Chapter 22: Applications in Personal Financial Planning in Special Circumstances – Essentials of Personal Financial Planning



Alexander and Barbara Wilson met in their teens almost 60 years ago at a campground in Minnesota. They quickly became sweethearts, not to mention inseparable. When it came time for college, Barbara chose NYU to realize her dream of living in New York; Alexander chose Columbia to be near her. After completing school they married, stayed in New York, secured employment, raised their four children, and retired.

The Wilsons were extremely successful in their fields, both earning high salaries. Thanks to a very modest lifestyle and investing wisely, they were able to amass $8 million in personal savings. Thinking that New York had changed too much for them over the years, Alexander and Barbara began to talk about moving back to Minnesota. They quickly discovered that the old campground where they met was up for sale. The property is beautiful—20 acres on a lake surrounded by cedar and pine trees—too beautiful for them to pass up. That was 15 years ago. Since then, Alexander and Barbara have fixed up one of the old camp buildings, turning it into a lovely home. They expanded it from 600 square feet to 1,200 and updated it with all the modern amenities one could want.

Unfortunately, Barbara’s health has now failed. The Wilsons have decided to provide for her care at their home on the lake, but that requires full-time caregivers, 24 hours per day—which the Wilsons can afford. In addition, their oldest daughter, who moved with them to Minnesota to help fix up the campground, fell into a terrible painkiller addiction after an accident. She lives on her own but is unable to support herself, so Barbara and Alexander provide money for her monthly living expenses.

Although Alexander and Barbara are not worried about money, one of their other children is. He has come to you for advice. What are some of the personal financial planning concerns you think should be addressed?


After completing this chapter, you should be able to do the following:

  Identify the income tax planning concepts pertinent to principal residences, vacation homes, and household employees.

  Identify the appropriate use of advanced planning strategies with regard to divorce.

  Distinguish between types of closely held businesses and their income tax considerations in personal financial planning.


So far, we have covered a wide range of personal financial planning topics. However, there are still several areas that are important to a personal financial plan, whether it is for a family or an individual, that do not quite fit under any of the other financial planning topics addressed thus far. This chapter covers those special circumstances.

In earlier chapters, we discussed housing issues, primarily those tied to insurance and estate planning. In this chapter, we look at the additional issues of home sales, vacation homes, and household employees. We have also touched on closely held businesses in terms of estate and retirement planning; in this chapter, we will broaden our coverage of closely held businesses by exploring the idea of entity selection, as well as the business applications of insurance. Finally, we address a topic we have not previously covered: divorce. Although this is a sensitive topic that is often difficult to discuss with a client, it can have an enormous impact on any financial plan.


As we learned in chapter 4, personal financial planners must be well versed in all the issues surrounding the purchase of a home because the purchase of a principal residence is perhaps the most important decision for many of their clients. There are several reasons for this, as follows:

Mortgage payments, property upkeep bills, property taxes, and insurance costs represent 28 percent of the average household budget.

Interest on a 30-year mortgage often exceeds the principal amount financed.

The debt that must be addressed as a result of premature death or disability is a significant personal financial planning consideration.

Personal financial planners must also be familiar with all the issues surrounding the sale of a home because that can have a major impact on a client’s finances. Additionally, some clients are successful enough to purchase a vacation or second home. The rules for buying a vacation or second home differ from those for the principal residence and require attention.


The sale of a principal residence can be a stressful event. The seller is often simultaneously in the process of moving and buying a new home, so keeping track of financial details is a challenge. Personal financial planners can help by covering key financial considerations prior to the sale. The most important consideration is that of income taxation.

Under IRC Section 121, the first $250,000 of gain on the sale of a principal residence is excluded from income if the taxpayer owned and used the home as a principal residence for an aggregate time period of two years out of the five-year period immediately preceding the home’s date of sale. If the gain from the sale of the home is entirely excluded, the transaction is not reported on the taxpayer’s income tax return. For married taxpayers filing jointly, the maximum amount of realized gain that may be excluded from gross income is $500,000, and only one of the spouses needs to meet the “two out of five rule.”

