EDMONDS CASEPERSONAL INFORMATION AND BACKGROUND

Rick and Cheryl Edmonds live in a cozy neighborhood outside of Harrisburg, Pennsylvania. They married in their mid-30s, when Cheryl moved to the area with her son Greg after divorcing her first husband. Rick and Cheryl then had a second child Olivia shortly thereafter. A few years later, Rick and Cheryl decided to adopt another child Ashley, who was an infant at the time and was orphaned after Rick and Cheryl's neighbors died tragically in a private airplane crash, leaving Ashley with no living relatives to care for her.

Name

Relationship

A2e

Occupation

Health

Comments

Rick

Husband

55

Attorney/owner with Edmonds, Edmonds, and Leap. Also part- time public defender for the

county

Excellent

Enjoys hunting and fishing in his spare time

Cheryl

Wife

55

Senior account executive with Mirage, Inc.

Good

Enjoys world travel

Greg

Son

33

Psychologist - private practice

Excellent

Cheryl's son from her first marria e

Olivia

Daughter

24

Senior in college,

studying criminology

Excellent

Ashley

Daughter

15

High school student

Excellent

Adopted by the

Edmonds when she was an infant

Rick has been a practicing attorney for over 25 years and has been in business with his twin brother Mick and Sam Leap, their best friend from college, for the past 15 years. Rick also works part time as a public defender for the county. Prior to starting the business with Mick and Sam, Rick worked as a corporate attorney for PlayNRide, a large corporation that manufactures toys and amusement rides for children.

Cheryl is a senior account executive with Mirage, Inc., a large publicly traded advertising agency. Cheryl has worked for them for nearly 20 years and is well respected in her field for her keen ability to predict trends in consumer tastes and target advertisements in a tasteful but fun and effective manner.

Greg, Cheryl's son from her first marriage, is a psychologist with a successful private practice in Maryland. Greg is currently engaged to Gina, and the couple is expecting their first child in a few months. Gina is currently working as Greg's administrative assistant but is unsure if she will return to work after the baby is born. Greg pays Gina a salary of $25,000 per year, and he has net self employment income (after deducting the 50% of self-employment taxes) of $285,000.

2018 Keir Financial Education, LLC Appendix A-37800-795-5347

Appendix A - Edmonds Case

Olivia is currently enrolled in her senior year at a local college and should graduate with a degree in criminology this year.

Ashley, the Edmonds' adopted daughter, is attending a private high school in the Harrisburg area. She is an honors student, president of student council, and actively involved in many school sports and clubs. She also volunteers her time, working with the local animal shelter, and aspires to become a veterinarian some day.

Cheryl's parents are currently in their mid-70s and live in a retirement community in Florida with their Chihuahua Snuggles. While they are both currently in good health, Cheryl is concerned that if something were to happen to one of them, the other would be devastated and lonely living so far away from the rest of the family.

Rick's parents are in their early 80s and are in poor health. They live in a nearby nursing home, and Rick goes to visit them regularly. Rick and Cheryl have asked them to move in with them to spend the rest of their days near their children and grandchildren, but they do not want to be a "burden" on the family.

REAL ESTATE INFORMATION

Rick and Cheryl-built their current home 12 years ago at a cost of $250,000. Since the original construction, they have added a large garage and swimming pool at a cost of $80,000. The home is currently worth $475,000.

In addition to their home, the Edmonds also own a large amount of wooded real estate in rural Pennsylvania, where they have built a hunting/fishing lodge, which both Rick and Greg enjoy numerous times throughout the year. They also rent the lodge (approximately 200 days per year), which is a beautiful site for fishing, hiking, and biking during the summer, as well as a popular hunting area in the fall through the spring. Rick has begun implementing a plan to raise elk, bear, and other large game on the land and tum it into a retreat area for big game hunting. He would like to have it up and running within the next 5 years.

GOALS AND OBJECTIVES

1.Rick wants to retire from practicing law at the age of 63 and begin taking his Social Security income but will continue to work as a business consultant for 3 years afterward until Cheryl is ready to fully retire.

2.Cheryl plans to retire at the age of 65.

3.Within the next 5 years, Rick would like to turn the hunting lodge into a big game hunting retreat.

4.The Edmonds would like to establish a college fund for Greg and Gina's baby.

5.Rick would like to make a donation to his alma mater for a new law library building

upon his death.

6.The Edmonds plan to take a 6-month trip around the world for Cheryl's 60^th birthday.

7.Rick and Cheryl want to minimize gift, estate, and GST taxes.

