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How to Build Quality Custom Recommendations

Table of ContentsWhat are Quality Custom Recommendations?.................................................................................................3

Sample Format Using 4 Step Approach.............................................................................................................3

Enhance the Generic Paragraphs........................................................................................................................4

Generic Paragraphs...............................................................................................................................................5

Required Disclaimer for Modular Plans.......................................................................................................5

Net Worth..........................................................................................................................................................5

Cash Flow.........................................................................................................................................................6

Asset Allocation..............................................................................................................................................7

Life Insurance..................................................................................................................................................8

Disability...........................................................................................................................................................9

Long Term Care Insurance..........................................................................................................................10

Retirement Planning.....................................................................................................................................11

Special Situations for Retirement Planning..............................................................................................12

Monte Carlo....................................................................................................................................................15

Estate Planning.............................................................................................................................................15

Special Situations for Estate Planning......................................................................................................17

Income Tax....................................................................................................................................................20

Education.......................................................................................................................................................21

Asset Protection............................................................................................................................................22

Next Steps......................................................................................................................................................23

FOR INTERNAL USE ONLY. NOT FOR USE WITH THE PUBLIC. 2

How to Use This Document?

This document guides you through the process of creating quality custom financial planning recommendations. It includes a sample format using a four step approach that can be used to create custom recommendations. The guide also includes a library of generic paragraphs that can be copied to a Word document and modified as needed based upon the client’s specific situation.

What are Quality Recommendations?At the client delivery meeting, the financial planner will present the client with a financial plan and recommendations. Recommendations that are written by the financial planner are referred to as custom recommendations.

A frequently asked question is “What does a custom recommendations report include?” Generally, a custom recommendations report is intended to summarize the client’s goals, disclose major assumptions, present the findings of the analysis and suggest options to help meet the goals. Many planners have had success using the “suggested” sample format because it is easy to organize the discussion.

Consider the following when creating your custom recommendations to make them quality recommendations:

Be Objective-The recommendations should be objective with the financial planner appearing as knowledgeable and unbiased as possible.

Provide Options-The recommendations present more than one option for meeting the goal rather than just one alternative so that the client does not question the plan’s objectivity.

Present a Fair and Balanced Discussion-The recommendations explain both the advantages and disadvantages of each option.

Make Your Recommendation-The financial planner presents the option that is believed to be most suitable for the client and cites the reasons why.

Sample Format Using the 4 Step ApproachBelow is the sample format using a 4 step approach that you can choose to use. Following the sample format is an example of a retirement recommendation that was created using the 4 Step approach.

1State the goal. Restate the client’s goals for each section of the financial plan. Explain how the goal was determined.

2List assumptions used in the analysis.State material assumptions not clearly identified in the analysis. For example, assets earmarked towards the goal, assumed return rate and savings.

3Summarize the need and give findings. State if there is a surplus or shortage. Identify strong points or areas of opportunities.

4List options/choices. Make your recommendation.Try to list at least 2 options. Make your recommendation.

FOR INTERNAL USE ONLY. NOT FOR USE WITH THE PUBLIC.

What does a custom

recommendations report include?

3

Example: Retirement Goal Using Sample FormatGOALYou would like to be able to comfortably retire at age 60.

ASSUMPTIONSYou plan to maintain the same lifestyle as today assuming 3% inflation through age 90. You will continue current 401(k) contributions at 6% with a 3% company match assuming a current rate of return of 6%.

FINDINGSThe analysis indicates that you need to increase savings by $x,000 per month or allocate additional assets today in a lump sum amount of $xxx,000.

OPTIONS/CHOICES: When there is a shortfall, you may want to consider one or more of the following options: save more, increase investment returns, delay the goal or reduce the goal. Any combination of those options can and should be used to reach your goal. I suggest that you review your expenses and increase 401(k) plans as cash flow allows.

Review the positioning of your current investment and retirement assets to match your investment objectives and your risk tolerance.

Enhance the Generic Paragraphs …and make them quality custom recommendationsThe generic paragraphs included in the custom recommendations library are meant to be a starting point. As planners become more experienced, they enhance the generic content to make the discussion personalized and provide more value.

Let’s start with one of the generic paragraphs taken from the Retirement Planning section of this guide. We will enhance a retirement recommendation for hypothetical clients, John and Linda.

Generic Retirement Paragraph

Based on the assumptions made for the retirement analysis, unless you take corrective action, the plan shows that you may not be able to maintain your desired retirement lifestyle. You need to save about $278 on a monthly basis starting now.

Enhanced Retirement Paragraph

John and Linda, retirement is your top priority. Your goal is to retire in 9 years at age 67 assuming the same lifestyle as today. You have worked hard to accumulate your retirement assets of about $490,000. John is contributing 6% to his 401(k) with a 3% contribution by his employer.

The retirement analysis shows that you are not on track to meet your goal. You need to save an additional $278 a month based upon your current mix assuming a return rate of 7.1%.

You have a number of options which include saving more, working longer or delaying the goal. Congratulations on significantly improving your cash flow position since your last financial plan. Consider using your excess cash flow and increase your savings now. You mentioned that you really did not want to work longer so increasing your savings now appears to be a suitable option for you.

You don’t have any retirement funds in the “tax-free” bucket. Since John’s employer offers a Roth 401(k), consider contributing a percentage of his salary into the Roth 401(k). The contributions are not deductible, but qualified distributions are not subject to federal income taxes.


Let’s review what was done…We started with the generic paragraph that said the clients need to save more. Here is what we did to enhance the generic paragraph:

Restated the goal Personalized and praised client’s accomplishments Provided at least 2 options which were timely and appropriate Stated which option was most suitable and why

Enhancing the generic paragraphs may take a little effort at first but your clients will appreciate reading a recommendation that is personalized and specific to their needs.

How to Use the Generic ParagraphsBelow are generic paragraphs that can be incorporated in your custom recommendations document. To use the paragraphs in your custom recommendations document:

Highlight the paragraphs one at a time that are suitable for your clients.

Copy and paste the highlighted text to a Word document.

Feel free to enhance the content in the generic paragraphs by adding personalized and specific discussion based upon the client situation.

REQUIRED DISCLAIMER FOR MODULAR PLANS

The financial planner is required to include the following language in ALL modular plans in addition to the required custom recommendations in accordance with Prudential Financial Planning Services Policy – Defining Comprehensive and Modular Plans:

This (insert modules selected, e.g. retirement and education) analysis is based on the data and assumptions that you have provided or instructed me to use. It provides a snapshot of your current financial position and estimated resources needed to help meet your goal(s). The results that you achieve and the conclusions reached in your plan will be impacted by changes in your financial circumstances, the economy, market conditions and tax law changes. In addition, we agreed to not review your other financial needs or how an unplanned material event (for example, disability or unexpected health care needs and costs) will impact the analysis.

We recommend that you consider a comprehensive financial planning engagement. A comprehensive financial plan will give you a more integrated look at all of your current financial goals, help you map out a strategy to achieve them, identify appropriate steps to take, and point out risks. Although recommendations are made, if a comprehensive plan was prepared, the totality of the recommendations provided to you could differ.

NET WORTH Findings: (Choose one)

Your financial position appears positive. Your net worth is determined by the value of your assets minus your liabilities. The analysis shows that you have $xxx,xxx in assets and $xxx,xxx in liabilities, which leaves a net worth of $xxx,xxx. Congratulations are in order for the success you have achieved from all your hard.


Your financial position requires immediate attention. If you are to achieve your goals, then you need to focus your attention on managing your current spending and reducing your personal debt. It is important to set priorities for your personal goals and allocate fund accordingly.

Options/Choices:

Generally, 3 to 6 months of expenses should be held in a liquid account such as checking, savings or money market, for emergency purposes. For your situation, this means you should have at least $x,000 set aside for an unexpected event. You currently have a $x,000 in an emergency fund.

Consider a three-tiered approach to liquidity in your cash reserve: 1) tier one should be one to two months of immediately available funds such as from an interest-bearing checking account; 2) tier two should be one to two months in funds that you can access within 2 to 3 days such as money market funds; and 3) tier three should be one to two months of funds in investments such as mutual funds in a non-qualified investment account where you are not significantly penalized should you need to liquidate some of them to make cash available. This tiered method gives you higher availability of your funds when necessary, yet overall gives you a potentially higher investment return.

