Topic 7
Financial Planning for
Special Circumstances
Topic 7: Financial Planning for Special
Circumstances
• Learning Objectives
– Evaluate the need for and recommend financial
management strategies for clients with special
challenges. Examples of these groups include:
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single head-of-household families,
non-traditional families,
pre- and post-divorce planning,
pre- and post-mortem planning,
remarriage,
elderly clients,
disabled clients or families with disabled offspring,
business owners, and
athletes/entertainers.
Topic 7: Financial Planning for Special
Circumstances
• Life changes such as divorce, disability, terminal
illness, job change, and appearance of dependents
with special needs can greatly impact and alter the
client-planner relationship.
• May need to return to step 1 in the planning
process
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Identify exactly who the client will be
Discuss client expectations
Communicate the planner’s ability to meet expectations
Explain the services to be provided
Define the scope of the engagement.
Topic 7: Financial Planning for Special
Circumstances
• Requires a review of each of the six core areas
of financial planning
– Fundamentals
– Insurance and risk management
– Investments
– Income taxation
– Retirement plan
– Estate plan
Topic 7: Financial Planning for Special
Circumstances
• “Normal” special circumstances
– Divorce
– Disability
– Terminal illness
– Nontraditional families
– Job change and job loss
– Dependents with special needs
– Monetary windfalls
– Elderly clients
Topic 7: Divorce – Practice
Management Issues
• Evaluate whether the planner is able to
continue to represent both husband and wife
– Who is the client (in whose best interest do you
act?)
– May need to terminate existing engagement and
enter new agreement(s)
Topic 7: Divorce – Reviewing
Fundamentals
• Distribution of assets
– Equal values of assets may still leave ex-spouses in
very different financial situations based on the type of
assets each party receives
• Evaluate after-tax cash flow
• Negotiating child support payments
– How long payments will continue
– Who will pay for private elementary and secondary
school and college tuition
• Negotiating alimony
Topic 7: Divorce – Reviewing
Insurance and Investments
• Insurance
– Assess the need for life insurance to protect
alimony and child support payments
– Medical insurance for ex-spouse and children
• Who will pay for children’s out-of-pocket medical
expenses
• Investments
– Re-evaluate risk tolerance and risk capacity
– Consider tax impact of investments
Topic 7: Divorce – Income Tax Issues
• Alimony is taxable to the receiver and tax
deductible to the payer
• Child support is not taxable to the receiver
and is not tax deductible to the payer
• Property settlements are non-taxable
– Property settlements disguised as alimony will
trigger a recapture tax
• Tax implications of who will claim the children
as dependents
Topic 7: Divorce – Reviewing the
Retirement and Estate Plans
• Retirement
– How to determine an equitable division of retirement plan
assets
– Qualified Domestic Relations Orders (QDRO)
• Ensures that a qualified plan can be divided as part of the property
settlement in a divorce, without any negative tax consequences to
either spouse
– Discuss spousal right to collect Social Security benefits
based on ex-spouse’s earnings
• Estate
– Update wills, trusts, POAs, beneficiary designations
– Ensure titles to assets get transferred
– Name choice of guardian for minor children in the will
Topic 7: Disability – Planning
Proactively
• Analyze sources of income and the relevant level of dependency on
each income source
• Ensure adequate emergency funds are in place
• Assist clients with selecting the appropriate
– Short-term disability plans
– Long-term disability plans
– Long-term care insurance
• Educate clients regarding Social Security disability benefits and how
they may coordinate with group and individual disability insurance
income
• Evaluate income tax impact on various disability income benefits
• Ensure that the client has executed and updated a durable power of
attorney and durable power of attorney for health care
– Sign HIPAA forms at each medical service provider to release information
to the DPOA
Topic 7: Disability – Reviewing the
Plan When a Disability Occurs
• Return to step 2 in the planning process to re-evaluate
goals, objectives, and time-frames and gather
information regarding the new financial situation
• Review disability income sources such as short-term
and long-term disability insurance policies, Social
Security disability, or the ability to adjust investments
to a goal of producing income
• Review cash flow plan and make adjustments as
needed
– Assess lump-sum cash flow needs such as the need to
equip a home for accessibility
• Review and update powers of attorney and advance
medical directives
Topic 7: Terminal Illness
• Clients diagnosed with a terminal illness may be
concerned with increasing their cash inflows today in
order to pay medical bills or enjoy life during the time
they have remaining
– Discuss the accelerated death benefits and viatical
settlement (An arrangement in which someone with a
terminal disease sells his or her life insurance policy at a
discount from its face value for ready cash. The buyer cashes
in the full amount of the policy when the original owner
dies.)