8.The Edmonds determined that they would want $225,000 of retirement income if they retired today, including their anticipated $28,000 yearly Social Security benefit (the amount they will receive based on their plan to retire at the ages stated previously) but excluding any non-qualified deferred compensation.

2018 Keir Financial Education, LLC Appendix A-38www.keirsuccess.com

Appendix A - Edmonds Case

INCOME TAX INFORMATION

Rick and Cheryl had an adjusted gross income of $345,000 last year and paid $78,000 in taxes to the federal government. They anticipate that their adjusted gross income this year will be about the same but are not sure of the tax consequences if they decide to exercise some of Cheryl's stock options. They are in the 33% marginal federal tax bracket for the current year.

RETIREMENT INFORMATION

Cheryl participates in her employer's 401(k) plan and contributes $14,000 per year. Cheryl's employer matches the first 4% of her salary dollar-for-dollar, and the next 3% at 50 cents on the dollar, with a 3-year cliff vesting schedule. The plan also allows for the purchase of incidental whole life insurance. In addition, Cheryl has been offered a non-qualified deferred-compensation agreement by her employer. The proposed agreement will provide Cheryl $30,000 per year of retirement income upon separation of service, as long as she remains employed in a full-time capacity until at least age 65. If Cheryl dies before age 65, Rick is to receive a $300,000 preretirement death benefit. Cheryl is considering the agreement but is concerned that if the company management changes hands, she will not receive the promised benefits.

When Rick left employment with PlayNRide, he was fully vested in their profit-sharing plan, with an account balance of $220,000 at that time. Rick decided to leave the assets in their plan because he was too busy dealing with setting up the business with Mick and Sam.

Rick currently participates in the county's Section 457 non-qualified deferred-compensation plan, choosing to defer $17,000 per year of his salary from the county. Edmonds, Edmonds, and Leapis currently considering adding a qualified retirement plan to allow Rick, Mick, and Sam to put some significant additional money aside on a tax-deferred basis but has not made a final decision on the plan as of yet.

Based on their ages, Rick and Cheryl both reach full retirement at age 67. Rick and Cheryl assume they will live for 30 years in retirement. They also assume a 3.5% inflation rate, a 6% rate ofreturn on their investments in retirement, and an 8% return before retirement.

BUSINESS INFORMATION

Edmonds, Edmonds, and Leap is a closely held C corporation.

2018 Keir Financial Education, LLC Appendix A-39800-795-5347

Am2endix A - Edmonds Case

The employee census is as follows:

AgeLength of Em12loymentSalm:y

Attorney/Owners:

Rick Edmonds

55

15 years

$175,000

Mick Edmonds

55

15 years

$175,000

Sam Leap

54

15 years

$175,000

Attorneys:

Brian Wall

50

12 years

$145,000

Cindy Zakowski

42

8 years

$135,000

Liz Barron

35

8 years

$135,000

Scott Jameson

38

6 years

$110,000

Angie Quinn

33

5 years

$105,000

John O'Neal

36

5 years

$105,000

Paralegals:

Jodie Howell

35

4 years

$ 35,000

Ken Mowry

30

9 months

$ 26,000

Administrative Assistants:

Kathy Conrad

55

15 years

$ 35,000

Beth Jones

21

1 year

$ 24,000

EDUCATION INFORMATION

Rick and Cheryl currently invest $12,000 per year in a 529 plan account for Ashley's college funding. They anticipate that she will attend 4 years at the current tuition of $20,000 per year and an additional 2 years at a tuition rate of $30,000 per year. Their expectation is that tuition will increase at a rate of 7% per year.

Rick and Cheryl would also like to put aside funds for Greg and Gina's child's college education. They would like to plan for a current tuition of $18,000 per year with a 7% annual increase in inflation. Their goal is to provide half of the funding.

The Edmonds would like to make these gifts with the lowest possible transfer taxes and are seeking income-tax-efficiency as well.

ESTATE PLANNING INFORMATION

Rick's will currently leaves everything to Cheryl. If Cheryl predeceases Rick or does not survive him by at least 30 days, those assets will be split among the 3 children equally. Cheryl is named as the executor of Rick's estate.

2018 Keir Financial Education, LLC Appendix A-40www.keirsuccess.com

Appendix A - Edmonds Case

Cheryl's will leaves everything to Rick. In the event that Rick predeceases her, Cheryl's will leaves everything to "my children,per stirpes." Rick is the executor.

As mentioned, Rick and Cheryl are considering gifts toward their grandchild's education. At some point, they may decide to give the hunting lodge to Greg ifhe stays actively involved with it after its conversion to a retreat. The Edmonds estimate that the value of the lodge as an operating big game retreat will be approximately $300,000. If they do make these gifts, they have agreed to split them.