We recommend that you consider establishing a home equity line of credit. The line of credit may be used for an emergency expense that exceeds available liquid cash balances.

Reduce your credit card debt and monitor credit card purchases. Credit cards carry a relatively high interest rate and the interest paid is generally not deductible. By eliminating your credit card balances, you can make dollars available for other financial goals.

The mortgage interest rate on your home is higher than present mortgage rates. Consider refinancing your present mortgage to a lower interest rate mortgage, which may lower your monthly mortgage payments and give you more discretionary income to help you reach your financial goals. If you qualify for refinancing, also consider refinancing for a time period less than 30 years that may further reduce your interest rates and move you closer to your goals.

CASH FLOW Findings: (Choose one)

As shown in the cash flow analysis, you may have excess cash this year. The analysis shows you have cash inflows of $xx,xxx and cash outflows of $xx,xxx resulting in a $x,xxx in excess cash flow for this year. It is important to set priorities for your financial goals and allocate the excess funds accordingly.

As shown in the cash flow analysis, you may be overspending this year. The analysis shows you have cash inflows of $xx,xxx and cash outflows of $xx,xxx and may be overspending this year by $x,xxx. This may cause you to use funds from your long-term investments to fund current expenses. You should review and adjust your expenses as needed.

Options/Choices:

A sound strategy is to pay yourself first. Invest in vehicles that offer an automatic savings plan so that your excess cash flow is automatically invested in an account of your choice on a regular basis.

Dollar cost averaging can be an excellent long-term strategy. Such a plan involves a continuous investment in securities regardless of fluctuating price levels of such securities. Dollar Cost Averaging does not guarantee a profit nor remove the risk of a loss in a declining market. You should consider your financial ability to continue participating in such a plan during periods of low levels.

Consider using personal planning software to help you monitor and track expenses. It is important that you understand your current spending habits and regularly review your cash flow. Overspending may result either in


an increase in debt or depletion of capital. Cash flow surpluses should be captured and applied to your financial goals.

Consider saving a portion of your free cash flow in an account for future large purchases such as vacations and cars. Pay cash for your next vehicle and avoiding debt will allow you to maintain a financial stress free retirement.

ASSET ALLOCATION The first step in formulating your investment plan is to evaluate your risk profile and time horizon, and use that data to determine an appropriate investment asset allocation which best suits your needs. It is a process of optimization, where an attempt is made to maximize your return and minimize your risk or portfolio volatility by diversifying among various investment classes. Investing in a variety of asset classes can help you protect your portfolio from excessive volatility in any one particular class.

The proposed allocation was developed by applying an investment model designed by Prudential Investments with the assistance of an independent consulting firm to analyze your responses to the investment questionnaire. The proposed allocation is based on generally accepted investment theories, including an analysis of the historical long-term performance of various asset classes. There is an objective correlation between your proposed allocation and your responses to the questionnaire. You may elect to adopt the proposed allocation or choose your own.

Options/Choices:

Using the asset allocation model generated from the risk tolerance questionnaire you completed, along with the time horizon for your financial goals, the analysis indicates that you should consider repositioning assets to more closely match your investment risk tolerance. Consider re-allocating your portfolio as follows:

% Stocks% Fixed Income% Cash

Keep in mind that tax consequences must be considered when reallocating non-qualified assets. Consult your tax advisor.

Your tolerance for risk is an important factor in deciding what financial products you will be comfortable purchasing and owning. Sometimes this decision involves a compromise. In order to obtain the rate of return that will keep pace (or even outpace) inflation, you may need to invest in more aggressive investments. However, more aggressive investments may give you additional risk with the potential of loss as well as gain. It is important that you understand and feel comfortable with the financial products you choose.

In order to move towards this asset class mix, consider repositioning your qualified assets first. Then develop a schedule for repositioning other dollars that are earmarked for retirement but held outside of a qualified retirement plan. Keep in mind that tax consequences must be considered when reallocating non-qualified assets. Consult your tax advisor.

An alternative for your investments would be to consider either a professionally managed investment program or a wrap fee managed money program. Managed money programs offer you a choice of different individual account managers provided through one comprehensive statement. This set up allows you the experience of proven institutional managers on an individual level. Another benefit to a managed money program is the direct ownership of securities providing for individual tax management abilities such as tax-loss harvesting and offsetting of gain, tax exempt and fixed income strategies, as well as the ability to choose limited exposure to certain securities based on your individual choice. A wrap fee managed money program offers you a choice of many different mutual fund families provided through one plan and one statement. Considering more families of funds would offer a greater selection and allow you to reallocate your portfolio to match your investment criteria.


In addition to investment class diversification, you should generally limit your investment in any single, non-diversified investment to no more than 10% of your portfolio. There is some risk associated with allowing too much of your investment portfolio to be based on the performance of one stock. Diversifying out of a stock may have tax consequences. You should determine a holdings limit with which you are comfortable. Then, we can discuss a tax-efficient way to help get there consistent with your other goals.

As time passes, market changes will have different impacts on each asset class within your selected investment portfolio. This will cause some assets to grow or decline faster than other assets in your portfolio. Reviewing your assets is critical to maintaining your progress towards your goals. Consider re-balancing your portfolio at least annually. If your goals, savings rates, income tax rates or time-frames change proper adjustments to your investment strategy should be made based on these new factors.

LIFE INSURANCE Your premature death could have a severe financial impact on your survivors. Short term needs, such as funeral expenses and costs associated with the administration of an estate can place a financial burden on your survivors at an emotional time in their lives. Other long-term needs, such as paying off debt, providing for survivors and funding other goals, can adversely impact your survivors for many years into the future. Life insurance can be used to help mitigate these risks.

Findings: (Choose one)

The analysis shows a gap in your coverage. Using current available resources and existing insurance, there is a shortfall of about $xxx,000. Consider purchasing additional life insurance to cover the shortfall.

The analysis shows that using current available resources and existing life insurance, you have no life insurance shortfall. Review your coverage periodically to ensure it continues to meet your changing needs.

Options/Choices:

In order to choose the most appropriate type of coverage, consider the duration of the need, the amount of the protection needed and your ability to pay the life insurance premium. Term insurance is a temporary solution to a temporary need. Consider permanent life insurance for helping to meet needs that will remain throughout your lifetime.

Below are some options you may want to consider:

Life Insurance Types

Term Insurance - It provides insurance protection for a specified period (term) and pays a benefit only if the insured dies during that period. Most common types include annual increasing term, level term and decreasing term. Convertibility gives you the option of converting all or a portion of the term life insurance to a permanent life insurance policy without evidence of insurability.

Whole Life Insurance - Permanent life insurance that combines a death benefit with a cash value element. The cash value increases each year the policy is kept in force provided all premiums are paid when due and there are no outstanding loans or withdrawals. In addition, values may be increased by dividends (which are not guaranteed and will change).

Universal Life Insurance - Permanent life insurance that generally allows the owner to determine the amount and frequency of the premium payments within limits and to adjust within limits the policy face amount up or down to reflect changes in needs.

Variable Life Insurance- Permanent life insurance with an investment feature that provides a return linked to an underlying portfolio of investments (common stock, bond, money market account or other investments). Cash value of the policy fluctuates with the performance of the investment portfolio. Performance is not guaranteed and the policy owner assumes the risk.


Consider purchasing a combination term and permanent life insurance policy. This option can be cost effective and provides you with permanent life insurance with the option to convert all or a portion of the term life insurance to the permanent life insurance policy without evidence of insurability, if you convert within the conversion period.

Given your current life insurance need, consider purchasing a life insurance policy with a long-term care rider. The life insurance death benefit can be used for long-term care benefits with in home care or facility care. The unpaid portion of the death benefit will be paid to the beneficiaries of the life insurance policy at death. If a long-term care event doesn’t occur, the premiums paid will be recaptured due to the death benefit payment claimed by the beneficiaries.

