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Vol. 72, No. 6, November 2018
FOCUS ON Financial Services & Financial Planning
Best Practices in Buy-Sell Agreement Planning
April Caudill, JD, CLU, ChFC, AEP
One of the most important skills an advisor can offer to clients who own a business is the ability to understand and explain business planning needs. In the area of buy-sell agreements, the depth of technical knowledge, tax expertise, and practical experience necessary to do this thoroughly is much greater than it might appear. The results of a 4-year study of over 1,500 buy-sell agreements reveal a wide range of best practices and practical recommendations. Financial advisors who are aware of the client’s circumstances and goals can identify questions for discussion with the client’s attorney, suggest updating where necessary, and help ensure that there is adequate funding of needs upon death and disability.
Retirement Adequacy in the United States
Vickie L. Bajtelsmit, PhD, JD
Anna Rappaport, FSA, MAAA
Are future retirees on track to have sufficient resources to retire comfortably? Some studies suggest that there is a retirement crisis, and others conclude that the U.S. retirement system is healthy. The truth is somewhere in between. This article summarizes recent research studies on retirement adequacy and explains the differences in research objectives, empirical methodology, and model assumptions that have led to divergent conclusions.
An Update on Stable Value Funds Performance through 2017
David Babbel, PhD
Miguel Herce, PhD
In defined-contribution savings programs, the two major classes of financially engineered products are target date funds and stable value funds, each with upwards of $800 billion assets under management. Recent changes in the capital markets have caused a disruption in some traditional asset allocations, including stable value funds. The term premium that has generally prevailed between intermediate-term and short-term fixed income yields has shrunken substantially over the past 2 years, and the typical yield spreads between high-grade and low-grade bonds have also narrowed. This article updates recent research to include the past 2 years of data and shows some interesting and important new results that raise crucial questions to plan sponsors. The authors examine the performance of stable value funds since their inception in 1973 and compare this with the performance of other fundamental asset classes. While this article reports on past performance, it also discusses factors that would need to be incorporated when considering future performance.
Financial Planning Considerations for Americans Working Abroad
William F. Ragle, PhD, CFP
Paul G. Schloemer, PhD, CPA
The global economy frequently provides opportunities for employees of U.S. organizations to live and work overseas. Providing financial and tax planning services to clients becomes complicated when U.S. citizens reside outside the United States. The financial professional needs to be aware of tax laws and other financial regulations that impose severe penalties for noncompliance. Organizations that employ these expatriates should also be aware of potential pitfalls so that they can caution their employees and direct them to professionals who can assist them. This article provides an overview of key issues encountered by U.S. expatriates.
The 2018 JFSP Year in Review
Kenn Beam Tacchino, JD, LLM
In 2018, the Journal of Financial Service Professionals continued its proud tradition as a leading source of ideas for the financial services community. This column highlights the various topics we covered and lets you know what we had to offer this past year. We hope this summary is a useful tool for reviewing the educational opportunity provided by the Journal.
Accounting & Taxation
Intergenerational Split Dollar…The Beat Goes On
Thomas F. Commito, JD, LLM, CLU, ChFC, AEP
Intergenerational split dollar has been a controversial topic, at least for the past few years. In simplified form, it consists of an older-generation person purchasing a life insurance policy on a younger-generation person. Usually, the policy then is subject to an endorsement split-dollar plan, with an irrevocable life insurance trust (ILIT), normally set up with the older-generation person owning the cash surrender value and the ILIT owning the net death benefit. There have been two key issues with these plans. First is the setup of a valid split-dollar plan, and then, more importantly, are the gift tax consequences to the older generation.
Data Scraping and People Analytics: What Every Estate Planner Needs to Know
Mark R. Parthemer, Esq., AEP
Sasha A. Klein, Esq., AEP
The issues are complex, involving data used for research, as well as by major corporations, and compelling arguments exist on both sides regarding access to this data. There is direct fallout that impacts estate planning clients. Advisors simply must have an understanding to properly advise clients both on the estate planning and administration matters. This column is not intended as a comprehensive review of the myriad legal and financial aspects of data scraping, but conveys the key features relevant for estate planning advisors.
Ethics & Regulation
Environmental, Social, and Governance Forces Driving the Fiduciary Standard Forward
James Pasztor, MSF, MPAS, CFP
Environmental, social, and governance (ESG) issues will become increasingly important to 21st century fiduciary advisors and their clients. Advisors need to acquire the education and skills necessary to provide competent advice taking into account ESG risk factors if they want to look out for the best interest of their clients.
Social Security and Financial Security: The 1.42 Percent Solution
John N. Migliaccio, PhD, RFG, FGSA, MEd
Social Security funding concerns can be fixed with some minor changes; however, the sooner, the better. We look at some solutions preferred by a representative group of American citizens to restore and improve the Social Security retirement system and examine the impact that they may have on different generations.
Insurance & Risk Management
The Importance of End-of-Life Planning
Steve Parrish, JD, RICP, CLU, ChFC, AEP
For advisors who provide insurance and risk management to individuals and families, a growing area of interest is end-of-life planning. First, this topic has garnered public attention due to changes in medical technology and health care management. Second, state legislatures have given individuals and their families far more control over managing these decisions. To provide holistic risk management to clients, insurance advisors should know about end-of-life issues such as medical directives, medical powers of attorney, POLST orders, and physician-assisted suicide.
Qualified Plans & Retirement Counseling
Social Security Taxation
Christopher Cortese, CFP
When the Social Security Act of 1935 was executed and a funding system was born for eligible individuals, there was no tax provision for the income that would be received. Initially, the Treasury’s underlying rationale for not taxing Social Security was around the definition of what type of income it was considered. Benefits under the act were considered “gratuities” and at that time, gifts and gratuities were generally not taxable. Social Security benefits come from three contribution sources: the employee’s payroll tax, the employer’s matching contribution, and the interest earned. Since none of the three components that make up the funding had ever been taxed, it was odd that the Social Security benefit was not eligible for taxation.
Social Security Planning
Social Security Coverage for State and Local Government Employees
Bruce D. Schobel, FSA, MAAA, CLU, CEBS
Many government employees working in noncovered employment have no idea of the special rules that may affect their future Social Security benefits. As a result, these employees may expect to receive significantly more retirement income than will actually be paid. Contributing to this problem is the fact that Social Security Administration (SSA) itself does not know who is affected by the government pension offset or the windfall elimination provisions until the individuals apply for benefits and disclose that they are receiving pensions based on noncovered employment. Until then, the personalized earnings and benefit estimate statements that SSA provides upon request will overstate potential future benefits. This can impede sound financial planning.
An Advisor’s Introduction to Blockchain
Richard M. Weber, MBA, CLU, AEP (Distinguished)
Emerging into public use less than 25 years ago, the internet has changed virtually every aspect of modern life, producing extraordinary benefits and disruption. The next big thing may well be blockchain, a shared, decentralized, secure, unchangeable digital ledger, bringing increased trust and efficiency to business networks. Blockchain is the technology behind bitcoin—but cryptocurrency is just the first of many opportunities to bring commercial transactions firmly into the 21st century.
COMING IN JANUARY
Gender Issues, Small Business & Financial Planning