In making gifts and bequests, the Edmonds want to treat their children equally. Thus far, they have made no taxable gifts.

STOCK PLANS

Eight years ago, Cheryl's company started granting her non-qualified and incentive stock options, which vest over a 4-year period (25% per year). The current market price of the stock is $32 per share. The following table summarizes her options as of the end of last year:

Year Granted

Number of Options

Type

Exercise Price per Share

Expiration Date

Percentage Vested

Last year

10,000

NQSO

$30

Eight years

25%

Two years ago

10,000

NQSO

$28

Seven years

50%

Three years ago

5,000

NQSO

$29

Six years

75%

Four years ago

10,000

NQSO

$25

Five years

100%

Five years ago

15,000

NQSO

$23

Four years

100%

Six years ago

5,000

NQSO

$20

Three years

100%

Seven years ago

5,000

ISO

$21

Two years

100%

Eight years ago

10,000

ISO

$17

Next year

100%

Two weeks ago, Cheryl's employer also granted her 20,000 shares of restricted stock at no cost to her. She is considering using an 83(b) election because she expects the stock to appreciate significantly during the restriction period.

BROKERAGE ACCOUNT INFORMATION

Rick and Cheryl currently have a joint brokerage account that they opened several years ago. The Edmonds sporadically add to it but do not have a set plan for additions. They chose the allocations themselves and use an annual rebalancing strategy to reset the allocations at the end of each year.

2018 Keir Financial Education, LLC Appendix A-41800-795-5347

Appendix A - Edmonds Case

Name

Allocation Percenta2e

Basis

FMV

(End of Last Year)

Tax-free money market

10%

$10,000

$18,000

S&P 500 Index Fund

30%

$25,000

$54,000

Large-cap growth fund

15%

$20,000

$27,000

Mid-cap growth fund

20%

$18,000

$36,000

Small-cap fund

25%

$25,000

$45,000

Total

100%

$98,000

$180,000

Rick also invests $1,000 per month from his county salary into an individual brokerage account, which he views as "play" money. He makes frequent changes to the holdings, and it is currently allocated as follows:

Name

Allocation

%

Basis

FMV

(End of Last Year)