Consider supplementing your current group life insurance coverage. You may be able to convert this insurance when you retire but the rate may reflect your age at that time. Personally owned life insurance will not be affected by changes in benefit programs or employers.

Consider utilizing the cash values of life insurance that not only provide for your life insurance needs but a way to potentially accumulate assets on an income tax-deferred basis. Cash value can be accessed via loans and withdrawals that reduce the death benefit and cash value and may have tax consequences.

DISABILITY A disability can disrupt an otherwise prudent and successful financial plan. It is important that every sound financial plan include a method of providing adequate income in the event of disability. Disability income insurance is designed to provide an income supplement in the event you are unable to work due to illness or accident.

We do not consider Social Security disability income in the analysis since we consider a person to be disabled if they cannot engage in their own occupation and Social Security uses a stricter definition of disability.

Findings: (choose one)

Based upon your desire to provide for the assumed standard of living in the event of disability, the analysis shows an average monthly shortfall of $x,xxx. Consider disability income insurance coverage to provide protection in this area.

Based upon your desire to provide for the assumed standard of living in the event of disability, the analysis shows no shortfall.

Options/Choices:

Consider enrolling in group coverage at work. Generally, an employer’s long-term group disability income plan covers only a specified percentage of salary and not other compensation such as bonuses, company pension retirement benefits or other forms of company provided compensation. Almost all company plans integrate benefits with social security which reduces your company benefit. Use after-tax dollars to pay for long-term disability coverage under your employer’s flexible benefit plan so that any benefits you receive will not be taxable. Consult your accountant or tax advisor regarding your particular situation.

The main points to consider in selecting a disability policy are:

Monthly benefit-How much do I need and how much can I get?Waiting period- When will the benefits start? Generally 30, 90, 180 days or 1 yearBenefit period- How long will benefits last? Generally 2 or 5 years, lifetime to 67Definitions – Own Occupation, Training, education and experience, any gainful employmentOptional benefits-For example, inflation protection/cost of living. May be available at an additional cost.

Consider a policy that is non- cancellable and guaranteed renewable. With a non-cancelable option, if you pay the premiums, the insurance company cannot cancel or modify the provisions of the policy although they can increase the premiums for an entire group of policyholders. The guaranteed renewable option gives you the right to renew the policy annually, regardless of your current health, up to a maximum age, generally 65. Consider a


cost of living benefit which gives you the option to increase your benefits to reflect an increase in the cost of living (inflation indexing). Many companies charge extra for certain options.

Consider individual disability income insurance. You may not want to rely on just group policies. The amount of coverage may be inadequate or may cause uncertainty should you change jobs or your employer changes insurance providers.

Review your coverage periodically to ensure it continues to meet your family’s changing needs. Monitor your protection needs to ensure you are in a position to help meet your disability income need.

LONG TERM CARE INSURANCE One of the greatest risks to the preservation of a retiree’s assets is a long-term care event. A Long-term Care event is the inability to perform two or more important activities of daily living due to old age, sickness and/or an accident. This includes bathing, transferring, toileting, dressing, eating, continence, and/or a mental impairment. A Long-term care event can happen at any age.

If long term care is needed, it can be costly. Consider purchasing a long term care insurance policy to maintain your independence and choice, as well as protecting your assets from the high cost of a nursing home, an assisted living facility, or home-based care.

While the analysis depicts the effect on your assets if either one of you should require long term care, it does not show what would happen in the event that you both needed long term care at the same time.

Options/Choices:

Your three options are: self-insure, rely on your assets and Medicaid, and transfer the risk to an insurance carrier.

The design of coverage and benefits under most long-term care policies can be very flexible. Look for benefits that cover the costs of care in a facility, at home, or in the community (e.g. adult day care). At your age, compound inflation coverage is a necessity, as well as having an adequate level of benefits, to keep pace with the medical inflation rate over a long period of time. Also look for a policy design that allows for benefits to be paid for future trends in delivering long-term care services. Other options and features can be designed into the coverage to fit your needs.

When evaluating the components of long-term care coverage, the following should be examined:

FEATURES CHOICESWaiting Period 0,30,60,100 daysLifetime Maximum 3,4,5 years or lifetimeDaily Maximum $xx-$xxx per dayPayment Method Daily, Monthly or Cash BenefitInflation Protection Period, Simple or Compound

Consider a policy design that offers shared care benefits where if one of you requires care and the other does not, your benefit pools can be shared. There are many options with a great amount of flexibility to meet your specific needs.

This may also be a good topic to discuss with your parents - to see what steps they have taken to protect themselves from the cost of a long term care event.


RETIREMENT PLANNING Findings: (choose one)

Based on the assumptions made for the retirement analysis, unless you take corrective action, the plan shows that you may not be able to maintain your desired retirement lifestyle. You need to allocate additional assets in a lump sum of about $xx,xxx or save about $xxx on a monthly basis starting now.

Congratulations! It appears you should be able to maintain the retirement lifestyle you desire, based on the analysis and the assumptions made. Since changes in lifestyle and unexpected events can occur, it is important that we continue to monitor your situation.

Options/Choices:

When there is a shortfall, there are several strategies that you can consider to accomplish your retirement goal. You may want to consider one or more of the following options:

Save more as cash flow allows, Adjust your retirement expenses, Delay your goal and/or work part time during retirement years, Invest more aggressively

Review the positioning of your current retirement investments to see whether they match your investment objectives and proposed investment mix. By planning for this retirement objective early, you will help generate money that will be available when you need it in later years.

We recommend that you consider making your investments within the framework of a “tax control triangle strategy.” A portion of your investments should be made into tax-deferred investments such as your 401(k), IRA or annuity contract. A portion should be potentially tax-free investments such as Roth IRAs, ROTH 401(k) or tax-exempt bonds. Another portion should be in taxable investments such as mutual funds, real estate, money market funds or certificates of deposit. This strategy helps lessen the future impact of changing tax regulations and changing financial conditions by providing investment options that function differently. Over time, taxes will become by far your largest single component of your expenses. Prudential Financial, its affiliates and its financial professionals are not tax or legal advisors. You should consult with your attorney or tax advisor.

Take full advantage of funding your qualified retirement plan and maximize pre-tax contributions if possible. Your taxable income will be lowered and you gain the additional benefit of earnings growing tax-deferred for retirement.

Consider funding a Roth 401(k) if offered by your employer. Although contributions are not deductible, the account grows tax-free and future distributions taken during retirement are not taxed provided you are 59 ½ and you have held the account for 5 or more tax years. Unlike a Roth IRA which sets income limits on eligible contributions, there are no income restrictions for a Roth 401(k). The maximum employee deferral set by the IRS does apply to combined regular 401(k) and Roth 401(k) contributions. So make sure you meet with your accountant to discuss the appropriate amount of pre-tax savings to make to a regular 401(k) and the amount of after-tax savings to make to a Roth 401(k).

Annuities are another vehicle to consider for building protection strategies into your retirement planning. Consider a variable annuity for a portion of your investment assets or IRA. Annuities offer advantages and disadvantages. An annuity allows for unlimited deposits and tax deferred growth on earnings. An annuity can provide for extra features or options for additional costs and fees. A guaranteed minimum withdrawal benefit is an option that can be purchased to protect against downside market risk by allowing the annuitant to withdraw a maximum percentage of the entire investment each year. Annuities have disadvantages that need to be considered. Distributions of earnings are taxed as ordinary income and a 10% penalty applies on distributions received prior to age 59 ½. Generally, annuities have expenses including mortality and administrative expenses. Annuities also have surrender charges for a number of years, so should you take some money out within the first few years of the annuity's life, you would not only have to pay the 10% penalty if you were less than 59 ½, pay the taxes on the gains, but you would also have to pay surrender charges.


(Only include if there is a need for additional life insurance.) A variable life insurance policy, in addition to providing the benefits of life insurance, may accumulate cash values that can be used for your retirement goal. Benefits include investment option choices, tax-deferred cash value accumulations, diversification, generally income tax-free death benefit, income tax-advantaged withdrawals and loans may be available. (Unpaid loans and withdrawals cause a reduction in cash values and death benefits. In general, loans are not taxable, but withdrawals are taxable to the extent they exceed basis in the contract. Loans outstanding at policy lapse or surrender prior to the death of the insured will cause immediate taxation to the extent of gain in the contract. For policies, which are Modified Endowment Contracts, distributions (including loans) are taxable to the extent of income in the contract, and an additional 10% federal income tax penalty may apply.)

