benefit.

The benefits are not terminated if the spouse marries a person who is entitled to widower, parent monthly benefits, or childhood disability benefits.

Question 24

Beneficiary Designations & Estate Planning Documents

Answer 24

If one of the ex-spouses designated the other as the beneficiary of a retirement plan or insurance and does not change the designation, the ex-spouse is still entitled to receiving the amounts upon the death of the account holder.

Therefore, it is important to inventory accounts where beneficiaries can be named, then review and, if necessary, change the designation after the divorce and separation of assets.

Estate documents may become invalid upon a divorce.

Question 25

Another divorce consideration is the reassessment of coverage for risk management.

Answer 25

A decrease or increase of death benefit may be necessary depending on new insurance needs.

The spouse who is receiving the alimony and, if applicable, the child support should consider taking out a life insurance policy on the paying spouse to ensure the support will continue beyond his or her life span.

The recipient spouse should also have the power to change the beneficiary designation of the policy.

The recipient spouse may also consider disability insurance for the payer spouse in case they become disabled and will no longer be able to work and provide alimony and/or child support.

Question 26

Property Titling and Ownership

Answer 26

Sole ownership of property goes through probate at the owner’s death and the fair market value is included in the owner’s estate, subject to estate taxes.

An owner needs to have a will to pass the property to others at his death, or the property is subject to state intestacy laws. This is also similar to a tenancy-in-common form of ownership which can have multiple property owners. Each tenant-in-common must include their fractional interest in the property (one-half ownership, one-fourth ownership etc.) in their gross estate at death, and their property interest must be transferred by will or intestacy, which is subject to probate administration.

Question 27

What are the two forms of property ownership that pass automatically at death to the other surviving owners?

Answer 27

1. Joint tenancy with right of survivorship (JTWROS)
2. Tenancy by the entirety.
   Both forms of ownership avoid probate and only the value of the decedent’s property interest is included in their gross estate at death.

A joint tenancy with right of survivorship can be held with multiple owners but a tenancy by the entirety can only be owned between husband and wife.

Upon a divorce, the property can no longer be held as tenancy by the entirety. If the ex-spouses still want to hold the property together and avoid probate, the closest substitute is a joint tenancy (JTWROS). This will require a change in the deed of the property. The titling of the property can also be changed to a tenancy-in-common, but this form of ownership would not avoid probate at the owner’s death. If the property is changed to being held as a tenancy in common, then upon the death of one of the owners, his or her interest in the property (one-half of the property’s fair market value) will be included in his or her estate at death.

Question 28

Question

In tenancy by entirety ownership, what happens to a joint owner’s interest upon death?

1. The interest goes to the deceased owner’s spouse
2. The interest goes to the estate of the deceased owner
3. The interest goes to the heirs of the deceased owner
4. The interest goes to the designated beneficiary

Answer 28

1. The interest goes to the deceased owner’s spouse

Tenancy by entirety is a form of joint tenancy property titling but may only be used by spouses. At the death of one spouse the deceased owner’s interest automatically goes to the deceased owner’s spouse.

Question 29

Disability, Social Security and Medicaid - Trust recommendation

Answer 29

Disability insurance brokers boast that a person’s greatest asset is not anything material, rather it is his or her ability to earn an income. This power delivers all other assets.

Disabled persons may qualify for social security benefits earlier than retirement.
Disability under Social Security is based on the person’s inability to work.
Applicants are considered disabled under Social Security rules if they cannot do work that they did before and the Social Security Administration decides that they cannot adjust to other work because of their medical condition(s).
The disability must also last or be expected to last for at least one year or to result in death.

**Social Security provides two avenues of aid for the disabled: Social Security Disability Insurance and Social Security Supplemental Security Income. **
They both have strict guidelines for qualification. For more details on social security options available, visit SSA.gov.

Medicaid is also another source for funding a disabled person’s medical expenses. However, the best way to avoid losing the Medicaid benefits because of assets owned is to create a Supplemental Needs Trust to hold his or her assets. A person such as a family member may establish a Supplemental Needs Trust for a disabled individual without jeopardizing the beneficiary’s eligibility for Medicaid and other government benefits. Recent changes in federal and state law allow disabled persons to establish the trust with the disabled person’s own funds.

In risk management and insurance planning, considerable discussion goes into the need for disability insurance. As a rule of thumb, it is recommended that one should have 3 to 6 months worth of take-home salary saved in a cash reserve as emergency funds in case something such as an accident or illness occurs and leaves him or her disabled.

Question 30

Dependents with Special Needs

Answer 30

When a family has a child who has special needs or is disabled, the planning is not only for education, but also likely to be living expenses for the remainder of the child’s life.
In some severe cases, these children may never have the ability to earn their own income.

