Case Study #2: Tanya and Larry Braun

It is January 1st.

Tanya and Larry Braun have decided to retain the services of your financial planning company. They are considering making some major changes that will affect their financial situation, so they have come to you for advice and guidance.

Family Situation Tanya and Larry have been married for 15 years and they have a two year old daughter,

Samantha.

Samantha Braun

Employment

Birth Date

June 30th May 15th April 1st

Age as of January 1st

39 37 2

Family Member

Larry Braun

Tanya Braun

Tanya and Larry are both career-oriented. Tanya continued to work full-time after Samantha was born and they have been fortunate that Tanya's mother, Greta, has cared for Samantha while Tanya and Larry work.

Tanya owns and operates a specialty garden accessories shop, Grand Illusions, as a sole proprietor. Her storefront is located in a renovated house downtown, and she has owned the building for the last ten years. She has one part-time employee, but otherwise she manages the shop by herself, with some assistance from Larry and Greta. Her net income from the business was about $55,000 last year. It has been growing at about 10% each year and she expects that growth to continue. Her shop is located on the main floor of the building, and she rents the second floor to a custom framing business, bringing in net rental income of $6,000 each year.

Since he graduated from college 18 years ago, Larry has been working his way up the ladder at ComBuild Inc., a construction company. His current salary is $62,000 and it has only been increasing by about 2% per year for the last four years. Larry has gone as far as he can go with this company and he wants to move on, perhaps by starting his own construction company. However, he feels that opportunities in his province are limited and he wants to relocate to southern Ontario, where several of their friends currently live.

Before changing jobs, Larry would like to take a one-year, full-time business course to supplement his work experience. The program begins in January of next year and finishes in December. Two years from today, in January, Larry expects to return to work (either as an employee or on a self-employed basis). While Larry's friend in Ontario has indicated that Larry might be able to work for him part-time, earning about $15,000 per year, Larry is worried about other sources of income during his period of study. They have another friend in Ontario who said she would be willing to take care of Samantha in her home, but this will cost about $6,000 each year.

Personal Use Assets

Tanya and Larry bought their house 14 years ago for $80,000 with a $20,000 downpayment; the home is registered in joint tenancy. They believe it is now worth about $140,000. Their household furnishings and personal belongings have been bought and paid for.

In addition to their two personal vehicles, Larry is restoring an antique 1957 Chevrolet, which he believes could sell for about $14,000. Tanya collects artwork, including sculptures and paintings; her collection is currently valued at $50,000.

Tax-paid Capital

Tanya bought her store 12 years ago for $150,000 with $50,000 allocated to the land and $100,000 allocated to the building. She made a downpayment of $30,000. Her mother guaranteed the loan at that time. The store mortgage is currently based on an effective annual rate of 7.25% and it is up for renewal in December in two years.

The property was recently appraised at $220,000 ($70,000 for the land; $150,000 for the building) and the UCC of the building is $78,000. Her other business-related assets, including store furnishings and inventory, were valued at $45,000 at the end of last year.

Larry has a small investment portfolio, consisting almost entirely of foreign equities, currently worth $36,000 with an ACB of $23,600. The only non-foreign property in this portfolio consists of shares in a labor-sponsored investment fund that he purchased two years ago. He paid $3,000 for the shares and they are still worth only $3,000. They have never provided him with any dividend income. In the year he made the LSIF investment, his home province provided a tax credit of 15% on new LSIF investments up to a maximum investment of $5,000. He also has a modest amount in GICs and money market funds. He has been adding about $1,000 a year to each in recent years.

Retirement Assets

Larry has been a vested member of his employer's defined contribution pension plan for the last 16 years. He and his employer each contribute 5% of his salary and there is currently about $148,000 in his RPP account. He has contributed regularly to his own RRSP and he has accumulated about $112,000 in his plan. During the last five years, he has been making contributions of $5,000 each year to a spousal RRSP for Tanya, accumulating about $27,000. As of the end of last year, Larry had no unused RRSP contribution room.

Tanya, on the other hand, has not contributed very much to her RRSP and she has only $18,000 in her plan. At the end of last year, she had unused RRSP contribution room of $33,780.

Estate Planning

Larry and Tanya drafted new wills just after Samantha was born and they have not changed them since that time. Basically, the wills leave all of their assets, other than their RRSPs, to each other and in the event of their simultaneous death, to Samantha in trust. They have named Samantha as the beneficiary of their RRSPs and their estates as the beneficiaries of their insurance policies. Larry has named Tanya as the beneficiary of his RPP. Neither of them has drafted a power of attorney.