The following conditions also apply:

The exclusion is allowed once every two years.

A surviving spouse is allowed up to two years to use the $500,000 exclusion amount.


A taxpayer purchased his principal residence over 10 years ago for $100,000. Recently, the taxpayer decided to downsize. He sold his principal residence for $600,000 and purchased a condominium for $400,000. What is the amount of capital gain which must be recognized on Schedule D of Form 1040?

Selling price $600,000
Purchase price (basis)     - 100,000
Realized gain $500,000
Less exclusion (single)     -250,000
Recognized gain $250,000

Note: The purchase of the condominium does not affect the recognized or realized gain.

The IRC also provides for exceptions that allow a taxpayer who does not meet the minimum two-year residency requirement to qualify for a partial exclusion. Section 121 provides taxpayers with a partial exclusion when a move is required by a change of employment, health reasons, or unforeseen circumstances, such as those noted in exhibit 22-1.


Change in employment that makes it impossible to pay the mortgage or basic living expenses

Condemnation, seizure, or involuntary conversion of the property such as foreclosure, damage to the home from a natural disaster, an act of war, or terrorism

Divorce, legal separation, or death of a spouse

Eligibility for unemployment compensation

Multiple births resulting from the same pregnancy

A work-related move if the taxpayer’s new employment is more than 50 miles away from the principal residence (working from home) or the former place of employment.

The amount of the exclusion depends on the length of time the owner of the home lived in it during the preceding five years before the sale. For example, a taxpayer who lived in a house for one year, or 50 percent of the two-year requirement, is entitled to a 50 percent exclusion. A 50 percent exclusion would allow $125,000 of taxable gain to be excluded from income, or $250,000 for a married couple.

You are most likely familiar with Section 1031. This is the section of the Internal Revenue Code that permits a taxpayer to exchange rental or investment property or property used in a business for “like-kind” property also held as rental or investment property or property used in a business. This exchange allows for the deferral of taxable gain on the transaction. When the taxpayer has a residence that is converted to rental property, it is possible to combine the benefits of the 1031 exchange with the Section 121 exclusion. The personal financial planner who has in-depth tax expertise is able to provide clients with assistance in navigating this opportunity.


Angie Roberts is a single taxpayer and purchases a townhome for $320,000, which she uses as her principal residence from 2011 to 2013 (three years). In 2014, she rents the townhome to a tenant (with the association’s permission) and claims depreciation deductions of $30,000.

In 2016, Angie executes a Section 1031, and exchanges her townhome for $15,000 in cash and a condominium with a fair market value of $560,000. It is her intent to rent the condominium.

Angie can claim Section 121. She owned and used the townhome as her principal residence for at least two years during the five-year period prior to the exchange. In addition, because the property is now an investment property (rented to a tenant), Angie can also defer any gain under Section 1031.

Amount realized $575,000 ($560,000 + $15,000)
Adjusted basis   -290,000 ($320,000 − $30,000)
Realized gain $285,000
Section 121 - 250,000
Section 1031 $ 35,000 (Deferred gain)

Angie’s basis in the rental condominium is $525,000.

Adjusted basis: $290,000
Excluded gain:   250,000
Cash received:   -15,000
Basis $525,000


The personal financial planner has a significant opportunity to help a client who is considering purchasing a vacation or second home by having the client objectively look at all of the carrying costs of such a home. Carrying costs may include property taxes, upkeep, insurance, and mortgage, as well as the resource of time involved with maintaining the second home. Clients often will be able to secure the loan to purchase a second home, but may not necessarily have the time or the financial resources to maintain it.

In addition, because a vacation home or second home is not a principal residence, the exclusion of gain under Section 121 does not apply. As a result, clients are not left with many options to defer taxes when they dispose of their second home assets. The gain from the sale of a vacation or second home may be deferred under Section 1031 by a qualified transfer into income-producing property.


