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Vol. 72, No. 1, January 2018
FOCUS ON Financial Planning Strategies
Strategy: Cross-Purchase versus Stock Redemption Buy-Sell Agreements in S Corporations
David K. Smucker, CPA, CLU, ChFC, MSM
Buy-sell agreements are a necessary part of any business succession plan. S corporations (whether electing limited liability companies or electing C corporations) are popular forms of doing business. The two basic buy-sell agreement structures are cross-purchase or stock redemption (entity). This article compares and contrasts the attractions and limitations of both structures, with particular attention paid to life insurance funding and the mechanics and taxation at death or retirement. It reviews variations—wait-and-see, one-way, and asset sales—as they are affected, then reviews many of the factors to be considered in choosing the appropriate structure. In the end it concludes that every plan needs to be tailored to the specific circumstances of each business.
Strategy: Assessing the Impact of Required Minimum Distributions on the 4 Percent Rule
Stephen J. Larson, PhD, CFP
This paper assesses the impact of required minimum distributions on the 4 percent rule. The main finding pertains to ending retirement account balances. They are likely to be overstated when required minimum distributions are ignored in an analysis, and this would create a false sense of security with regard to longevity risk and legacy goals.
Strategy: Using an IRA Trust for Asset Protection and Wealth Preservation
Julius H. Giarmarco, JD, LLM
It is often in the IRA owner’s best interest to name a trust as the beneficiary of the IRA. If done correctly, this can ensure funds stretch out and allow the IRA owner control over who the successor beneficiary will be after the primary beneficiary dies. At the same time, this will also protect the beneficiaries from their inability to manage funds well, their disability, their creditors, and their predators (including ex-spouses). However, IRA trusts are very complex instruments that must be carefully drafted to accomplish these objectives. If the IRA trust is not created to meet certain federal regulations, the beneficiaries could lose most of the benefits of inheriting tax-advantaged IRA assets.
Strategy: Tax Diversification
Stephanie Wendling, CPA
Kenn Beam Tacchino, JD, LLM, RICP
When it comes to the decision to choose an IRA, the conventional wisdom indicates that a Roth IRA should be used if tax rates are expected to rise in retirement, and the traditional, tax-deductible IRA should be used if they are expected to fall in retirement. This conviction, however, may be flawed because it ignores the implications of having tax-free money available in retirement that can be used to reduce the client’s tax liability and the client’s annual Medicare premiums. The ability to select income payments from tax-diversified accounts will enable the planner to optimize retirement spending by using resources on budgetary needs instead of squandering them on avoidable tax obligations.
By the Numbers: The 2018 Indexed Pension and Social Security Numbers
Kenn Beam Tacchino, JD, LLM, RICP
The 2018 indexed pension and Social Security numbers are presented in an easy-to-read table.
Economics & Investment Management
Exploring the Theoretical and Methodological Issues Surrounding the Relationship between Risk Tolerance and Wealth Accumulation
John E. Grable, PhD, CFP
Angela C. Lyons, PhD
Research that is applicable to financial advisors has grown in depth and breadth over the past 2 decades. Breakthroughs in economic modeling have been used to inform practice. While significant progress has been made, one area in particular continues to challenge the profession—the issue of endogeneity. This is a concept from economics that requires researchers and consumers of research to question causal relationships between and among variables. This column provides a basic overview of the concept of endogeneity from a practical perspective and concludes that financial advisors are wise to never consider correlation to be the same as causation. Or, as the economic profession famously asserts, “Correlation does not imply causation.”
Will You Be the One Who Leads the Succession Planning Process?
Dennis C. Reardon, JD, LLM, CLU, ChFC
If you think motivating your client to tackle estate planning is difficult, consider the challenges inherent in business succession planning. Right now, of the thousands of senior citizens newly minted every day, an indefensibly high number are experiencing a failure to launch the succession planning process. Maybe you should be the one to break the logjam. Someone has to, or the prompt to action will be one of those unpleasant involuntary events that can arise, such as family disharmony, health problems, or death.
Ethics & Regulation
The Dark Side of Retirement
Ronald F. Duska, PhD
It may be time for financial planners to advise some clients that retirement may not be in their best interests. If the job is rewarding, and interesting, the escape from retirement may indeed be a very good thing.
Supreme Court Clarifies the Definition of Church Plan, but Significant Open Issues Remain
Paul J. Schneider, JD, LLM
In a unanimous decision, the Supreme Court restored order to the church plan community by holding that an employee benefit plan sponsored by a church affiliate does not have to be established by a church in order for that plan to qualify for the church plan exemption under the Employee Retirement Income Security Act, as long as the plan is maintained by a principal-purpose organization. However, this decision will not end the litigation brought by church plan participants. There are other elements of the church plan definition that have to be resolved.
I’m Retired. Now What? Making the Most of the Longevity Bonus
Sandra Timmermann, EdD
Many people who have held busy and demanding jobs that provided fulfillment are seeking help with the transition from a productive career to another stage in life. Moving into retirement can be puzzling, disorienting, and sometimes depressing. Retirement can have its ups and downs, all at the same time. There are pleasures in being free from the daily grind. At the same time, the lack of focus and structure, coupled with a sense of loss in terms of age and position can eventually leave an empty feeling inside. Advisors need to help clients find their purpose and answer the inevitable questions of “Now what?” and “What’s next?”
Retiree Health Benefits Revisited
William S. Custer, PhD
Expectations of access, cost, and quality of health care in retirement have changed over the last 5 years. We take a closer look and make projections for the future.
Ready for Whatever Happens: Helping Clients Develop Resilience beyond Their Finances
Douglas B. Richards, JD, MBA, CLU, ChFC
Financial planners may want to consider encouraging their clients to have an emergency plan in place and to develop and maintain those things that help build resilience for times of crisis and unusual stress such as hurricanes. Support groups can contribute to resilience and can provide not only assistance in times of crisis but also opportunities to assist others, which can be just as meaningful and important to a person’s resilience. By encouraging clients to connect with others—whether that connection comes through churches, schools, associations, or even neighborhood gatherings—financial service professionals are helping their clients to be ready for whatever happens.