– Recommend the creation of a living will to direct how
extensively the client wishes to be treated medically when he
or she is near death
– A return to step 2 in the planning process will be necessary to
adjust goals and time horizons, to review the beneficiary
designations, and to ensure all prior implementation
recommendations have been completed
Topic 7: Nontraditional Families
• Single head-of-household families
– Subject to greater cash flow risk than families with two
earners
• Need for additional emergency funds
• Increased need for insurance planning
– Life
– Disability income
– Long-tem care
– Income tax filing status
– Retirement planning may prove challenging due to cash flow
constraints, time out of the workforce to care for children or
aging parents, and limited availability of qualified plans
– Estate planning documents must be in place and kept up-todate
Topic 7: Nontraditional Families
• Unmarried couples have special concerns
– They will not qualify for the marital deduction for
federal estate planning purposes
– Without a properly drafted will, beneficiaries who
are relatives may be entitled to the decedent’s
assets before the significant other of the decedent
Topic 7: Nontraditional Families
• Same-sex couples
– Many states do not recognize these relationships
– Federal laws will recognize the marriage of a
same-sex couple based on the “state of
celebration rule”
• If the couple is married in a state that recognizes samesex marriages, the federal government will recognize it
regardless of which state the couple currently resides in
• Applies to federal taxation, Social Security benefits,
qualified retirement plans, etc.
Topic 7: Job Change and Job Loss
• Just when things are going smoothly, an
unexpected job adjustment may dampen a
client’s plans toward saving for long-term
objectives
• Financial planners will need to focus on
– Retirement accounts
– Severance packages
– Unemployment compensation
Topic 7: Dependents with Special
Needs
• Families with a dependent with special needs will
have all of the same goals and planning issues as
families without a special needs individual, plus
additional challenges and planning needs for the
dependent with special needs
– In step 2 of the planning process, informationgathering will be increased to include identification of
additional social and government benefit resources
such as SSI, Medicaid, vocational rehabilitation, and
subsidized housing
– Care must be taken to ensure that any strategies
commonly used to achieve traditional planning goals
do not impede the availability of government
resources to help fund the special needs goals
Topic 7: Dependents with Special Needs
– Insurance and Investments Planning
• The usual need to protect the family against premature death
or disability of the parent, plus providing for the supplemental
lifetime needs of the dependent with special needs
– Life insurance on both the wage-earner and the family member
providing care for the individual with special needs
– Use care in selecting the type of life insurance (term insurance is
cheaper but the need is permanent)
– Do not name the individual with special needs as the beneficiary of
any life insurance death benefits (a special needs trust should be
the beneficiary)
• In addition to the typical risk and return assessments done in
investment planning, planning for a special needs family will
also focus on trust administration and investment
management
– As a general rule, the individual with special needs should have no
more than $2,000 in his or her name (including custodial accounts
and 529 plans)
Topic 7: Dependents With Special
Needs – Special Needs Trusts
• Clients who have dependents with special
needs should consider creating a special
needs trust
– These trusts allow the special needs individual to
be the beneficiary of the trust without impacting
the individual’s ability to qualify for public
assistance programs
Topic 7: Dependents with Special
Needs – Income Tax Planning
• Families who itemize deductions on their income tax return
are eligible to deduct medical expenses in excess of a 10%
floor (10% of the Adjusted Gross Income calculated on their
income tax return). Deductible Medical expenses may
include:
– costs of buying, training, and maintaining a guide dog or other
service animal
– fees paid on a doctor’s recommendation for a child’s tutoring by a
teacher specially trained and qualified to work with children who
have learning disabilities caused by mental or physical impairments
– cost of tuition, meals, and lodging when attending a school that
furnishes special education to help a child to overcome learning
disabilities
– admission and transportation to a medical conference concerning
the chronic illness of the special needs dependent
– special equipment installed in a home, or for improvements, if
their main purpose is medical care
Topic 7: Dependents with Special
Needs – Estate Planning
• Family members should have a will to avoid the dependent
with special needs receiving assets directly as a result of
intestacy law distributions
– Assets intended for the individual with special needs should be
directed to the Special Needs Trust to avoid disqualification for
government support benefits
• Care-givers should name in their will a guardian for the
dependent with special needs
– Guardian of the Person and Guardian of the Property need not
be the same individual
• Care-givers should draft a Letter of Instruction
– Explains everything a new caregiver should know about the
individual with special needs, including information about the
child’s daily routine, likes, dislikes, preferred activities,
medicines, friends, religious services regularly attended, etc.
Topic 7: Monetary Windfalls
• Financial planners may need to assist with
– Evaluating the alternatives of taking a lump-sum
payment or an annuity
– Investing the funds wisely
– Avoiding irrational exuberance
– Income tax issues
– Estate tax issues
• First determine whether you need to redefine
the scope of the engagement
Topic 7: Monetary Windfalls
• Lump sum vs annuity example
– Buck won the Megamillion lottery and was offered
a choice between $20 million today or $800,000
at the beginning of each year for 30 years. What is
the IRR on the annuity?
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PV = (20,000,000 – 800,000) = -19,200,000
PMT = 800,000
N = 29
FV = 0
Solve for I/Y = 1.31%
Topic 7: Working with Elderly Clients
• Remind elderly clients to keep POA current
– Involve the POA in planning so that he/she is aware of
clients wishes should the client become incapacitated
– Protects the planner from confidentiality issues in seeking
assistance if the client shows signs of diminished capacity
• Assist with housing decisions (CCRCs, downsizing, etc)
• Assist with insurance decisions such as Medicare and
Medicare Supplement insurance, and whether longterm care insurance is desirable and affordable
• Communicating Recommendations
– Speak slowly and clearly
– Split meetings down into shorter, focused segments
– Use larger font on printed communications
End of Topic 7