One aspect of owning a home that we have not yet discussed is having people work within the home. Although the idea of a household employee often brings to mind butlers and maids in mansions, household employees are most definitely not just for the rich; they are actually quite common. It helps to understand what, exactly, a household employee really is. A household employee, for income and payroll tax purposes, is someone who works in the home, and the taxpayer-employer dictates not only what work is to be accomplished, but how it is to be accomplished. The number of hours the worker works in the household does not matter. Nor is it of any consequence whether or not the work is full time or part time; or whether or not the worker was hired through an agency or from a list provided by an agency or association. It is also of no importance as to how the worker is paid, whether hourly, daily, weekly, monthly, or by the job. The only significant factor is whether the taxpayer controls the activities and determines how the activities are to be accomplished. If the taxpayer meets this one criteria, the homeowner has a household employee for income and payroll tax purposes.




Housecleaning workers

Domestic workers


Health aides




Private nurses

Yard workers

Unfortunately, many taxpayers disregard the need to pay taxes on their household employees. There are a variety of reasons for this behavior, including being confused by the complex rules surrounding taxes for household employees, not hiring a tax professional to explain those rules, or simply not wanting to pay the tax. Regardless of the reason for it, this behavior is ill-advised. Household employee taxes need to be paid; otherwise, tax penalties can be severe.

To help clarify the issue, let’s take a look at who is not a household employee. If the worker is in sole control of how the work is accomplished, then the worker is not a household employee but a self-employed independent contractor. A self-employed independent contractor usually provides his or her own tools and offers services to the general public. Someone who provides child-care services in their own home (as opposed to the taxpayer’s home) generally is not considered a household employee. If an agency provides a worker and controls what work is done and how it is accomplished, the worker is not a household employee.


Chelsea Turner pays Alice Childs (a tenant in her apartment building) to watch her dog, provide light housework, run errands, take care of her laundry, and prepare an occasional meal. Alice follows Chelsea’s specific instructions about the household duties. Chelsea provides the household cleaning equipment and supplies that Alice needs to perform her tasks. Alice is considered Chelsea’s household employee for income and payroll tax purposes.

Taxation Issues

When a household employee is hired to provide service on a regular basis, the employer and the household employee must complete U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Form I-9 must be completed no later than the first day of work, and the employee must provide documented proof attesting to his or her current work eligibility status in the United States. The employer must complete the employer section of Form I-9 by examining the documents presented by the employee as evidence of his or her identity and employment eligibility. Acceptable documents to establish identity and employment eligibility are listed on the form. The employer should retain the completed I-9.

The taxpayer-employer is responsible for paying Social Security and Medicare taxes on the wages paid to a household employee. The income threshold in 2016 for paying Social Security and Medicare taxes is $1,900. Noncash wages such as food, lodging, clothing, and other noncash items are not considered wages for Social Security and Medicare purposes.

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Household employee wages are subject to FUTA taxes. The personal financial planning client should work with a tax professional to determine whether state unemployment tax is required in addition to the federal unemployment tax.

In many states, household employers are required to participate in the state’s workers’ compensation program. In other states, it’s optional. However, it is recommended as a best practice.

Employment Practices Liability Insurance

A household employee, whether a nanny, a housekeeper, or a pool cleaner, is an invaluable asset. However, a household employee exposes the employer to lawsuits as the result of the potential for accidents, wrongful termination, privacy issues, discrimination, harassment, and negligence claims. Most homeowner’s insurance and umbrella insurance policies do not cover household employees and employment practices. A specific type of insurance referred to as employment practices liability insurance (EPLI) is necessary for the taxpayer who hires household employees.

Closely Held Business Basics

From household employees, we move to a topic that covers a wider array of employees: closely held businesses. As you should recall from earlier chapters, a closely held business is a business controlled by a single individual, a family, or a small number of individuals. The phrase is more of an industry term than a legal description. Although we have discussed closely held businesses before, we still have some additional issues to address. The most important of these issues is selecting the type of business structure to be used. This is known as the entity selection process.