Insurance

Larry has life, disability and group health insurance through his employer. The life insurance policy will pay twice Larry's salary and double that amount if he dies an accidental death. The disability plan provides long-term coverage (until retirement) and has a 120-day waiting period. Larry pays for the disability premiums through a regular deduction from his paycheque. The group health coverage covers 80% of standard dental work and prescription medication and provides limited coverage for things like glasses, chiropractic care, etc. As a result of the heavy physical labour early in his career, Larry's back sometimes gives him problems and he makes full use of the coverage. The Brauns are aware that this coverage will cease if Larry quits his job and returns to school.

Tanya has purchased her own $150,000 term insurance policy. The policy includes a child life rider that covers Samantha for $20,000. Tanya does not have any disability insurance.

Objectives

Larry and Tanya want to consider the possibility of relocating to southern Ontario. Initially they want Larry to return to school for one year in the Toronto area, beginning in January of next year. After that, they will decide whether he should go into business for himself or whether he should look for a more senior position with a company in his field.

If they move, Tanya will sell her storefront building and set up a new shop in Ontario. She has not yet decided whether she should purchase a new shop or rent space.

The Brauns also want to start thinking about saving for Samantha's education. So far, they have not done anything in this respect but, Greta contributed $2,000 to an RESP on Samantha's behalf in late December of last year and she plans to do so again at the end of this year and all future years. Her final contribution will be made in the year before Samantha begins her post-secondary education. For planning purposes, Larry and Tanya have assumed that Samantha will begin post-secondary studies in January in 15 years and they want to save the equivalent of an additional $50,000 in current dollars outside of an RESP to fund her education by the time she is ready to start school.

Assumptions Tanya's marginal tax rate last year: 41.9% Larry's marginal tax rate last year: 41.9% Greta's marginal tax rate last year: 30.8% CPP YMPE for last year: $58,700 CPP YMPE for this year: $61,600

ASSETS

Liquid Assets

Net Worth Statement: Tanya and Larry Braun As of December 31st of last year

joint chequing account 1,500 Larry's money market fund 6,000 Larry's GICs 6,250

13,750

Investment and Business Assets - Non-registered

Tanya's store Tanya's store furnishings and inventory Larry's equity portfolio 36,000

36,000

Investment and Business Assets - Registered

Larry's RPP 148,000 Larry's RRSP 112,000 Tanya's spousal RRSP Tanya's RRSP

260,000

Personal Use Assets

house 70,000 1957 Chevrolet 14,000 sculptures and paintings personal vehicles 6,500 furnishings, personal belongings 19,500

Larry

Tanya

1,500

1,500

220,000 45,000

265,000

27,000 18,000 45,000

70,000

50,000 5,400 19,500

Total

3,000 6,000 6,250 15,250

220,000 45,000 36,000 301,000

148,000 112,000 27,000 18,000 305,000

140,000 14,000 50,000 11,900 39,000

110,000 144,900 254,900

TOTAL ASSETS 419,750 456,400 876,150

Short-term Liabilities

credit cards

Long-term Liabilities

mortgage on storefront mortgage on house

estimated deferred taxes

Larry

900

900

13,725

13,725

108,940

296,185

Tanya

900

900

80,454 13,725 94,179 45,881

315,460

Total

1,800

1,800

80,454

27,450

107,904

154,801

611,645

Liabilities and Net Worth: Tanya and Larry Braun

Net Worth

TOTAL LIABILITIES AND NET WORTH 419,750 456,400 876,150

Statement of Cash Flow: Tanya and Larry Braun as of last year

Cash Inflows $

Larry's salary Tanya's self-employment income Tanya's rental income Larry's dividend income 500 Larry's interest income 475 Tanya's interest income 25

TOTAL CASH INFLOWS

124,000

62,000 55,000 6,000

Cash Outflows

income taxes mortgage (interest only) property taxes home insurance utilities maintenance landscaping food household expenses telephone personal care clothing transportation entertainment eating out gifts and charitable donations subscriptions and books holidays sports & music registrations life insurance sundry payroll deductions interest on storefront principal repayment on storefront Larry's RPP contributions Larry's spousal RRSP contributions Tanya's RRSP contributions additions to Larry's equity portfolio additions to Larry's GICs and money market funds interest on credit cards parts for 1957 Chevy new sculptures and paintings house Mortgage principal new home furnishings

TOTAL CASH OUTFLOWS

Unaccounted Difference in Cash

$

32,023 2,900 1,800 720 2,800 1,200 1,500 6,000 3,200 720 1,500 5,000 4,500 4,800 5,200 4,000 1,200 6,000 1,600 540 600 5,956 5,332 3,100 5,000 1,500 2,000 2,250 294 1,500 2,000 3,542 3,000

123,277

723

CASE STUDY # 2 QUESTIONS

5 How much life insurance would you recommend for Tanya using the capital- needs approach?

6 If Larry terminates his employment, he will lose his group health plan. What would you recommend?