There are many expenses that may come with supporting a dependent who has special needs. There might be costs for therapy, costs for making the home accessible, and costs for special equipment, such as a wheelchair.

Parents of special needs dependents should begin a savings plan for their special needs children as soon as possible to allow the investment to compound. Gifts to minors, in account such as UGMA or UTMA, may help save money for the child, but they may also work against the child’s eligibility to receive government aid later on in life.

Concerns and issues for parents with special needs children:
- How do you protect a special needs child’s future government benefit eligibility for Social Security Income (SSI) and Medicaid?
- What will happen to their child when the parent is no longer able to care them?
- What financial resources will the child require?
- How do you select a guardian (and successor guardian) and/or trustee (successor trustee) for the child?

Question 31

List 3 Estate Planning Documents for Dependents with Special Needs

Answer 31

1. Guardianship Appointment: It is important to appoint a guardian who will be a committed advocate for the child. Also, the best guardian may not be the best trustee, as the role of the trustee will be to manage and administer the trust. Sometimes the best caregiver is not the best person to manage or make decisions about money.
2. Will: Allows parent(s) to name a guardian/successor guardian for the child/children. If a will is not drawn at the time of death, there will be no guardian appointment. The appointment will be left to a judge to make.
3. Letter of Intent: This is not a legally binding document, but it can provide insight as to a parent’s vision regarding their child’s future care and quality of life. The content may include names of doctors, known allergies, medicines, therapies, hobbies, likes/dislikes, and a parent’s desires for the child when he or she is no longer living.

Since money and assets should not be left directly to a special needs child, it is important to be sure that the child is not named as a beneficiary of a life insurance policy, annuity, or retirement plan.

Question 32

Special Needs Trust

Answer 32

If the disability looks to continue into the child’s adult life, a supplemental or Special Needs Trust can be created for the child. This trust is created to provide for a special needs child while preserving government benefit eligibility, as the assets held in trust do not belong to the beneficiary. The drafting of the trust is extremely important because the benefits of the trust are not supposed to supplant, but instead** supplement government benefits that provide food, shelter and clothing.**

A special needs trust cannot pay for room and board, but can pay for the following needs:
* medical/dental expenses
* annual checkups
* transportation and vehicle purchase
* equipment
* training programs
* education
* insurance
* rehabilitation
* vacations, and
* a home health aide.

A special needs trust is irrevocable and must be set up by parents or a third party. The trustee has discretion to use assets for the benefit of the disabled person and must handle all distributions from the trust. When the disabled person dies, unused assets can go to other siblings or family members.
If parents feel their child might be able to handle their own finances as an adult, they can allow the trustee to evaluate competency. The assets can then be transferred to the child.

Funds of the trust may come from a structured settlement. It can also come from life insurance. A survivorship, or second-to-die policy covers both parents and pays out on the death of the second. The special needs trust can be named as the beneficiary.

Practitioner Advice: A Special Needs Trust should be drafted by an Estate Planning Attorney because of the intricacies of the law in this area and the potential loss of government benefits if not properly drafted.

Question 33

Terminal Illness

Answer 33

Adequate estate planning ensures assets are properly distributed in a timely fashion. An estate-planning attorney can review wills and trusts and make any necessary changes and additions to those documents.

**It is also the time to identify how property is owned, how bank accounts are titled, and review life insurance policies and retirement accounts to make sure the correct beneficiaries are named.
**
**If a person chooses to receive money from an insurance policy to spend on the last days, either for pleasure or for medical expenses, he or she may be able to obtain a viatical policy. This allows the person to receive all or part of the life insurance policy proceeds while he or she is still alive.
**

Many life insurance policies now provide a feature in their policies called an Accelerated Death Benefit or Living Benefits Endorsement. This feature allows the insured to receive a portion of the death benefit if the insured is terminally ill.

**Another option is to assign ownership of your policy to a viatical settlement company and receive a percentage of the face amount of that policy. **The proceeds received by the policyholder as a result of a viatical sale are not taxable, though the viatical company may have a tax liability when the policy is paid. A viatical settlement falls under the “transfer for value” rules which will be discussed in subsequent courses.

Question 34

Non-traditional families

Answer 34

Non-traditional families typically consist of unmarried couples who may or may not have children.

Estate planning should have explicit instructions about who should receive assets from the estate because there is no surviving spousal protection. In addition, financial planning software can also be limiting when applied to non-traditional families.

**Regulations no longer prohibit unmarried partners from receiving Social Security survivor benefits **eliminating the general absence of advantages traditional married couples enjoy, such as Medicaid coverage for a spouse’s nursing home stay. In addition, it’s important that retirement accounts and life insurance policies have accurate beneficiaries named and periodically updated to reflect the wishes of the non-traditional family member. Also, pension options might not allow for a non-spousal beneficiary. These considerations need to be factored into retirement planning for non-traditional family members. Long-term care insurance may help with this dilemma.