The choice of business entity or the decision as to whether or not to form a business entity is critical in the personal financial planning process. The choice of entity affects the entire spectrum of an individual’s personal financial plan: asset protection, income taxes, and financial independence, as well as risk

management. Businesses may be grouped into two broad categories: those whose activities would create little or no risk to the owner by their activities (stock nature photographer); and those that would bring risk to the owner by their activities (manufacturer and distributor of energy drinks). Of course, there are a number of specific types of business entities. In this section, we briefly examine each one.

Sole Proprietorship

In a business formed as a sole proprietorship, the owner of the business is generally responsible for the day-to-day operations of the business. For liability purposes, the activities of the business are indistinguishable from the owner’s personal activities. There is no asset protection, and any liability arising out of business activities are attached to the sole proprietor.

Table 22-1 shows the advantages and disadvantages of sole proprietorships.

No legal formalities Unlimited liability for business activities
Availability of pension plans (Keogh, Solo K, SEP) No business continuity; the business dies with the owner
Conduit taxation of income or losses to owner; no
additional tax return required, files Schedule C
with Form 1040
Capital structure depends on resources of the business owner

General Partnership

A general partnership (GP) is an association of two or more owners to carry on a trade or business for profit. A partnership is the simplest and least expensive of a co-owned business to create and maintain. Like a sole proprietor, partners are held personally liable for all business debts and obligations, including court judgments. Additionally, any individual partner can bind the entire business to a contract.

Table 22-2 shows the advantages and disadvantages of partnerships.

Little or no legal formalities: partnership agreement
can be oral or written, and is state-specific
Unlimited personal liability for acts of the partnership
or a partner acting on behalf of the partnership
(joint and several liability)
Availability of pension plans (Keogh, Solo K, SEP) Capital structure depends on resources of partners
Conduit taxation of income or losses to owner

Limited Liability Partnership

A limited liability partnership (LLP) is a partnership in which the partners are not personally liable for malpractice-related claims resulting from negligence or misconduct of another partner. Professional service providers (such as accountants, lawyers and doctors) often choose to form as an LLP because of this limitation on malpractice.

Limited Partnership

A limited partnership (LP) is a type of partnership in which there are two categories of partners: general partners and limited partners. General partners are tasked with running the day-to-day operations of the partnership and share in any profits or losses of the LP, much the same as in a GP or LLP. Limited partners contribute money but are not permitted to participate in the day-to-day operations of the LP. They may also be called silent partners. A limited partner is liable only for losses up to the amount of money the limited partner contributed to the LP.

Limited Liability Company

The owners of a limited liability company (LLC) are called members. Most states do not restrict ownership and, therefore, members of an LLC may include individuals, corporations, other LLCs and foreign entities. In an LLC, every member has limited liability for all debts or claims against the business, and all members are able to be involved in the daily operations of the company without losing this limited liability status. There is no maximum number of members for an LLC, and in most states there is also no minimum because single-member LLCs (those having only one member) are allowed.

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as a disregarded entity. A single-member LLC is automatically considered to be a sole proprietorship (a disregarded entity) unless an election (Form 8832) is made to be treated as a corporation. Income from a single-member LLC is reported on Form 1040 and Schedules C, E, or F. If the LLC has two or more owners, it will automatically be treated as a partnership unless an election is made to be taxed as a corporation. Ownership interests, the disbursement of funds, capital structure, and most other financial items are governed by the LLC’s operating agreement, which is state specific. Each state has different laws as to the regulation and taxation of an LLC. The personal financial planner should be familiar with the statutes of the various states in which he or she practices.