SPECIAL SITUATIONS FOR RETIREMENT PLANNING When to Start Social Security Benefits

For many people, when to start social security benefits is one of the most significant financial choices they will make.

There’s no one-size-fits-all answer. When to begin social security benefits depends on a number of factors, such as your cash needs, your health and family longevity, whether you plan to work in retirement, whether you have other retirement income sources, your anticipated future financial needs and obligations and the amount of your social security benefit.

You can start your social security benefits as early as age 62 or as late as age 70. Your monthly benefit will be different depending on the age you start receiving it, If you choose to start your benefits early, they will be reduced based on the number of months you receive benefits before you reach your full retirement age. The reduction in your benefit amount also depends on the year you were born. You could also receive a reduction in your benefit amount if you work after you start receiving benefits.

Medicare Supplement Insurance (Medigap policy)

Medicare pays for many, but not all, health care services and supplies. Medicare Supplement Insurance policies can help pay some of the health care costs that Medicare does not cover, like deductibles and co-payments.

The federal government regulates these types of policies to assure uniformity among the benefits that are offered and covered in each policy. There are ten standardized policies that are available. All policies offer the same basic benefits, but some offer additional benefits so you can choose which one meets your needs.

Medigap plans no longer cover prescription drugs, so if you purchase Medigap, you will also have to buy Part D Medicare coverage (prescription drug coverage).

The best time to buy a Medigap policy is during the Medigap Open Enrollment period. This period begins on the first day of the month in which the applicant is age 65 or older and enrolled in Medicare Part B and lasts for 6 months.

Defined Benefit Pension Options

When deciding how to receive their pension benefits, defined benefit plan participants usually have three options: Single Life, 100% Joint and Survivor, or 50% Joint and Survivor.


The Single Life option provides the highest annual pension income and pays only during the life of the pensioner; upon death, the payments cease. While this option may make sense for a retiree without dependents, it typically is not attractive to retirees with a spouse or other beneficiaries relying on the pension.

Under the 100% joint and survivor option, an amount significantly less than the maximum payout is offered in return for an extension of benefits to the pensioner’s beneficiary after the pensioner dies, an attractive option for participants that must provide for a younger beneficiary with a life expectancy greater than their own. Once the beneficiary passes away, however, the benefits are canceled. One benefit of taking the 100% Survivor option is that upon the first death the survivor would continue to receive the decedent's pension. Both pensions continue until the survivor's death. Only spouses are eligible to receive the survivor benefit under this option.

Under the 50% joint and survivor option, an amount less than the maximum payout but greater than the 100% joint and survivor option is paid for the duration of the pensioner’s life. When the pensioner dies, the beneficiary receives 50% of the original pension benefit until death. This option is an attractive alternative for participants with beneficiaries that also have some retirement savings.

An extremely critical issue to determine is whether or not your pension plan requires you to select the joint and survivor option in order to continue post-retirement medical benefits.

In order to get an idea if this alternative would work for you, you should first check with your pension plan administrator and find out about your projected benefits.

Net Unrealized Appreciation (NUA)

If you take a lump sum distribution from your retirement plan and it includes company stock, it may be tax-wise to not roll the stock over to an IRA but rather pay ordinary income tax on it. One of the details to check before your 401(k) is rolled over to an IRA is whether there is any Net Unappreciated Appreciation (NUA) in the account. The NUA election allows employees to take a lump sum distribution of company stock from their retirement plan and pay ordinary income taxes on this stock's basis. The difference between the basis and the fair market value, the NUA, is taxed at long-term capital gains rates when the stock is eventually sold, regardless of the holding period. This can be a better option than rolling the stock into an IRA where all distributions will be taxed as ordinary income when distributed.

The special tax treatment of NUA is a “window of opportunity”. In order to determine whether this strategy is appropriate for you, the following should be considered:

Individual’s age and tax bracket. Ability to pay income tax on employer’s cost basis at distribution. Potential growth of stock. Individual’s need for diversification. Plans to leave to heirs.

Prudential Financial, its affiliates and its financial professionals are not tax or legal advisors. You should consult with your attorney or tax advisor.

Options for 401(k)

Should you leave your current job, you have several options regarding our 401(k) plan. It is important to consider all of your options carefully before making a decision. Your options include:

cash out the account value; leave the money in his former employer’s plan, if permitted; roll over the assets to his new employer’s plan, if one is available and rollovers are permitted; or roll over to an IRA.


If you decide to cash out of the account value for the full vested balance, the plan is required to withhold 20% for income taxes. You will have to pay income taxes on the gross amount of the distribution, and if you are under 59 ½, an additional 10% penalty may also apply. You should consider whether or not his is suitable for your needs.

An option may be to leave the funds in the existing 401(k) plan, if permitted. Many employers will allow ex-employees to maintain accounts indefinitely. You have to find out if there is a required minimum amount for your particular 401(k) plan. If you are at least 55 when you leave your job, you are eligible to take penalty-free withdrawals from your former employer’s 401(k) plan. This option is not available if you roll the money over to an IRA. If your company retirement plan account holds some appreciated employer stock when you leave your job, you may be better off leaving the employer stock and other funds in the plan. If the stock and other funds are later withdrawn as part of a lump-sum distribution, the employer stock may be eligible for favorable income tax treatment. The tax advantages of retaining employer stock should be balanced with the risks of holding too much employer stock in a retirement plan. Both plans and IRAs typically include investment-related expenses and plan or account fees including administrative fees. Check the fees that are being charged for fund investments in an IRA. Sometimes there are special lower-fee versions of mutual funds only available in 401(k) plans and in some cases employers pay for all or some of the plan’s administrative fees. Also, some plans provide access to investment advice, planning tools, telephone help lines, educational materials and workshops.

You may be able to transfer the funds from your old 401(k) plan to your new 401(k), if one is available and rollovers are permitted. There are no taxes or penalties involved. You can keep all of your retirement funds and can now add to it in the new 401(k) plan. Before selecting this option, you should review the investment choices in your new employer’s plan. If you find the selection to be lacking, then the IRA option discussed below may be an option for you. Also, there may be a waiting period before you are allowed to participate in your new employer’s 401(k) plan. It also may be easier to borrow from a plan.

Another option may be to roll the funds from your 401(k) to an IRA. This option normally provides the largest number of investment options. The importance of this factor will depend upon how satisfied an investor is with the options available under the plan under consideration. Also, IRA providers offer different levels of service, which may include full brokerage service, investment advice, distribution planning and access to securities execution online. State laws vary regarding creditor protection. Other considerations for this option include:

There is no tax due on the distribution from your employer. Earnings within the IRA continue to grow tax-deferred. Distributions are not required until you are 70 ½ years of age and tax penalty free withdrawals may be

available for certain situations. Be aware that lump-sum distributions that include employer stock would be treated differently. The special

treatment available for employer stock is lost if these funds are rolled to an IRA. If employer stock is transferred in-kind to an IRA, stock appreciation will be taxed as ordinary income upon distribution.

Roth IRA Conversions

Starting in 2010, anyone can convert their Traditional IRA to a Roth IRA, regardless of income or tax filing status. Previously, those clients with modified adjusted gross incomes were not eligible to convert to Roth IRAs. The $100,000 income ceiling for Roth IRA conversions is permanently repealed, so higher-income clients can now convert their IRAs. Married individuals filing separately can also now convert. However, not all clients who are eligible to convert should do so.

Here are some factors you should discuss with your tax advisor when deciding if converting to a Roth IRA is right for you.

Do you expect your tax rate to go up? If so, a Roth IRA conversion could be in your best interest since qualified distributions from Roth IRAs are received income tax-free, whereas distributions from a Traditional IRA are generally taxable. The old rule of thumb was that most retirees could expect their tax brackets to go down in retirement. However, this may no longer be applicable. Further, many believe that with soaring federal deficits and the rising costs of entitlement programs like Social Security and Medicare, tax rates will have to increase in future years. Keep in mind if you are under age 59 ½, converted Roth IRAs must be open at least five years before you can make penalty-free withdrawals.

