CASE STUDIES

PHILLIP AND MARSHA SANDERS

Primary Residence (JTWROS)................................................................................................................................$450,000 Mortgage on primary residence...................................................................................................................... ($175,000) Cash accounts (JTWROS)..........................................................................................................................................$22,000 Phillips 401(k) .......................................................................................................................................................... $125,000 Phillips traditional IRA (no nondeductible contributions)............................................................................... $105,000 Marshas 403(b)........................................................................................................................................................... $65,000 Mutual fund account (JTWROS).............................................................................................................................. $44,000 Cash value of life insurance ....................................................................................................................................... $2,000 Marshas automobile ................................................................................................................................................... $9,000 Freds UTMA account (Phillip custodian)................................................................................................................ $8,000 Darlenes 529 college savings plan (Phillip owner) .....................................................................................$27,000

Income/Expense Data

Phillips monthly disability income ......................................................................................................................... $4,000 Marshas annual salary ............................................................................................................................................. $38,000 Interest & investment income .................................................................................................................................... $2,700 Monthly expenses (excluding mortgage and taxes).......................................................................................$4,500

Other Pertinent Information

• Phillip was in a severe car accident four months ago; he has been released back to his home, but is unable to return to his former work as a middle manager for a local firm and is totally disabled

• Phillip has a medical malpractice suit pending against the hospital that treated him; the suit is expected to be settled out of court shortly for $1,250,000

• Phillip and Marsha do not live in a community property state

• Phillip and Marsha have simple wills that leave all of their property to the surviving spouse; Phillip and Marsha

  have power of attorney and health care power of attorney documents that name each other as attorney-in-fact

• The Sanders are in a combined federal & state tax bracket of 20 percent since the loss of Phillips income (for- merly $80,000/year)

• The Sanders state that they are moderately conservative, and their investment account is primarily (60 percent) equity investments

• Phillips 401(k) account is associated with his former employer before he left his job due to the accident

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FINANCIAL PLANNING

• Marshas currently contributes $500/month to her 403(b)

• Darlenes 529 plan was originally funded with a $6,000 deposit two years ago.

• Phillip recently acquired a universal life policy last year with a death benefit of $100,000; Marsha is the beneficiary

• Phillip has a term insurance policy with a death benefit of $500,000; Marsha is the beneficiary

• Marsha has a term insurance policy with a death benefit of $300,000; Phillip is the beneficiary

• Phillip and Marsha are beneficiaries of each others retirement accounts

• Phillip pays for his own disability insurance policy that provides 60 percent of his former income of $80,000; the policy has a ninety-day elimination period and provides benefits until age sixty-five; the policy provides benefits for two years if Phillip is unable to perform the duties of his regular occupation, and after two years provides benefits only if Phillip is unable to perform any occupation that he is reasonably qualified for by education, training, or experience

• Marsha has no disability insurance

• Phillip and Marsha receive adequate medical insurance coverage for the family through Marshas employment; the Sanders have adequate homeowners and automobile coverage

• The primary residence mortgage is a thirty-year fixed-rate loan, and was refinanced three years ago at a 6.25 percent rate

• Marshas mother has come to live with the family since Phillips accident, and her Social Security income gener- ally covers her own expenses; she has little other assets, aside from a $200,000 residence of her own

  Goals

1. Manage family finances in the coming months as Phillips health declines

2. Provide for college education for Darlene and Fred, assuming $15,000/year (in todays dollars) (four years for Darlene, two more years of payments for Fred)

Economic Environment

The economy has been growing strong for several years. Current inflation, as measured by the CPI, is at 3.3 percent (however, college costs are inflating at 7 percent). Ninety-day T-bill rates and money markets are currently 5 percent. Long-term government bonds are yielding 7.5 percent. Economic growth was 5.0 percent last year, and unemployment is at 4.5 percent. Interest rates are expected to be flat or rising slightly in the near future. Economic growth is expected to slow slightly in the coming years.

5. It has just recently come to Freds attention that he has a UTMA account in his name. He has decided that he wants to use the funds to buy a new car, despite the fact that Phillip and Marsha intended to use the money for his college expenses. Fred may:

   1. a) Use the funds however he likes because he is twenty-one

   2. b) Only use the funds for college, because he is still a college student

   3. c) Only use the funds for college, because his parents can control the money that they contributed to the

      account

   4. d) Use the funds however he likes, once he graduates from college

6. What are the tax consequences of the earnings portion of a withdrawal from Darlenes 529 plan to pay for expenses for Phillip, given that he is both disabled and the owner of the 529 plan?

   1. a) Tax-free and penalty-free

   2. b) Tax-free, but subject to a penalty

   3. c) Taxable, but penalty-free

   4. d) Taxable and subject to a penalty

7. The Sanders would like to take a withdrawal from Darlenes 529 account to pay for a computer that she will

use for school. The tax consequences of the earnings portion of this withdrawal are:

1. a) Fully taxable and no penalties will apply because the funds are being used for a school-related expense

2. b) Fully taxable, but a 10 percent penalty will apply

3. c) Fully tax-free, but a 10 percent penalty will apply

4. d) Fully tax-free (as required by the institution she will attend), and no penalties will apply because the funds

   are being used for a school-related expense

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FINANCIAL PLANNING

8. If the Sanders want to improve their ability to qualify for financial aid, which of the following strategies might be appropriate?

   1. a) Liquidate the mutual fund account to pay down part of the mortgage

   2. b) Take a withdrawal from Phillips IRA to pay down part of the mortgage

   3. c) Bothaandb

   4. d) Neither a nor b

9. Darlene plans to attend a college that costs $15,000/year in todays dollars (payable in a single payment at the start of each school year), with expenses inflating at 6 percent. How much will Darlenes total college expen- ditures amount to by the time she graduates (to the nearest dollar)?

   a) $65,619 b) $69,556 c) $73,730 d) $89,630

10. The Sanders owe a semester tuition payment for Fred right now, and another two payments every six months after that a total of three payments, at $9,000 each. If the Sanders keep Freds tuition funds invested in a money market (and rates stay level), how much will the Sanders need in the account to cover all of the payments (to the nearest dollar)?

    a) $24,509 b) $25,704 c) $26,347 d) $27,000