A corporation is an independent legal entity owned by the stockholders of the corporation. The corporation itself is held legally liable for its actions and any debts or liabilities, rather than the shareholders of that corporation. Because it is an independent legal entity, a corporation is more complex than other business entities. Despite, or in some cases because of this complexity, corporations are generally the best entity choice for larger established businesses, primarily because of the complete lack of individual liability. There are two types of corporations: C corporations and S corporations.

A C corporation is a separate tax entity. If a C corporation distributes after-tax earnings to its owners, the distributed income is taxed a second time at the owner level. This is referred to as double taxation. The distributed income is a dividend. To somewhat make up for the double taxation of distributed income, C corporations are taxed under a progressive tax rate. The C corporation files its taxes on Form 1120.

Table 22-3 shows the advantages and disadvantages of C corporations.

Limited liability for shareholders Complexities of corporate formalities
Potential sale of stock to an unlimited number of investors Potential for “double taxation”—dividends paid after tax
Business continuity Accumulated earnings beyond certain limits are subject to double taxation
Dividends received deduction

Under Section 243, a C corporation is allowed to take a dividends received deduction (DRD) on Form 1120 for the dividends paid to the corporation by companies in which the corporation has an ownership interest. The reason for this deduction is the potential for triple income taxation. Triple income taxation may occur because the corporation paying the dividend is paying the dividend with after-tax income, and the corporation receiving the dividend needs to pay income tax on corporate earnings. If the corporation receiving the dividend itself pays out a dividend, then that dividend will be taxed yet again.

A personal service corporation (PSC) is a C corporation that is owned by certain individuals who perform professional services. A PSC is denied the traditional progressive tax rate enjoyed by C corporations. Instead, a PSC is taxed at a flat 35 percent on profits of the corporation. In a PSC, the stock is owned by professionals who provide personal services for the corporation in the fields of accounting, architecture, actuarial science, consulting, engineering, health, law, or the performing arts.

An S corporation is a special type of corporation created through an IRS tax election. Profits and losses from the S corporation pass through to the shareholder’s personal income tax return and, as a result, the business is not taxed, thus eliminating any potential for double taxation.

A shareholder in an S corporation must receive compensation that is reasonable, but the IRS has not defined what qualifies as reasonable compensation. Because income from the S corporation may be directed to the shareholder(s) in the form of a distribution, resulting in less Social Security tax being paid, the IRS scrutinizes very closely the ratio between wages and distributions.

Table 22-4 shows the advantages and disadvantages of S corporations.

Limited liability for shareholders Complexities of corporate formalities
Flow through taxation Limited to 100 shareholders
Business continuity Types of shareholders are preset by the IRS
Reasonable compensation

An LLC may elect to be taxed as an S corporation. The election is accomplished with IRS Form 2553. The LLC remains a limited liability company from a legal standpoint, but for income tax purposes it will be treated as an S corporation.


The personal financial planner should pay particular attention to the titling of a client’s business interests. If a revocable living trust (RLT) exists, then the membership interest for the business should be titled in the name of the revocable trust. This strategy will provide for asset protection at death and business continuation in the event of the owner’s death or disability. If an RLT does not exist, this provides the personal financial planner an opportunity to discuss the benefits of a trust-based estate plan with their client.


Business owners often hire family members. Although this is usually done for entirely different reasons, hiring family members can have tax advantages. Compensation paid to a child under age 18 who works for his or her parent in a trade or business is not subject to Social Security and Medicare taxes. Additionally, compensation paid to a child under age 21 who works for his or her parent in a trade or business is not subject to FUTA tax. Payments for the services of a child are subject to income tax withholding, regardless of age.


Disability insurance products and key employee life insurance have very specific applications to closely held businesses and will be discussed here. The statistical odds of a business owner becoming disabled is greater than those of the business owner dying. Two types of disability insurance products used for businesses include disability buy-sell and business overhead expense insurance. The loss of a key employee can also have a significant financial impact on a business, depending on his or her role with the company. These topics are discussed in this section.