Do you have another source to pay the tax on the Roth conversion? If you convert to a Roth IRA, you must pay a tax on the amount converted. Most tax advisors agree that you should only consider a Roth IRA


conversion if you have another, non-qualified source of funds to pay the tax on the conversion. Using the IRA itself to pay the tax is generally not advisable.

How long do you intend to keep the funds in the Roth once you convert? If you anticipate taking distributions within a few years of converting, the advantages of converting may not be significant. The longer your funds remain untouched within the Roth IRA, the more your account will benefit from tax-free compounding and the more advantageous the conversion is. The further off retirement is, the more worthwhile the Roth conversion.

Will you need the funds in retirement? Traditional IRAs generally require you start taking distributions, and pay taxes on those distributions, starting at age 70 ½. Roth IRAs have no required minimum distributions while you are alive. So if you would prefer to not touch the money for as long as possible, a Roth IRA may be the better choice. A Roth IRA can be a valuable estate planning tool. Not only does the Roth grow income tax free but distributions are not required during your lifetime, thereby creating a great opportunity to accumulate wealth. And, after your death, your beneficiaries will receive distributions income tax-free.

Will a conversion push you into a higher tax bracket? The additional taxable income from the conversion may push you into a higher tax bracket or subject you to the Alternative Minimum Tax. This could cause you to not only pay higher taxes sooner, but may cause you to lose the benefit of tax deductions or credits that you would otherwise be eligible to take.

If you're not sure if a Roth IRA conversion is right for you, consider a partial conversion. The Roth conversion isn't all or nothing. You can convert part of an IRA or qualified plan to a Roth. This way, you will have more options down the road. (Note that if your Traditional IRA is invested in an annuity contract, a partial conversion may subject you to surrender charges and may impact benefits under your annuity contract.)

MONTE CARLO

The retirement analysis shows that your retirement goal is covered. This analysis is performed using a constant rate of return as shown in the retirement section of your financial plan. If it is assumed that your portfolio will be 100% successful based upon a constant return, how will your goal be impacted if you don’t achieve this constant return because of market fluctuations? Your desired retirement lifestyle could be drastically impacted.

Because investment rate of returns are not constant from year to year, I have included a Monte Carlo analysis to evaluate the effect of fluctuating investment returns. The Monte Carlo analysis analyzes the plan by randomizing the rates of return within the normal annual range based upon the standard deviation of the portfolio. Monte Carlo performs this analysis 1000 times to simulate a number of possible financial outcomes. An overall probability of success is calculated based upon the results of these multiple outcomes.

A proper perspective is important in evaluating the result of the Monte Carlo analysis. This analysis is designed to bring attention to the fact that the variation of returns is important to monitor. Even small reductions in risk and improvements in return can dramatically improve the predicted outcome. Only careful monitoring will tell you if these improvements are being realized.

ESTATE PLANNING

It is important that you have a will and update it regularly with an attorney to make sure that it represents your wishes and takes advantage of current tax laws. A will allows you to choose who receives your estate, rather than state law making that determination. Give serious consideration as to whom you wish to designate as executor and how you want your estate distributed.

In addition to a will, the other estate planning documents that you should consider include:

Living Will. A living will is a document that will ensure your wishes are carried out in regards to life support in the event that you are put on a life support system.

Execute a Durable Power of Attorney. A durable power of attorney grants to another person the right to act on your behalf to manage your estate, make investments, or to buy and sell property. It may be used if you become unable to handle your own affairs for reasons of age or health.


Execute a healthcare proxy. This document is designed to allow an individual to appoint another person or proxy to make decisions about their health care treatment in the event they lose the capacity to decide for themselves.

Appoint a guardian for minor children. When your child turns age 18, meet with an estate attorney to create a Health Care Power of Attorney and HIPAA authorization. This will give you access to medical records and the ability to make health care decisions due to an accident or illness.

Review the form of ownership of your assets and your beneficiary designations to determine if your estate will be distributed according to your wishes.

There are several ways to reduce estate taxes. These include utilizing the unified credit, utilizing the marital deduction and removing life insurance proceeds from your estate. There are also some more sophisticated planning techniques such as gifting programs and charitable trusts. It is important to meet with your attorney to identify your goals and to determine which of these techniques best match your goals.

One of the provisions of the American Taxpayer Relief Act of 2012 made the “portability” of the unused exemption permanent. Portability effectively makes the federal estate tax exclusion amount “portable” between a husband and wife. When one spouse dies, the other generally can get the deceased spouse’s unused exemption amount without having to set up trusts or other tax-savings maneuvers.

Your life insurance over which you have control is currently included in your gross estate and may be subject to estate taxes. If the sole purpose of any existing insurance policy is to provide liquidity for payment of these taxes, consider transferring complete ownership and control of your life insurance policies to either an adult children or an irrevocable trust for the benefit of your child. Policies irrevocably transferred will be excluded from your estate if death occurs after 3 years from the date of transfer. Consult with your attorney on this matter.

One of the objectives of estate planning is to provide estate liquidity. Many expenses are involved is settling an estate and distributing the property. These include administration expenses, cash bequests, death taxes, legal fees, and funeral expenses. To keep your estate intact, you may want to consider a second-to-die policy purchased thorough a life insurance trust. An irrevocable trust could be created to hold a life insurance policy, which will provide liquidity to pay estate taxes. The trustee should not be legally responsible for paying your estate taxes, but could provide liquidity to your estate by either loaning money to your estate or buying assets from your estate. Consult with your attorney on this matter.

Consider taking advantage of the annual gift tax exclusion by making gifts to your heirs. You are not only removing the present value of those assets from your estate, but their future appreciation as well. Since any appreciation in value after the transfer escapes both federal gift and estate taxes, property most likely to appreciate in value is especially appropriate for gifting. Gifts within the annual exclusion amount or which do not exceed the exemption equivalent or applicable exemption will not cause you to pay any gift tax. While gift-giving can be an effective method of reducing tax liability and the size of your estate, it is important to retain enough income-producing assets to provide for your current and future needs. Inflation, changing economic conditions, taxes, life expectancy and other factors need to be considered in order to determine how much capital is needed for your financial security.

Normally, anything you leave to your spouse, who is a U.S. citizen, passes estate tax free because of the unlimited marital deduction. Upon the surviving spouse's death, his/her estate will be subject to estate tax. However, when the surviving spouse is a non-citizen, the unlimited marital deduction is not available. This restriction is to prevent your non-citizen spouse from returning to his or her homeland at your death with your assets and avoiding the anticipated estate taxes at their subsequent death. Transfers to a special trust, a Qualified Domestic Trust (QDT)), qualify for the unlimited marital deduction, as the IRS can better track them. Treasury Regulations set forth additional requirements once the assets exceed a stated dollar amount.

Prudential Financial, its affiliates and its financial professionals are not tax or legal advisors. You should consult with your attorney or tax advisor regarding the matters above.


SPECIAL SITUATIONS FOR ESTATE PLANNING American Taxpayer Relief Act of 2012 (ATRA)

The American Taxpayer Relief Act of 2012 (ATRA) was signed into law on January 2, 2013. ATRA contained a number of transfer tax provisions bringing clarity to estate planning for 2013 and beyond.

The prominent transfer tax provisions include:

The estate and gift tax exemptions are set at $5 million and are indexed annually for inflation from 2011 on. For 2017, the transfer tax exemptions are $5.49 million per individual,

Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death,

The top transfer tax rates are set at 40 percent (an increase from the 35 percent maximum tax rate in 2012),

Spousal portability was permanently extended. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up trust planning specifically for this purpose. However, there are still many benefits to using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.

