Roy is an executive in the computer industry, and he is in the process of leaving his
Question:
Roy is an executive in the computer industry, and he is in the process of leaving his former employer to work for a relatively new company. He and his wife Rowena have two children: Roland, age 24, who graduated from university last year and has started a full time job, and Rolo, age 21 who is beginning his 3rd year at University (4yr program).
Roy is now 53, and Rowena is 52 , and they would like to buy a small farm property and semi-retire sometime in the next three to seven years. They both grew up on farms, and have no desire to remain in the city any longer than they must. Roy feels he could make at least $40,000 per year, net of expenses, consulting for the first 5 years of his retirement.
Financial Situation
Roy and Rowena have about $20,000 in bank accounts, and Rowena has $2000 in a Canada Savings Bond. Roy has $180,000 in an RRSP, mostly invested in balanced mutual funds. Rowena has $30,000 in her own RRSP , all of which she contributed herself based on her part-time work as a nurse and all of which is invested in GICs.
Their jointly -owned home is presently worth $1,200,000 with a $80,000 mortgage at 7.25% interest. They plan to sell it when they retire, and buy a farm for about $500,000. They estimate they will spend about $40,000 in renovations and moving costs. The remainder will be free to invest . They own 2 cars worth $12,000 each.
Roy's salary and bonus have averaged $150,000 per year in the last three years. In his new position, he will have a salary of $140,000 and the potential for a bonus of up to $50,000 per year. Rowena does not plan to return to work.
Roy's Pension
Roy's present pension plan is a blend of defined benefit and defined contribution. The defined benefit portion will give him a pension at age 65 of 1% of his average salary over the last 5 years for each year of service (quoted on the basis of a life pension, with a minimum guarantee of 60 monthly payments). There is very modest indexing pre -and post -retirement-for example , in years in which inflation has been 3%, the company has increased pensioners' incomes by only 1%. He has been with the company over 20 years, and has accumulated a pension at age 60 of $1477/mth. If he wishes to take this income at an earlier age ,it will be reduced by 6% for each year before age 60. If he defers taking his pension until age 63, he will receive a lifetime pension of $1800/month.
Roy has been advised that his total pension from the defined portion of his plan is worth $180,000 of which $5000 is "actuarial surplus" which cannot be transferred into his RRSP. He has further $300,000 in his defined contribution portion of the plan.
His new employer does not have a pension plan , and has no intention to begin one. There is, however, a deferred Profit Sharing Plan, which matches employee RRSP contributions, to a maximum of 9% of salary or $6750, whichever is less.
Insurance Plans
Roy has $500,000 of group term insurance with his previous employer, and can convert up to $200,000 of this to personal insurance coverage when he leaves, although at a considerably higher premium. His new employer has a group plan, but the maximum coverage allowed at present is only $300,000. Rowena is eligible for up to $20,000 of life insurance coverage under Roy's new group plan.
In addition to his group coverage , Roy also has a $200,000 term insurance policy which he owns personally. Rowena has been designated as beneficiary under all of his insurance policies (as she has under his RRSPs)
Roy's previous and new employer group plan provides disability insurance coverage, employee-paid, but the maximum available to any employee is $5000 per month , or $60,000 per year. He has no personal coverage. The group plan also provides good health care and dental care insurance coverage.
Wills
Their wills were signed in 2013. Under their terms, they leave their estates outright to the surviving spouse, and appoint him/her as executor. If the spouse does not survive him/her, then Rowena's brother is appointed as executor, and he is to hold the estate in trust for the children until the youngest has attained the age of 25 years, and to hold the house in trust until then as well, as a residence for both sons. In the event neither son survives them, their respective estates are to be divided equally among Roland's and Rowena's brothers and sisters.
Estate Plan and Life insurance needs analysis assignment
a)Develop a cash Flow Statement for Roy and Rowena. Assume their living expenses average $5000/month and they intend to spend $30,000 for Rolo's education.
(use the following format):
Gross income including bonus
Less: Living Expenses
Income Tax
Other deductions
Net Discretionary Income
b)Roy and Rowena are concerned about their Life and disability health and benefit package, and also during post-retirement. What alternatives would you recommend? Discuss some areas of concern and your recommendations.
c)Estate distribution chart-develop a chart showing what assets (and values ) pass by joint ownership(and to whom) by beneficiary designation and under terms of the will
d)Taxes, Fees and other Estate Costs- develop a statement of taxes, fees, and other charges and expenses. Include funeral expenses, probate fees, solicitor's fees (assume 0.75% of the probatable estate) and income taxes. If you include executors' fees, the maximum amount chargeable is 2.5% of the value of assets as they are cashed in and 2.5% of the value of the assets as they are distributed.
e)Estate liquidity-make up a chart showing the liquid assets of the estates(i.e. those which can be used to pay the estate debts and estate settlement costs), deduct the taxes and fees and other liabilities from this amount, and show the net liquidity surplus or shortfall.
f)Survivor income-estimate the income available to Rowena if Roy predeceases her.
g) Wills and Powers of Attorney-Comment on Roy s and Rowena's current Wills and Powers of Attorneys , and make any recommendations you feel that might be worthwhile for them to consider. Give reasons for any recommendations.
h)Finally summarize your recommendations and outline course of action for Roy and Rowena.
CCH Federal Taxation Basic Principles 2020
ISBN: 9780808051787
2020 Edition
Authors: Ephraim P. Smith, Philip J. Harmelink, James R. Hasselback