For estate planning, the goal is to ensure the partners’ assets go to the people they designate. A will and/or a trust is necessary to make that happen, otherwise the state would distribute an unmarried decedent’s assets to their next of kin. Should your client want his or her partner to oversee decisions regarding medical and financial matters should he or she becomes incapacitated, it would be important to establish a Durable Power of Attorney and Health Care Proxy as the choice of an appointee may not be an obvious one. It is imperative that formal documents be established to avoid probate court.

Gift taxes may be an issue if partners are not contributing equally to accounts.

**Long-term care insurance could also be a valuable strategy in estate planning as a lien could be placed on a jointly owned home of a non-married couple should a partner require the assistance of Medicaid.
**
Even though normal divorce rules do not apply, non-traditional families may have the same troubles deciding on an equitable division of assets. A written contractual agreement, called a millennium family agreement or co-partnership agreement can help settle how assets, such as 401(k) and other retirement plans, should be divided if the couple decides to split up.

Practitioner Advice: A domestic partnership agreement can create a framework for the partners to list their wishes on how to transfer the ownership of their assets. It is redundant to a Will but it may help to avoid a contest of the will in a situation where family members might not be supportive. **For example, a couple may contribute unevenly to the purchase of their residence. The couple agrees that, initially the ownership should reflect each party’s proportional contribution, but that, over time, things should balance out to 50/50. This can be accomplished by drafting a sliding scale into the agreement. **

Question 35

Options for existing employer sponsored retirement plan accounts when changing jobs are:

Answer 35

1. Roll the funds into the future employer’s qualified retirement plans: Request for a direct rollover, where the check is made out to the plan administrator of the new company.
2. Keep the funds in the old plan: In the event the new employer does not sponsor a retirement plan, and the participant’s account is larger than $5,000, then it may make sense to leave the plan where it is.
3. Roll the money over to an IRA account: Open an IRA at a financial institution. Keeping the funds separate from other IRA moneys will allow it to be transferred to another employer-sponsored plan later on.

Question 36

How can you prepare for job loss so that you are not caught empty handed:

Answer 36

• Assess the security of the job position
• Identify the severance policy
• Establish an emergency fund of three to six months’ worth of fixed and variable expenses

The difference between being laid-off and being fired would be the availability of a severance package. There are a number of things that a company may do to assist employees who are being laid-off.

Question 37

What benefits are continued if laid off?

Answer 37

Depending on the job, companies typically will carry over for a short period certain benefits after a layoff:

• Medical Insurance
• Life Insurance
• Pension Credit
• Long-Term Disability
• Short-Term Disability
• Tuition Reimbursement
• Vacation Accrual
• Use of Office

Question 38

Section Two Summary

Answer 38

There are many special circumstances, such as divorce, that require the services of specialized financial planners. As a financial planner, it is important to understand the emotional side of the special circumstances to better serve clients. There are many web-based calculators and financial planning software available that may help determine one’s needs in cases such as divorce or disability.

In this lesson, we have covered the following:

Divorce: Division of assets, establishing alimony and child support can be done through mediation, arbitration or by court order. Division of assets is dictated by either community property state laws or through an equitable division. Alimony and child support are determined based on the need of the spouse with custody.
Disability: Government aid for people with disabilities is available from Social Security and Medicaid. If the person had a disability insurance policy, then the proceeds would help with the person’s expenses. A prolonged disability may necessitate the creation of a supplemental income trust that can hold assets to pay for living expenses not covered by governmental aid. It will also ensure that government aid such as Social Security and Medicaid is not limited.
Dependents with Special Needs: Planning must provide the child with not only education needs, but living expenses that can extend beyond the death of the parents. A special needs trust can be established to pay for expenses not covered by governmental aid for a dependent with special needs.
Terminal Illness: Planning for medical expenses for the remainder of the terminally ill person’s life, as well as the cost of carrying out the person’s wishes for his or her last days. If sufficient funds are available already for funeral and estate expenses, life insurance could be sold to supplement the expenses of the last days.
Non-traditional Families: Unmarried couples may not have the same regulatory protection and tax advantages that married couples have. Their estate planning instructions need to be more explicit. They will need more to fund retirement since surviving spouse benefits are not available. Also written agreements to assets would facilitate a division of assets in case the couple decides to separate.
Job Change: The most important part of planning for a job change is to determine what to do with the money held in a qualified employer sponsored retirement plan. Keeping the money in the existing plan, or a direct rollover into an IRA or another employer plan will maintain the tax deferred status without penalties. Taking the money out and not reinvesting it into a retirement plan within 60 days will incur a 10% penalty if the person was younger than 59 1/2. Also the entire distribution would become taxable at the person’s income tax bracket.
Job Loss: Unemployment insurance and severance packages help alleviate living expenses until a new job is found. Emergency fund planning ahead of time will help as well.