For most Americans the 2012 Tax Act removed the emphasis on estate tax planning and put it back on the real reasons to do estate planning: taking care of ourselves and our families the way we want. Proper estate planning provides peace of mind by allowing individuals to:

Ensure their assets are distributed the way they want; Avoid state inheritance/death taxes that have lower exemptions than federal taxes; Avoid probate, which can be quite expensive and time-consuming in some states; Protect an inheritance from irresponsible spending, a child’s creditors, and from being part of a

child’s divorce proceedings; See that control of their assets remains in the hands of a trusted person, Provide for minor children or grandchildren; Help protect assets from creditors and frivolous lawsuits; Protect themselves, their family and their assets in the event of incapacity; and Help create meaningful charitable gifts.

(NOTE: Next 3 paragraphs are applicable only for estates between $5 and $10 million)

A primary estate planning decision for clients in the $5-10 million range will be whether to use a credit shelter trust or rely on portability at the first spouse’s death.

Because the portability provisions have now been made permanent, married couples may be more inclined to proceed with fairly simple “all to spouse” Will planning, relying on portability to take advantage of both spouses’ estate exemptions, rather than using more complicated bypass trust planning.

An optimal approach may be to utilize planning that leaves the surviving spouse with the decision of whether or not to utilize portability. Alternatives are (1) to rely on a disclaimer provision (allowing a surviving spouse to disclaim an outright bequest with a provision that the disclaimed assets pass to a bypass trust) or (2) to leave assets to a QTIP.


Situations favoring an approach leaving all of the assets outright to the surviving spouse and relying on portability include:

A competent spouse who can manage assets; A desire by the clients to avoid using trusts taking into consideration the costs of administering

trusts and the fact that many individuals are unfamiliar and uncomfortable with trusts; A first marriage or no children existing by prior marriages of either spouse; Clients who are more interested in basis step up than getting future appreciation out of their

estate; Situations in which it is undesirable to retitle assets (e.g. to be able to utilize each spouse’s

exemption amount); There is a residence or other assets that would be difficult to administer in a trust; or Qualified retirement plan assets are the predominant assets in the estate.

There are various reasons for continuing to use family trusts (bypass trusts, credit shelter trusts) and not rely on the portability provision including:

The unused exclusion from a predeceased spouse will be lost if the surviving spouse remarries and survives his or hers next spouse,

The deceased spousal unused exclusion amount is not indexed, Growth in the assets are not excluded from the gross estate of the surviving spouse unlike the

growth in a bypass trust which is excluded, The burden of the federal estate tax has been lessened or eliminated for most, but for others it is

still a serious concern which can be mitigated with good use of trust planning, Second Marriages- a Family Trust is an important tool to ensure that the surviving spouse is

taken care of without jeopardizing the eventual inheritance of children from a prior marriage, Re-marriage – Outright bequests to a spouse always creates a risk that the inheritance of the

deceased spouse’s children will be diverted to a future spouse and/or the children of that spouse, Divorce- If a beneficiary gets divorced there is a risk that an outright bequest will be lost at least in

part as part of the divorce settlement. A well designed trust can eliminate that risk. Minor children - Outright bequests to minors will typically require the appointment of a guardian

and court supervision over expenditures for the benefit of minors. Establishing a Minor’s Trust is a far superior method of providing for young children.

Spendthrift Protection – Beneficiaries sometimes have difficulty in managing their financial affairs. The Family Trust can be designed to include spendthrift provisions and other limitations on distributions to ensure that the beneficiaries are well taken care of without the risk that a new found inheritance will be quickly squandered on impulse purchases.

Disabled Beneficiaries - Disabled beneficiaries or beneficiaries with special needs are often the recipients of public benefits. Outright bequests can interfere with the flow of those benefits and place the beneficiary’s inheritance at risk. A properly drafted “Supplemental Needs” Trust is the preferred planning technique in these cases.

Creditor Protection - an outright bequest will be available to creditors of the beneficiary. A well drafted trust can include provisions to make trust assets available for the benefit of the beneficiary without exposing them to creditor’s claims.

Standard benefits of trusts including asset protection, providing management and restricting transfers of assets by the surviving spouse.

Irrevocable Life Insurance Trust ("ILIT")

This type of trust is designed to hold life insurance policies for those clients who will be subject to estate tax and wish to provide liquidity to help pay those taxes with life insurance without subjecting the policies themselves to estate taxation. Through loans and purchases of estate assets, the trust can make life insurance proceeds available to the estate at the insured's death without subjecting the policies themselves from causing additional taxation. The trust must be "irrevocable," meaning the terms of the trust cannot be changed. The trust is named as owner and beneficiary of any new or existing life insurance policies to be subject to the trust. Cash gifts are also made to the trust to provide the trustee the funds necessary to pay the premiums for the policies.


In order for these cash gifts to qualify for the annual gift tax exclusion and thereby avoid gift taxation, the gift must be a "present interest" gift. To have gifts to ILITs qualify as present interest gifts, ILIT's are generally designed to be "Crummey" trusts. This means that the trust beneficiaries will have a right to withdraw each contribution to the trust for a limited period of time. Once this time period passes (i.e., 30 days), the beneficiaries’ right to the contributed funds expires, and the trustee can then choose to use the funds to pay premiums on the trust-owned life insurance.

When an insured gives an existing policy on his/her life to an ILIT, the insured must live more than three (3) years after the transfer to have the policy escape estate taxation. However, this "3 year rule" does not apply to new policies originally bought by the ILIT. These policies are not subject to estate taxes, regardless of the insured's date of death.

Living Trust

A living trust is a trust in which the grantor retains the right to revoke the trust, or change any of its terms, at any time during the grantor's lifetime. At the grantor's death, the trust becomes irrevocable. Although a living trust does not provide any tax benefits (any trust income is taxed to the grantor and any property owned by the living trust is included in the grantor's estate for estate tax purposes), living trusts can provide several benefits, including:

The expenses and delays of probate (including "ancillary' probate when property is owned in another state) Privacy Protection from legal incompetence or physical incapacity of the grantor and/or beneficiaries Reduced potential for successful will contests Choice of state law applicable to the trust.

To create a living trust, there must be a "grantor" (who creates the trust), a "trustee" (who manages the trust property) and a "beneficiary" (who will receive income and/or principal from the trust). Depending upon your state, the same person may be able to hold all three positions.

A pour-over will directs those assets not in the living trust to be put in the trust at your death, however the assets directed by this arrangement will not avoid probate. Instead of naming an individual beneficiary for assets controlled by these vehicles, a living trust can be named as beneficiary, and then the terms of the trust control the amounts and timing of the distribution of these assets.

Valuation Planning with Family Limited Partnerships (FLP) and Limited Liability Companies (LLC)

Family Limited Partnerships (FLPs) and Limited Liability Corporations (LLCs) are two commonly used strategies for helping reduce estate and inheritance taxes. An FLP is a partnership created by two or more family members in accordance with state law. The family members contribute property that they expect to appreciate and, in return, receive general partnership interests or limited partnership interests, or both. The FLP is managed by the general partners, who have unlimited liability for the activities of the partnership. The limited partners also are essentially passive investors with few, if any, management rights. The limited partners' liability for the activities of the partnership is limited to the amount of his or her investment in the partnership.

A LLC is a business entity formed by "members" (often family members) under state law that has characteristics of both a partnership and a corporation. Like shareholders in a corporation, members are not personally liable for the activities of the LLC. In addition, like partners in a partnership, the legal specifications of one's ownership interest are governed by an operating agreement. An LLC can either be “member-managed,” where each member has equal rights in the management and operation of the LLC, or “manager-managed,” where a manager or managers specified in the LLC agreement are given the right to manage and operate the LLC. In addition, an LLC could have voting and non-voting membership interests, in which case it is managed by voting members or a managing member designated by them.

Family Limited Partnerships and Limited Liability Companies share these advantages:

Both allow you to transfer shares while you retain control of the business. Transferring shares will qualify you for the gift tax annual exclusion and the lifetime estate and gift tax

exemption. Transferring shares reduces your estate's value and, therefore, your federal estate tax.


There can be significant tax benefits of using FLPs and family LLCs. They involve discounting the property for gifting and for estate tax purposes. Those forming the FLP or the LLC no longer own the property contributed to the entity; they have units or membership interests in the entity. Because the interests are illiquid (there is no market for the partnership interests and the assets in the entity can't be sold by a single member), the shares are generally eligible for valuation discounts.