Business Disability Plans

We previously discussed the application of life insurance contracts and buy-sell agreements in chapter 16. Here we consider disability insurance as a means of funding a buy-sell agreement. Because the definition of what defines disability is insurance company-specific, the disability buy-sell agreement should contain the same definition of disability as the disability insurance policy insuring the agreement. Premiums are not deductible, regardless of whether it is an entity purchase or a cross-purchase buy-sell agreement. Payments received by the disabled partner, upon the sale of that partner’s portion of the business triggered by the disability, are considered payments from a sale to an outside party.

Business Overhead Expense Insurance

Business overhead expense (BOE) insurance insures ongoing business expenses while the owner of the business is totally disabled. The actual expenses of the business—excluding the owner’s salary—are reimbursed during the period of disability. The expense reimbursement is limited to a maximum monthly benefit, and the duration of the benefit is usually for a period of one to two years.

Premiums paid for BOE are considered a deductible business expense, regardless of how the business is organized. The business is the owner of the BOE policy; benefits are paid to the business. The benefits paid by the BOE are considered taxable income to the business; however, this income will generally be offset by the business expenses.

Key Employee Life Insurance

A key employee is anyone whose experience, knowledge, and skills contribute significantly to a business, and whose loss, through death or disability, would most likely cause substantial negative financial consequences for the business. A life or disability insurance contract can compensate the business when a key employees dies or becomes disabled. In addition to lost revenue to the business, the death or disability of a key employee will generate additional expenses including employment agency fees, moving expenses, and a potentially higher salary for the replacement. The employer is the owner and premium payer for the key employee life insurance contract. The life insurance premiums are not deductible; however, the death benefit is income tax-free (although subject to the alternative minimum tax).


Divorce is a difficult time for families. The personal financial planner is often involved in the process of determining income needs, providing advice as to how the assets should be divided, and assessing the income tax consequences of these decisions. In order to accomplish this role, the personal financial planner needs to have an awareness of property settlement rules; income tax implications of alimony, child support and property payments; dependency exemption rules; and the division of retirement plan assets.

The starting point in this process is the client’s statement of financial position and the personal spending plan. The personal financial planner should be cautious yet vigorous in the discovery process. Oftentimes, financial information has been hidden between spouses. Also, property transfers should be reviewed to ensure the right assets are transferred to the spouse who is best able to use the property.


Discussing the marital residence is an emotional conversation. Perhaps neither spouse is able to afford the maintenance for the property on their own. The recommendation may be made that the home be sold prior to any property transfers to take advantage of the Section 121 $500,000 gain exclusion, as opposed to selling the home after the divorce, when the available exclusion is only $125,000 for the single taxpayer.



If the divorce settlement mandates regular payments from one former spouse to the other, those payments may be structured as alimony or child support. In order to be considered alimony and be deductible by the payor and taxable to the payee, the following requirements must be met:

The taxpayers do not qualify to file a joint tax return and do not live together at the time of the payment.

Payments must be made in cash.

Payments must be received by or for the benefit of the recipient spouse.

The payments cannot extend beyond the death of the recipient spouse.

Transfers of noncash items such as services, property or the use of property, and promissory notes do not qualify as alimony. Cash payments to third parties can qualify for alimony if made pursuant to the divorce instrument for an obligation of the spouse, such as payments of the spouse’s rent, mortgage, tax, or tuition liabilities. Any payments to maintain property owned by the payor spouse, and used by the payee spouse (including mortgage payments, real estate taxes, and insurance premiums) will not qualify as alimony payments made on behalf of a spouse, even if required under the terms of the divorce instrument.

When the payee spouse owns a life insurance policy on the life of the payor, the policy payments made by the payor will qualify as alimony, if the payments are made under the divorce instrument.


As part of the written separation agreement, Mr. Church must provide Mrs. Church with a life insurance contract with a $1 million death benefit on his life.

If he owns the policy and she is the beneficiary, no alimony deduction is allowed.

