- Assume mickey dies in June this year and mike inherits his dads exxon stock, which is worth $350,000 at the time of his death. If mike sells the stock before the end of the year for $400,000, then what are the tax consequences?
- If Michael were to inherit his granddads IRA, how would he comply with the minimum distribution rules? Would it be safe from creditors?
CASE EXAMPLE MIKE & MARIA ROMAN CASE MIKE AND MARIA ROMAN Mike and Maria have come to you, a financial planner, for help in developing a plan to accomplis als. From your initial meeting together, you have gathered the following information. PERSONAL BACKGROUND AND INFORMATION COLLECTEDI THE FAMILY home with a baseball field to the left ile and Maria Roman live in the country and operate a baseball academy on their property. They have a baseball field to the left of their house and two covered baseball batting and pitching cages. Mike sed professional baseball for 15 years and now provides baseball instruction through RBI to children ages six to u twenties. Mike currently coaches several college baseball players and is one of the most respected hitting itching coaches in the area. He also coaches a 9-year old team and a 14-year old team, both competing at the maior division level. Maria has the tireless job of scheduling all of the lessons. Mike and Maria Roman Mike is 44 years old and loves his job. He is also an avid hunter and fisherman. Maria is also 44 years old and has done a wonderful job of raising their two kids, while helping with the family business. The Children Emily is 20 years old and is a Junior at Florida State University where she is double majoring in anthropology and communications. She has always been an excellent student and has a full academic scholarship. She also works part time to earn additional spending money. Her brother, Michael, is 17 years old and is a junior at Mission High School, where he plays shortstop on the baseball team and is hitting over 300 for the year. Roman's Baseball Institute (RBI) Mike started RBI seven years ago RBI over that time period bi seven years ago after he left professional baseball. He has built his reputation, as well as that of hat time period. RBI is one of the premier baseball academies in the area. 911 MIKE AND MARIA ROMAN RBI is fees from baseball lessons. Les rovide lessons (Mickey, Mr. Joe, and I v to play baseball, coached him grow as a child and now coaches for Mike lessons. Lessons are priced at $70. Loe, and Joey). His dad, Mickey aed him growing up, and works with s for Mike. Joey is 20 years old, play N37 $70 per hour. Mike has Mickey, who is now retired with him now that he s old, played baseball for 15-1 $02 The primary source of income for RBI is fees from three other coaches who help him provide lessa from the Post Office, taught him how to play baseh is retired. Mr. Joe also coached Mike as a child and, Mike growing up and played in college during hi hman year before getting injured. sec enue and has the following expenses: RBI generates $245,000 in gross annual revenue and hae $60,000 Coaching fees to his coaches Utilities Field Maintenance Equipment (balls, etc.) Other Expenses $2,500 $7,000 $1,000 $3,000 000 hours. His three coaches work the followi work the following number of Mike works 1,500 hours and the other coaches total 2,000 hours ! hours and are paid $30 per hour: Mickey Joey Mr. Joe 1,100 500 400 Mike's net income equals the fees less the expenses listed Mike's coaches have worked with him for at least five years. Mike's net income above. He reports his revenue and expenses on Schedule C of his personal income tax PERSONAL AND FINANCIAL OBJECTIVES FOR MIKE AND MARIA POMA Provide for retirement. They would like to retire when Mike is age 60. They want to plan on $100.000 of retirement income in today's dollars. They expect to receive Social Security and Mike has a pension with! Major League Baseball (MLB). They would like to plan on funding potential retirement expenditures until they turn age 95 and would like to maintain the same level of spending, even if Mike or Maria died early. 2. Provide for the cost of Michael's college education. They expect Michael to receive a partial baseball schol- arship, but they plan on paying $15,000 per year for each of his five years for college. 3. Establish a retirement plan for the income he earns at RBI. 