There are also a variety of non-tax and tax reasons for using FLPs and LLCs. They can provide a vehicle to transfer assets while retaining control over distribution to family members, protection from creditors (and failed marriages), and consolidation of the ownership in family property and one level of Federal income taxation. Also, FLPs and LLCs facilitate the making of gifts in much more efficient ways than direct gifts of property. Other advantages include the investments of the FLP and LLC and flexibility in governance.

The choice of whether to use an FLP or an LLC for estate planning purposes will be done by the client's legal and tax advisors. Either an FLP or LLC can be used to accomplish a client's estate planning objectives and is one of the most used techniques to exclude assets from a taxable estate — notwithstanding attempts by the Internal Revenue Service to disallow them. Of course, either of these strategies must be done in consultation with experienced and knowledgeable legal and tax advisors.

Survivorship Standby Trust

The Survivorship Standby Trust is a technique designed to help accomplish two objectives: (1) permit the insured to retain lifetime access and control over the cash values of a survivorship life policy and (2) avoid federal estate tax on policy proceeds at the death of the second insured. Under this arrangement, the spouse with the anticipated shorter life expectancy is the owner and premium payer of a survivorship life insurance policy. The owner spouse creates a trust under the terms of either his/her will or living revocable trust and designates this trust as the contingent policy owner and primary beneficiary. This trust will assume policy ownership on the death of the owner spouse. The trust is like an ILIT except it is waiting in the wings (i.e. it’s on “standby”) and does not begin to operate until the death of the primary owner spouse. Since the standby trust is contained in the will or living revocable trust of the owner spouse, it may be revised to meet the changing needs of the family. This technique allows a married couple to acquire the survivorship coverage needed to provide estate liquidity while giving them control and flexibility to adapt to changes in tax law or family circumstances.

INCOME TAX Consider use of the “Three Buckets of Money” for the greatest tax advantage. There are three tax treatments of appreciating and/or income generating assets. The ideal strategy is for you to have assets in all three “buckets”.

Bucket One – Taxable assets. These are assets that, when sold, require capital grains and/or losses to be claimed in the year the loss was realized. The second aspect of a taxable asset that spins off a dividend is that the income is taxable, year in and year out.

Bucket Two – Tax deferred assets. Examples of such assets are 401(k)’s, annuities, and traditional IRA’s. Such accounts enjoy tax-favored status but have restricted access. One cannot access capital before age 59½ without incurring a penalty (except under certain conditions). When money is distributed from these accounts, all the principle and gain are subject to taxation at ordinary income rates.

Bucket Three – Tax free assets. These accounts are few in number but singularly important to tax diversification. There are only three assets that generate tax-free growth and income. They are: municipal bonds, Roth IRA, Roth 401(k) and life insurance death benefits. (Cash values of life insurance, if accessed prior to death are tax deferred. Municipal bond interest may be subject to Alternative Minimum Tax and may impact taxation of Social Security benefits.)

Consider tax efficient mutual funds for depositing non-qualified assets. In a tax efficient mutual fund, the money manager seeks long-term growth of capital while managing the tax burden on the shareholders. Tax efficient investing is designed for long-term investors and attempts to hold investments for more than one year.

Contribute to flexible spending accounts to cover annual out-of-pocket medical and childcare expenses. Since your contribution is made with pre-tax dollars, you can obtain current tax savings. Monitor your account carefully to avoid losing whatever is not spent at the end of the year.


Understand your stock options and develop a strategy for exercising them or consider other goals for which the options could be used. Your stock options allow you to buy a specified amount of employer stock at a set price and for a stated period of time. Nonqualified stock options (NQSOs) generate ordinary income tax on the appreciation ('bargain element') upon the exercise of the option. Although no taxable income is recognized upon the exercise of Incentive stock options (ISOs), potential alternative minimum tax consequences may result upon exercise. Consult with your tax advisor about the rules on NQSOs and ISOs.

Don’t short-change your cost basis. Make sure you count any reinvested dividends and capital gains in your mutual fund as part of your cost basis when you redeem fund shares. They were already taxed to you when they were originally paid, so you should avoid paying the tax twice.

When contemplating the sale of an investment, consider the tax impact. While tax issues should generally never be the primary driver in determining the timing of a sale, all other things being equal, you should always try to optimize your tax situation. You may want to consider selling securities that are currently in a loss position. Losses can offset unlimited amounts of security gains and up to $3,000 per year of ordinary income. Furthermore, if you want to repurchase the same exact security, you may purchase the security after 30 days to avoid the wash sale rule. Consult with your tax advisor regarding your particular situation.

Claim all available “above the line” deductions and credits. Deductions taken 'above the line' in determining your adjusted gross income are generally more valuable than itemized deductions of the same amount because they reduce your AGI and help preserve other tax breaks. Tax credits actually offset income taxes dollar for dollar. Please consult with your tax advisor regarding income limitations on claiming deductions and credits.

As a homeowner, you may want to consider a home equity loan to consolidate debt. Interest on this type of loan may be fully deductible. Other than the mortgage loan on your residence, all of your other indebtedness involves paying interest that is probably not tax deductible. It should be mentioned that a possible disadvantage to this strategy would be that by changing this debt from an unsecured debt to that of a secured debt you increase the liability on the home value and an increase the risk of losing your home if financial difficulties occur and the loan payments cannot be made. Please note that it is against Prudential policy to recommend a client take out a new mortgage or home equity loan to finance an investment in securities, mutual funds, life insurance or an annuity product.

If you are thinking of making a charitable contribution, consider making the contribution with highly appreciated property, such as highly appreciated stocks. Generally you are permitted to take a deduction equal to the appreciated value of the property. This is advantageous compared with the outright sale of the property followed by the subsequent donation of the proceeds. Consult with your tax advisor for more specifics.

Don’t overlook available tax credits. While deductions lower your taxable income, tax credits are even better, since they actually offset income taxes dollar for dollar. You could be eligible to claim a credit for your child’s dependent care expenses or qualified college costs.

Please review the above strategies with your tax advisor, as Prudential does not render tax advice.

EDUCATION Findings:

Your goal is to fund four years of college costing $xx,000 per year in today’s dollars for (state child’s name). You currently have $x,xxx allocated for this goal and you are saving $x,xxx per year. Based upon the existing investments and assumed future savings, the analysis indicates you are able to cover x% of this goal.

Option/Choices:

Due to your limited time frame, an accumulation program for generating the assets you need for your education goal may not be feasible. Consider scholarships, student loans, and grants, liquidating some existing assets, borrowing money or using a combination of strategies. Consult your tax advisor to discuss potential tax consequences of liquidating nonqualified investments.


Based on your assessed risk tolerance and your time horizon for education funding, you are not currently invested in accordance with the proposed asset mix. Consider reallocating your education assets to take advantage of the benefits of diversification. When the start of college approaches, it will be important to consider reallocating your investments for education to assets that will have less price fluctuation and reduced volatility.

Consider investments that take advantage of long-term objectives. Dollar cost averaging can be an excellent long-term strategy. Dollar cost averaging does not guarantee a profit or remove the risk of a loss in a declining market. Such a plan involves a continuous investment in securities regardless of fluctuating price levels of such securities. An investor should consider his/her financial ability to continue participating in such a plan at periods of low price levels.

Consider a Coverdell Education Savings Account (ESA) as a funding vehicle to save for any level of education, starting with elementary school and continuing through graduate school. With an ESA, participants can benefit from both tax-deferred growth and tax-free withdrawals when the proceeds are used for qualified education expenses. However, there are income requirements that preclude some upper income families from participating..

Section 529 Plan

Consider using a 529 College Savings Plan as a funding vehicle to invest for college expenses. A 529 College Savings Plan is a state-sponsored, tax-advantaged savings plan that offers a number of benefits including tax-deferred growth and federal income-tax free withdrawals for qualified expenses. In addition to the federal tax benefit, many states offer a state income tax deduction for contributions to their plans as well as state income tax-free withdrawals for qualified expenses. Anyone, regardless of income level, can contribute, whether the 529 plan is for their child or that of a friend or family member.

Investors should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal securities is available in the issuer’s statement. The official statement should be read carefully before investing.