If she owns the policy and she is the beneficiary, alimony deductions are allowed.

Child Support

Payments for child support are nontaxable to the payee and nondeductible by the payor. Any amount tied to a contingency or occurrence of an event relating to a child is considered to be child support and not alimony.

Property Settlements

Any transfer of property between spouses incident to a divorce is a tax-free gift and the transferor’s basis in the property is carried over to the transferee.

Dependency Exemption

A dependency exemption is awarded to the custodial parent, or the parent having custody of the children for the longer period of time during the year, unless there is a written agreement to the contrary. A child must receive more than half of his or her support from either parent for more than half of the calendar year. If not, neither parent is allowed to claim the dependency exemption.


Lisa and Robert Sterling are divorced. Lisa was awarded custody of their minor children in the Sterling’s divorce decree. Lisa may claim the dependency exemption. However, if Lisa were to become unemployed and, as a result, was unable to care for the children, who would receive the dependency exemption?

If Lisa and the children were to live with her parents, then her parents—the children’s grandparents—would receive the dependency exemption, as long as they are providing one-half of the children’s support, regardless of the divorce decree.


If, during the course of a personal financial planning engagement, a divorce occurs, the planner should make a determination as to whether or not a conflict of interest exists in representing both parties. If the planner determines the engagement can be performed objectively, the planner should document in writing the potential conflict and obtain the consent of both parties. If the engagement cannot be performed objectively, then the original engagement should be terminated and the personal financial planner may begin a new engagement with one of the parties or, alternatively, choose not to engage either of the parties.

Chapter Review

As you have seen, personal financial planning covers a broad range of topics, and the material in this chapter has been addressed from a 30,000-foot overview. There are areas of personal financial planning that require a deeper understanding because of their multifaceted impact, such as personal residence and divorce. These topics are generally referred to as special circumstances. Choice of an entity for a business owner also requires more than just a surface look. Entity selection affects the business owner’s income taxes, qualified plan design, and fringe benefits. The special circumstances discussed in this chapter may not be as widely known as the more traditional areas of personal financial planning, such as retirement, investments, and risk management; however, the correct application of this knowledge by the personal financial planner will meaningfully affect the client’s personal financial plan.


Recall that one of Alexander and Barbara Wilson’s children has come to you for some advice regarding his parents. What are some of the personal financial planning concerns you think should be addressed?

1. Providing for their daughter’s support could create gift tax issues. A potential solution is to purchase a duplex. In exchange for a small wage and free rent on one side of the duplex, the daughter is tasked with the responsibility of maintaining the property. The property should be held in an LLC in order to separate the Wilson’s assets from the claims of predators or creditors who might be hurt on, or encumber the property, in an attempt to reach the Wilson’s assets.

2. The Wilsons have people providing in-home care to Barbara. The Wilsons should speak with their CPA and have the CPA make a determination as to whether or not the care providers are considered household employees, which would therefore require payroll taxes. If so, arrangements need to be made for payroll services and EPLI insurance.

3. Property on the lake should be assessed for some type of land conservation easement. This strategy will provide income tax relief and potential income through the sale of membership interests that hold the property right to the easement.



1. Mr. Robert Andrews and Ms. Michelle Stevens are founders and co-owners of Social Media, Inc. Social Media is a C corporation. They each contributed $50,000 to the venture when they began 10 years ago. They have a buy-sell agreement. The agreement contains provisions for death, disability, and retirement. The company is now worth $1 million. If Michelle becomes disabled, Social Media will redeem her stock for $500,000. What amount of capital gains will Michelle have to report on her Form 1040?

A. $50,000.

B. $250,000.

C. $450,000.

D. $500,000.

2. Bob Newton is a key employee of Information Solutions, Inc. (IS). Bob has been with IS since 1984 and is about to retire. IS has a very large key employee life insurance contract on Bob, and now that he is retiring, the company no longer needs it. Bob has lost his insurability and is no longer able to purchase life insurance. IS has a defined benefit plan, and Bob is considering a pension maximization strategy. Which of the following is the best choice to be the purchaser of the key employee life insurance contract?