'EXTERNAL INFORMATION ECONOMIC INFORMATION Inflation is expected to be 3.0% annually. There is no state income tax. The yield curve is slightly upward sloping, but relatively flat. The historic and expected correlation between the equity markets in the mode high. The correlation between these markets increase especially during econo They have a required rate of return of 9 percent. omny is in a steady slow growth expansion phase with moderate unempe The economy is in a stea ne modernized countries is relatively c especially during economic crisis. Sion phase with moderate unemployment. CHARTE ANCIAL STA wear of inco Automobile Insurance . Both of their cars are covered. Type Bodily Injury Property Damage Medical Payments Physical Damage Uninsured Motorist Bodily Injury Uninsured Motorist Property Damage Comprehensive Deductible Collision Deductible Premium (annual) PAP $100,000/$300,000 $50,000 $5,000 per person Actual Cash Value $100,000/$300,000 $50,000 $1,000 $1,000 $3,300 Personal Liability Insurance . Neither Mike nor Maria have PLUP coverage. INCOME TAX INFORMATION The Romans filing status for their federal income tax return is ma the MLB minimum pension RETIREMENT INFORMATION Mike would like to retire at age 60 and quit working. Mike met the requireme of $34.000 per year, which is what he expects to receive. This pension begin life (both his and his spouse's life). It is not inflation adjusted from today or Social Security benefits will equal $30,000 in today's dollars at full retirement a have 40 quarters of Social Security coverage. pension begins at age 62 and the amount is fixed for adiusted from today or during retirement. Mike expec ors at full retirement age, which is age 67. Maria does not GIFTS, ESTATES, TRUSTS, AND WILL INFORMATION Neither Mike nor Maria have prepared a will or any other estate planning documents. MICKEY ROMAN Mickey is Mike's dad and is an "old school baseball coach. He turned 70 on December 22nd last year. He has al pension payment from the USPS of $2,000 per month and he and his wife receives a monthly payment from Social Security of $2,200. He also has an IRA with a balance of $85,000 as of December 31st 2014. Since his wife will continue to receive Social Security and his pension in the event he dies, he has named his grandson Michael as the beneficiary of his IRA. Mickey also has Exxon stock that was distributed from a qualified plan 30 years ago. The distribution was a lump- sum distribution in which the FMV of the stock from the plan was $100,000. Mickey deposited the stock in hii brokerage account and included $20,000 in his taxable income in the year of the distribution, based on th ickey still owns the stock, which is now worth $324,340 and is held in the same brokerage account. ng is hoping to leave it to Mike when he dies. 314 CHAPTER 15: ITEM SETS AND THE MIKE & MARIA ROMAN CASE BANK LEND NK LENDING RATES 15-year mortgage rate is 5.0%. 30-year mortgage rate is 6.0%. Secured personal loan rate is 10.0%. ATION INFORMATION Mike and Maria believe strongly in education. They want Michael to attend As mentioned, they expect to fund $15,000 per year for five years Michael's education. Tuition has been increasing at a 7 percent rate, which EDUCATION hael to attend a college for learning, as well ng at a 7 percent rate, which is expected to continue indefi- nitely. TERNAL INFORMATION INTERNA URANCE INFORMATION umber of Life Insurance Policy A Mike $150,000 Term Policy B Maria $40,000 Term $0 es listed Insured Face Amount Type Cash Value Annual Premium Who pays premium Beneficiary Policy Owner Settlement options clause selected $156 Mike Maria Mike None $0 $50 Mike Mike Maria None 2000 of n with es until early. schol- Health Insurance Vile and Maria are covered under the Major League Baseball policy. The plan includes a family deductible o $12,600 at a cost of $500 per month. Long-Term Disability Insurance Neither Mike nor Maria are covered by any disability insurance. Homeowners Insurance the Romans have a HO3 policy with endorsements for replacement value and open perils for persona property. The current dwelling coverage is 100% replacement value with an inflation rider. rely 91 INTERNAL INFORMATION ANCIAL STATEMENTS of Income and Expenses Statement of Income and Expenses Mike and Maria Roman Statement of Income and Expenses for 2014 Expected (Approximate) For 2015 Totals $245,000 CASH INFLOWS Salaries RBI Gross Revenue Total Cash Inflows CASH OUTFLOWS Taxes Federal Estimated Tax Payments Property Tax Principal Residence & Land $245,000 $40,000 $10,000 $50,000 $22,547 $3,488 $7,968 $13,000 $47,002 pension fixed for pects his does not $3,900 $3,500 $1,000 $1,750 $2,000 $500 $2,000 $2,000 $2,000 $4,650 $23,300 He has a m Social wife will ael as the Debt Payments Principal Residence Auto Loan - Jeep Auto Loan - Ram Credit Card Payments Total Debt Payments Living Expenses Utilities Principal Residence Gasoline for Autos Gifts Entertainment Vacations Church Donations Clothing Auto Maintenance Satellite TV Food Total Living Expenses RBI Expenses Fees Paid to the Three RBI Coaches Utilities for Batting Cages Baseball Field Maintenance Baseball Equipment Other Baseball Business Expenses Total RBI Expenses Insurance Payments MLB Health Insurance Premium HO Insurance Principal Residence Auto Insurance Premiums Life Insurance Premiums (Policy A &B) Total Insurance Payments Total Cash Outflows