State tax treatment varies. Out-of-state 529 plans may not have the same state tax benefits as those offered to in-state residents. For withdrawals not used to pay for qualified higher education expenses, earnings are subject to income taxes at the account owner’s rate plus a 10% federal tax penalty. Please consult your tax advisor with any questions.

ASSET PROTECTION When protecting personal assets from liability, ownership structure, titling, beneficiary arrangements, and nature of the assets are very important. Some assets are naturally protected under state and federal law, such as your retirement account. Your personal residence is protected if you own the residence jointly with your spouse. The cash value in life insurance is protected as long as the beneficiary is your spouse.

Review your auto, homeowners and umbrella insurance with a qualified professional for the appropriate coverage. Liability is of great concern in our society today especially if you have accumulated a significant amount of assets. Maximizing policy limits and coordinating your homeowners, auto, and umbrella protection is imperative to significantly reduce your potential future liability.

Monitoring your credit scores and credit reports could be important to your financial future. Credit scores and credit reports may dramatically impact such things as mortgage rates, car loans, certain insurance premiums, employment suitability, deposits for utility services, and more. Despite the growing importance of credit scores and the credit reports upon which they are based, it has been found that they are often inaccurate. According to a 2004 survey by the U.S. Public Interest Research Group, twenty-five percent of credit reports had errors serious enough to cause consumers to be turned down for a loan or a job.

There are steps you can take that can potentially save you thousands of dollars and also help you ward off identity theft. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies (Equifax, Experian, and Trans Union) to provide you with a free copy of your credit report, at your request, once every 12 months. Caution: the Federal Trade Commission warns that there


are many “imposter” websites that will try to sell you something or collect your personal information. If you find inaccuracies in your report, FCRA requires that both the consumer reporting company and the provider of the information are responsible to correct it. You should, in writing, tell both the consumer reporting company and the information provider of any item you wish to dispute.

You also have a right to request your credit score (called a FICO score) from each of the three consumer reporting companies. They will charge a fee for the score report. You should review your credit scores and credit reports once a year or prior to applying for a loan to check for errors, negative data, or any suspicious activity that may signal identity theft.

You should consider videotaping your possessions in order to provide a better record of your personal assets. Compile a thorough video of everything that you own, and narrate the video with commentary that includes where the items came from, their costs, and any special significance/uniqueness of special items. Be sure to keep a copy of the video off premises, possibly in a safe deposit box.

NEXT STEPS-YOUR ACTION PLAN ROADMAPCongratulations on completing the tasks needed to create your financial plan and complete the plan delivery meeting. Now that you have received your financial plan reports, where do you go from here? Our recommendations are as follows:

Review your plan report and ensure you understand the information contained in the report. Be sure to ask questions about any areas that need clarification. We are only a phone call away.

Implement your plan. You need to establish a reliable follow-up method for the strategies discussed in your plan report. Make sure it is clear who is responsible for implementing the task. Which items are you responsible for initiating? Which actions are the responsibilities of your other professional advisors: attorney, accountant, insurance agent, financial advisor, etc.? A checklist for these tasks is useful.

Review your plan on a regular basis, generally once a year. In addition, it is important to update your plan regularly and especially whenever a major change occurs in your family, like changes in employment, new income or expenses, early retirement, etc.

Remember to maintain a long-term focus with your plan. Do not expect to anticipate every curve in the road, but be prepared to adjust your plan when necessary. Your financial plan is not a single event, but a journey that may cover many years.

Below contains suggested next steps we call the Action Plan Roadmap. We look forward to working with you on your Action Plan Roadmap.

Completed Items

Plan delivery meetingDetermine next steps.

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Best Practice Opportunity Shared by Several of Our Top Planners:

Develop a communication strategy to follow-up with your client on the Action Plan Roadmap. The follow-up with the client can be in writing or in person. Schedule regular follow-up communications on the Roadmap reviewing what has been accomplished and what still needs to be done. Always congratulate the client on their success in checking items off the list as they are completed. No step is too small.

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Next Step Items

Net worthCreate an emergency fund to cover 3-6 months of living expenses. Establish a plan to invest funds in excess of your emergency needs using a tiering strategy.Refinance your mortgage.Create a plan to pay down credit card debt focusing on higher interest loans first. Consolidate consumer debt and develop a plan to pay off debt.Maximize a home equity line of credit.

Cash flowDevelop a plan to regularly track where your money is being spent.Prepare a detailed budget for the upcoming year.Establish a plan to capture your annual surpluses and apply it to your financial goals.Consider setting up an Automated Investment Program (AIP) to save for future goals.

Asset AllocationUnderstand and use tax diversification. Re-allocate non-qualified retirement investments in accordance with your recommended asset mix; tax

consequences may result.Rebalance your portfolio regularly.Consider a money management program.

Life InsuranceAcquire the recommended additional life insurance.Obtain an in-force illustration for your policies. Review the beneficiary designation on your existing life insurance policies. Consider purchasing life insurance on your children.

Disability Income InsuranceEnroll in your employer’s group disability income coverage.Elect supplemental disability income insurance through your employer.Acquire the recommended additional disability income insurance.Purchase an individual disability income policy.Review your existing coverage regularly.

Long Term Care InsurancePurchase long-term care coverage.Evaluate your existing Long-Term Care Insurance.Get multiple medical-insurance quotes from experienced broker(s) for family and business employees.Consider options to keep premiums and coverage’s reasonable.

Asset Protection Review your credit scores at least annually.Review your home and auto policies, including the deductibles and riders to ensure proper coverage. Review your liability insurance limits to ensure proper coverage.Add umbrella liability coverage to your homeowner’s coverage.


RetirementReallocate your qualified retirement investments in accordance with your recommended mix.

Begin saving at the recommended additional level for retirement accounts. Enroll in your employer sponsored retirement plan.Contribute a sufficient amount to qualified plans to obtain employer matching contributions. Make catch-up contributions. Consider purchasing an annuity to establish a form of guaranteed retirement income.Meet with a tax advisor to establish a retirement plan for your business.

Review your beneficiary designations for retirement and benefit plans.

Speak with a tax advisor regarding payouts from your retirement plan.Discuss the pro’s and con’s of the various pension plan payout options.

Payoff debt prior to retirement.Create an income plan during retirement. Work part-time to supplement income. Create a fund to cover health care costs during retirement.Evaluate at what age to begin your Social Security. Enroll in Medicare prior to the deadline.Enroll in Social Security.

Estate PlanningMeet with an estate planning attorney to review and update existing estate planning documents. Execute a will.Execute Durable Powers of Attorney.Execute Health Care proxy and Living will.Review all beneficiary selections and titling on deeds.Consider a gifting program.Establish a special needs trust. Consider a survivorship policy to fund a Supplemental Needs Trust.

Income TaxReview withholding elections with your tax advisor.Maximize qualified plan contributions.Explore tax efficient investments.Consider a flexible spending account to cover out-of-pocket medical and/or dependent care expenses.

EducationBegin saving at the recommended additional level for your education goal. Re-allocate your non-qualified investments earmarked for education in accordance with the

recommended mix; tax consequences may result.Establish a Coverdell Education Savings account.Establish a Section 529 account – Qualified Tuition Program.Review scholarships, work study and student loan opportunities.

OtherPrioritize and re-examine time horizons related to your major purchase goals.Schedule ongoing meetings. Schedule a periodic plan review.


Offering financial planning and investment advisory services through Pruco Securities, LLC (Pruco), doing business as Prudential Financial Planning Services (PFPS), pursuant to separate client agreement. Offering insurance and securities products and services as a registered representative of Pruco, and an agent of issuing insurance companies. Securities, products and services offered through Pruco Securities, LLC (Member of SIPC). Life insurance and annuities are issued by The Prudential Insurance Company of America, Newark, NJ, and its affiliates. All are Prudential Financial companies and each is solely responsible for its own financial conditions and contractual obligations. The availability of other products and services varies by carrier and state. This material contains references to concepts that have legal, accounting and tax implications. It is not intended as legal, accounting or tax advice. Consult your own attorney and/or tax advisor for advice regarding your particular situation.


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