A. Bob.

B. Bob’s children.

C. Bob’s intentionally defective grantor trust.

D. Bob’s wife.

3. Vicki Wilson owns Vicki’s Vettes (VV), an S corporation. VV is an automobile restoration business working exclusively with pre-1968 Chevrolet Corvettes. Her business overhead is $30,000 per month. She is the rainmaker for the business and, without her, there would be a cash flow shortfall. What should Vicki do to manage the risk of business overhead expenses should she become disabled?

A. Purchase individual disability insurance/premium deductible by the business.

B. Purchase individual disability insurance/premium is not deductible by the business.

C. Purchase a business overhead insurance/premium deductible by the business.

D. Purchase a business overhead insurance/premium is not deductible by the business.

4. Buck and Pat Johnson purchased their principal residence over 10 years ago for $200,000. They have decided to downsize and sell the place this year for $750,000. The Johnsons used the proceeds from the sale of their principal residence to purchase a smaller home for $250,000. What is the amount of recognized gain that they must report on Schedule D of the Form 1040?

A. – 0 – .

B. $50,000.

C. $250,000.

D. $350,000.

5. If a married couple occupied a principal residence for two out of the past five years and then rented it for three of those five years, are they still able to obtain Section 121 exclusion?

A. Yes, they lived in the house for five years.

B. No, they must live in the house at least three of the five years.

C. Yes, they are able to obtain Section 121 exclusion.

D. No, but they are able to obtain Section 1031 exclusion.

6. Which of the following items qualify as alimony payments pursuant to a separate maintenance decree or a written separation agreement?

I. Payments for a mortgage on property owned by the payor spouse but used by the payee spouse.

II. Payments of the payee spouse’s rent by payor spouse.

III. Payments of the payee spouse’s tuition to state university.

IV. Payments which continue beyond the payee spouse’s death, naming the children as the beneficiaries.

A. I, IV.

B. I, II.

C. II, IV.


7. Alice Walters was recently divorced from Juan. Juan has custody of their two children, Anjelica and Pete. Alice was ordered to pay $3,000 per month to Juan until their youngest child, Pete, reaches age 18. At that time, the payments are to decrease to $1,000 per month. What portion, if any, is deductible by Alice as alimony?

A. – 0 –.

B. $1,000.

C. $2,000.

D. $3,000.

8. Greg Watkins owns 100 percent of Speedy Plus Car Wash, Inc. Speedy holds a significant amount of stock of other corporations, mostly other car washes. The other car washes are paying dividends to Speedy. In order to receive the greatest income tax benefit (lowest tax paid), Speedy should elect to be which type of entity?

A. A C corporation.

B. A sole proprietorship.

C. An LLC.

D. An S corporation.

9. Nate and Tom Williams are brothers. They both enjoy cooking, and all of their friends say that they should open a restaurant. Of course, both will materially participate in the business. They have written a business plan, and they anticipate losses in the first three years until they are up and running. If one of the brothers dies, they want the survivor to be able to continue the business. They are considering raising additional capital through the sale of interests in the business or have the business borrow funds. Which one of the following business forms is most appropriate?

A. C corporation.

B. General partnership.

C. Limited liability company.

D. S corporation.

10. On which form or forms would the owner-employee of a C corporation receive notice of taxable income?

I. Form 1099-DIV.

II. Form W-2.

III. Schedule C.

IV. Schedule K-1.

A. I.

B. I, II.




1. What Internet resources are available from the IRS regarding Section 121—Exclusion of Gain from Sale of Principal Residence?

2. Download USCIS Form I-9. What is required when rehiring an employee within three years of the date Form I-9 was originally completed?

3. What resources are available from the Small Business Administration in choosing a business structure?

4. What are your state’s requirements for workers’ compensation and household employees?