Question 39

Section One Summary

Answer 39

Depending on how it is handled, a monetary settlement can be a blessing or a curse. Many people who come across a monetary windfall have expressed that their fortune was not worth the aggravation that they experienced after winning. The problem with coming across a large sum of money is the many charities, friends, and families that will wish for a portion of the proceeds. However, those who come across monetary settlements who diligently seek financial and legal advice tend to become more comfortable with receiving the money. One way to determine whether or not a lump sum from a structured settlement is more suitable is to determine the discount rate used to arrive at the lump sum and evaluate whether a better rate can be found for the investment.

In this lesson, we have covered the following:

Legal settlement: Tort remedies that defendants owe to plaintiffs by court order or agreement. Insurance and ownership planning can help defendants handle such occasions and limit the exposure of personal assets. Plaintiffs who are awarded the settlement will need to determine how to best use the funds as a remedy for injuries.
Structured settlement: A stream of tax-free cash flows used to fulfill legal settlement rather than a lump sum. Often used for cases where on-going care is necessary as a remedy. The amount can be sold to receive a lump sum for part or all of the cash payments.
Lottery winnings and monetary windfall: Taxes are withheld before distribution takes place. Taking a lump sum is preferred for estate planning. Winners can sell their stream of cash flows in order to receive a lump sum.
Lump sum retirement distributions: A one-time payout of the entire account balance of a qualified retirement plan. The payout must be for a qualified reason such as attainment of age 59 ½, death, disability, or for separation of service. Distributions are generally taxed as ordinary income, but may also be deferred by rolling the balance into an IRA or another qualified retirement plan.
Insurance proceeds: Generally paid to the beneficiary as: 1.) a lump sum (one payment which is income tax free) or 2.) an annuity payment (each payment is partially taxed at the ordinary income tax rate with a tax-free return of the basis component).

Question 40

Module Summary

Answer 40

The financial planning process can be valuable in many life situations. Beyond the intricacies of dealing with normal life cycle planning are a variety of special situations where financial planning may be essential. Financial planning can guide selection of the most suitable way to receive monetary settlements. It can also serve to identify all the potential pitfalls under special circumstances. If a financial plan exists, all of the circumstances discussed in this module should trigger an immediate re-evaluation of the plan and prompt necessary adjustments.

The important points to take away from this module are:

Monetary Settlements: Can be paid in a lump sum or structured payments. Depending on the source, the payments may be taxable. It is important to consider estate planning when deciding which method of payment to choose. Monetary settlements can come from legal disputes, insurance policies, retirement plans, lottery or monetary windfalls.
Special Circumstances: Financial planning combined with legal and tax advisors are important in most special circumstances to make sure the client fully complies with the law, exhausts all available government aid, and takes the best course of action to ensure all parties are taken care of financially. Special circumstances can include divorce, disability, dependent with special needs, terminal illness, job change, and job loss.

Question 41

Section 2. Special Circumstances - Quiz Question

Jason has worked at ABC, Inc. for 15 years but has recently resigned and started working for Acme, Inc. Jason has accumulated $48,000 in his retirement account. Which of the following actions can Jason take and not be taxed IMMEDIATELY? (Select all that apply)
* Directly roll the funds into the Acme, Inc. qualified retirement plan.
* Keep the funds in the ABC, Inc. plan.
* Rollover the money to an IRA account.
* Wait and withdraw the funds when he turns 59 ½.

Answer 41

Directly roll the funds into the Acme, Inc. qualified retirement plan. You correctly checked this.
Keep the funds in the ABC, Inc. plan. You correctly checked this.
Rollover the money to an IRA account. You correctly checked this.
Wait and withdraw the funds when he turns 59 ½. You should have checked this.

Jason could take any of the actions listed above and not be subject to tax.

Question 42

Section 2. Special Circumstances - Quiz Question

Christopher, your long-time client, was recently injured at his job. He hasn’t been able to go back to work since being injured. Which of the following criteria would allow Christopher to receive disability benefits from SSA? (Select all that apply)

Christopher’s doctor said he cannot function and be gainfully employed.
It is determined he cannot adjust to other work because of his advanced age, education, adverse vocational profile and his medical condition.
Christopher’s disability is expected to last for at least one continuous year or result in death.

Question 43

Section 2. Special Circumstances - Quiz Question

David and Joanne have been married for 4 years and live in Texas. Due to irreconcilable differences they have decided to divorce. David had $30,000 in assets when they got married and Joanne had $10,000 in assets when they got married. They decided to commingle their assets together after marriage. Over the 4 years of marriage they accumulated another $50,000 worth of assets. What is the dollar value of assets that David will receive?

• $35,000
• $40,000
• $45,000
• $55,000
• $80,000