Net DISCRETIONARY CASH FLOWS $60,000 $2,500 $7,000 $1,000 $3,000 a lump- ck in his $73,500 che Form punt. He $6,000 $3,000 $3,300 $2,472 $14,772 $208,574 $36,426 INTERNAL INFORMATIC CASE EXAMPLE MIKE & MARIA ROMAN CASE MIKE AND MARIA ROMAN Mike and Maria have come to you, a financial planner, for help in developing a plan to accomplis als. From your initial meeting together, you have gathered the following information. PERSONAL BACKGROUND AND INFORMATION COLLECTEDI THE FAMILY home with a baseball field to the left ile and Maria Roman live in the country and operate a baseball academy on their property. They have a baseball field to the left of their house and two covered baseball batting and pitching cages. Mike sed professional baseball for 15 years and now provides baseball instruction through RBI to children ages six to u twenties. Mike currently coaches several college baseball players and is one of the most respected hitting itching coaches in the area. He also coaches a 9-year old team and a 14-year old team, both competing at the maior division level. Maria has the tireless job of scheduling all of the lessons. Mike and Maria Roman Mike is 44 years old and loves his job. He is also an avid hunter and fisherman. Maria is also 44 years old and has done a wonderful job of raising their two kids, while helping with the family business. The Children Emily is 20 years old and is a Junior at Florida State University where she is double majoring in anthropology and communications. She has always been an excellent student and has a full academic scholarship. She also works part time to earn additional spending money. Her brother, Michael, is 17 years old and is a junior at Mission High School, where he plays shortstop on the baseball team and is hitting over 300 for the year. Roman's Baseball Institute (RBI) Mike started RBI seven years ago RBI over that time period bi seven years ago after he left professional baseball. He has built his reputation, as well as that of hat time period. RBI is one of the premier baseball academies in the area. 911 MIKE AND MARIA ROMAN RBI is fees from baseball lessons. Les rovide lessons (Mickey, Mr. Joe, and I v to play baseball, coached him grow as a child and now coaches for Mike lessons. Lessons are priced at $70. Loe, and Joey). His dad, Mickey aed him growing up, and works with s for Mike. Joey is 20 years old, play N37 $70 per hour. Mike has Mickey, who is now retired with him now that he s old, played baseball for 15-1 $02 The primary source of income for RBI is fees from three other coaches who help him provide lessa from the Post Office, taught him how to play baseh is retired. Mr. Joe also coached Mike as a child and, Mike growing up and played in college during hi hman year before getting injured. sec enue and has the following expenses: RBI generates $245,000 in gross annual revenue and hae $60,000 Coaching fees to his coaches Utilities Field Maintenance Equipment (balls, etc.) Other Expenses $2,500 $7,000 $1,000 $3,000 000 hours. His three coaches work the followi work the following number of Mike works 1,500 hours and the other coaches total 2,000 hours ! hours and are paid $30 per hour: Mickey Joey Mr. Joe 1,100 500 400 Mike's net income equals the fees less the expenses listed Mike's coaches have worked with him for at least five years. Mike's net income above. He reports his revenue and expenses on Schedule C of his personal income tax PERSONAL AND FINANCIAL OBJECTIVES FOR MIKE AND MARIA POMA Provide for retirement. They would like to retire when Mike is age 60. They want to plan on $100.000 of retirement income in today's dollars. They expect to receive Social Security and Mike has a pension with! Major League Baseball (MLB). They would like to plan on funding potential retirement expenditures until they turn age 95 and would like to maintain the same level of spending, even if Mike or Maria died early. 2. Provide for the cost of Michael's college education. They expect Michael to receive a partial baseball schol- arship, but they plan on paying $15,000 per year for each of his five years for college. 3. Establish a retirement plan for the income he earns at RBI. 'EXTERNAL INFORMATION ECONOMIC INFORMATION Inflation is expected to be 3.0% annually. There is no state income tax. The yield curve is slightly upward sloping, but relatively flat. The historic and expected correlation between the equity markets in the mode high. The correlation between these markets increase especially during econo They have a required rate of return of 9 percent. omny is in a steady slow growth expansion phase with moderate unempe The economy is in a stea ne modernized countries is relatively c especially during economic crisis. Sion phase with moderate unemployment. CHARTE ANCIAL STA wear of inco Automobile Insurance . Both of their cars are covered. Type Bodily Injury Property Damage Medical Payments Physical Damage Uninsured Motorist Bodily Injury Uninsured Motorist Property Damage Comprehensive Deductible Collision Deductible Premium (annual) PAP $100,000/$300,000 $50,000 $5,000 per person Actual Cash Value $100,000/$300,000 $50,000 $1,000 $1,000 $3,300 Personal Liability Insurance . Neither Mike nor Maria have PLUP coverage. INCOME TAX INFORMATION The Romans filing status for their federal income tax return is ma the MLB minimum pension RETIREMENT INFORMATION Mike would like to retire at age 60 and quit working. Mike met the requireme of $34.000 per year, which is what he expects to receive. This pension begin life (both his and his spouse's life). It is not inflation adjusted from today or Social Security benefits will equal $30,000 in today's dollars at full retirement a have 40 quarters of Social Security coverage. pension begins at age 62 and the amount is fixed for adiusted from today or during retirement. Mike expec ors at full retirement age, which is age 67. Maria does not GIFTS, ESTATES, TRUSTS, AND WILL INFORMATION Neither Mike nor Maria have prepared a will or any other estate planning documents. MICKEY ROMAN Mickey is Mike's dad and is an "old school baseball coach. He turned 70 on December 22nd last year. He has al pension payment from the USPS of $2,000 per month and he and his wife receives a monthly payment from Social Security of $2,200. He also has an IRA with a balance of $85,000 as of December 31st 2014. Since his wife will continue to receive Social Security and his pension in the event he dies, he has named his grandson Michael as the beneficiary of his IRA. Mickey also has Exxon stock that was distributed from a qualified plan 30 years ago. The distribution was a lump- sum distribution in which the FMV of the stock from the plan was $100,000. Mickey deposited the stock in hii brokerage account and included $20,000 in his taxable income in the year of the distribution, based on th ickey still owns the stock, which is now worth $324,340 and is held in the same brokerage account. ng is hoping to leave it to Mike when he dies. 314 CHAPTER 15: ITEM SETS AND THE MIKE & MARIA ROMAN CASE BANK LEND NK LENDING RATES 15-year mortgage rate is 5.0%. 30-year mortgage rate is 6.0%. Secured personal loan rate is 10.0%. ATION INFORMATION Mike and Maria believe strongly in education. They want Michael to attend As mentioned, they expect to fund $15,000 per year for five years Michael's education. Tuition has been increasing at a 7 percent rate, which EDUCATION hael to attend a college for learning, as well ng at a 7 percent rate, which is expected to continue indefi- nitely. TERNAL INFORMATION INTERNA URANCE INFORMATION umber of Life Insurance Policy A Mike $150,000 Term Policy B Maria $40,000 Term $0 es listed Insured Face Amount Type Cash Value Annual Premium Who pays premium Beneficiary Policy Owner Settlement options clause selected $156 Mike Maria Mike None $0 $50 Mike Mike Maria None 2000 of n with es until early. schol- Health Insurance Vile and Maria are covered under the Major League Baseball policy. The plan includes a family deductible o $12,600 at a cost of $500 per month. Long-Term Disability Insurance Neither Mike nor Maria are covered by any disability insurance. Homeowners Insurance the Romans have a HO3 policy with endorsements for replacement value and open perils for persona property. The current dwelling coverage is 100% replacement value with an inflation rider. rely 91 INTERNAL INFORMATION ANCIAL STATEMENTS of Income and Expenses Statement of Income and Expenses Mike and Maria Roman Statement of Income and Expenses for 2014 Expected (Approximate) For 2015 Totals $245,000 CASH INFLOWS Salaries RBI Gross Revenue Total Cash Inflows CASH OUTFLOWS Taxes Federal Estimated Tax Payments Property Tax Principal Residence & Land $245,000 $40,000 $10,000 $50,000 $22,547 $3,488 $7,968 $13,000 $47,002 pension fixed for pects his does not $3,900 $3,500 $1,000 $1,750 $2,000 $500 $2,000 $2,000 $2,000 $4,650 $23,300 He has a m Social wife will ael as the Debt Payments Principal Residence Auto Loan - Jeep Auto Loan - Ram Credit Card Payments Total Debt Payments Living Expenses Utilities Principal Residence Gasoline for Autos Gifts Entertainment Vacations Church Donations Clothing Auto Maintenance Satellite TV Food Total Living Expenses RBI Expenses Fees Paid to the Three RBI Coaches Utilities for Batting Cages Baseball Field Maintenance Baseball Equipment Other Baseball Business Expenses Total RBI Expenses Insurance Payments MLB Health Insurance Premium HO Insurance Principal Residence Auto Insurance Premiums Life Insurance Premiums (Policy A &B) Total Insurance Payments Total Cash Outflows Net DISCRETIONARY CASH FLOWS $60,000 $2,500 $7,000 $1,000 $3,000 a lump- ck in his $73,500 che Form punt. He $6,000 $3,000 $3,300 $2,472 $14,772 $208,574 $36,426 INTERNAL INFORMATIC