Oil limited partnership

10%

$20,000

$25,000

Hedge fund

10%

$10,000

$ 8,000

Technology sector fund

35%

$15,000

$12,000

Biotech sector fund

35%

$15,000

$19,000

High-yield bond fund

10%

$10,000

$13,000

Total

100%

$70,000

$77,000

2018 Keir Financial Education, LLC Appendix A-42www.keirsuccess.com

Appendix A - Edmonds Case

Rick and Cheryl Edmonds Projected Cash Flow for the Current Year

Cash Inflows

Rick's salary from Edmonds, Edmonds, and Leap

$175,000

Rick's salary as public defender

$ 40,000

Cheryl's salary

$145,000

Rental income from hunting lodge

$ 20,000

Investment income

Reinvested

Total

$380,000

Cash Outflows

Taxes (income, payroll, real estate)¹

$125,000

Retirement plan contributions

$ 31,000

Rick's brokerage account

$ 12,000

Lifestyle expenses

$150,000

Insurance premiums

$ 12,000

College fund - Ashley

$ 12,000

Unknown

$ 38,000

Total

$380,000

2018 Keir Financial Education, LLC Appendix A-43800-795-5347

Appendix A - Edmonds Case

Statement of Financial Position Rick and Cheryl Edmonds

as of December 31st Last Year

ASSETS

Cash and Cash Equivalents

Checking account: JT

$40,000

Savings account: JT

$35,000

CD: JT ²

$ 150,000

Life insurance cash value: W

$35,000

Life insurance cash value: H

$35,000

Total Cash and Cash Equivalents

$ 295,000

Invested Assets

Rick's share of law firm

$2,500,000

Profit-sharing plan: H ³

$ 280,000

40l(k) plan: W ⁴

$ 310,000

IRA: H⁵

$ 120,000

IRA: W ⁶

$65,000

Stock options: W

$ 506,250

Brokerage account: H

$77,000

Brokerage account: JT ⁷

$ 180,000

Total Invested Assets

$4,038,250

Personal-Use Assets

Pennsylvania home: JT ⁸

$ 475,000

Hunting lodge: H ⁹

$ 210,000

Jewelry: W

$15,000

Firearm collection: H

$20,000

Hummer:H

$80,000

Mercedes:W

$45,000

Boat: W¹⁰

$45,000

Furniture and household items: JT

$ 200,000

Total Personal-Use Assets

$1,090,000

Total Assets

2018 Keir Financial Education, LLC Appendix A-44

$5,423,250

www.keirsuccess.com

Appendix A - Edmonds Case

LIABILITIES AND NET WORTH

Liabilities

Mortgage - primary residence: JT ¹¹

$112,745

Credit card debt ¹²

$10,000

Hummer loan

$20,000

Mercedes loan

$15,000

Boat loan ¹³

$222500

Total Liabilities

$180,245

Total Liabilities

$ 180,245

Net Worth

$5,243,005

Notes to the Financial Statements

H=Husband W=Wife

JT = Joint tenancy

1 Property taxes on the hunting lodge are $1,800 per year.

2 The CD is earmarked for use to convert the hunting lodge and land into the big game hunting retreat.

3 Cheryl is the primary beneficiary. The 3 children are equal contingent beneficiaries. Includes

employer stock with a current market value of $200,000 and basis of $50,000.

4 Allocation is 40% mid-cap stock fund, 30% international stock fund, 20% large-cap stock fund, 10% intermediate-term bond fund. Rick is the primary beneficiary, and there is no named contingent beneficiary.

5 Greg and Olivia are primary beneficiaries. Ashley is the contingent beneficiary. Includes

$40,000 of nondeductible contributions. Rick has made no prior distributions.

6GregandOliviaareprimarybeneficiaries, Ashleyis the contingent beneficiary.Includes

$40,000 of nondeductible contributions.

7 See Brokerage Information for account detail.

8 The land is worth $200,000.

9 Basis is $165,000. The family uses the lodge approximately 18 days per year.

10 The boat is a 20-foot pontoon with a 250 hp engine.

11 A 20-year mortgage with 5 years remaining and a fixed interest rate of 6.25%.

12 The variable rate is currently 10.3%.

13 Purchased for $40,000 two years ago with a loan of $35,000; the loan rate is 7% fixed.

2018 Keir Financial Education, LLC Appendix A-45800-795-5347

Appendix A - Edmonds Case

INSURANCE INFORMATION

Life Insurance

Insured

Owner

Beneficiary

Face

Amount

Type

Cash

Value

Annual

Premium

Notes

Rick

Rick

Cheryl

$250,000

Universal

life

$35,000

$2,500

Bought 10

years ago

Rick

Rick

Cheryl

$350,000

Group

term

Company-

provided

Cheryl

Cheryl

Rick

$250,000

Universal life

$35,000

$2,500

Bought 10

years ago

Cheryl

Cheryl

Rick

200,000

Group

term

Company-

provided

Insured

Current

Benefit Amount

Benefit Period

Inflation Rider

Premium

Notes

Rick

$8,000/month

5 years

None

$3,000/year

100% of

premium paid by employer

Cheryl

$6,000/month

5 years

None

$2,200/year

50%of premium paid by employer; 50% paid by

Cheryl pretax

Medical Insurance

Insured

Plan Details

Copayments Coinsurance DeductibleStop-Premium

Loss

Rick

May see physician in the network or out of the network, but fees are lower in-

network

None

20% in-

network/ 30% out-of- network

$2,500 per person/

$4,000

family

$8,000

Paid by Cheryl's employer

Cheryl

May see physician in the network or out of the network, but fees are lower in-

network

None

20% in-

network/ 30% out-of- network

$2,500 per person/

$4,000

family

$8,000

Paid by

Cheryl's employer

2018 Keir Financial Education, LLC Appendix A-46www.keirsuccess.com

Appendix A - Edmonds Case

Insured Current BenefitAmount L- TCBenefit Period Inflation Rider Premium Date of Issue Rick $200/day 5 years 5% simple $2,500/year 2 years ago Cheryl $200/day 5 years 5% simple $2,500/year 2 yearsago arel

Homeowners Insurance

Type

Dwelling

Amount

Contents

Covera2e

Liability

Premium

Special

Riders

HO-3

(primary residence)

$275,000

$200,000

ACV

$1,000,000

$1,600/year

None

HO-2

(Hunting lodge)

$75,000

$50,000

ACV

$1,000,000

$700/year

Scheduled personal property rider- firearms

$18,000

Automobile Insurance

Vehicle

Type

Liability Limits

Collision

Comprehensive

(other-than- collision)

Premium

Rick's Hummer

Personal auto policy

100/300/50

$500 broad form

deductible

$250

deductible

$250/month

Cheryl's Mercedes

Personal auto policy

100/300/50

$500 broad form

deductible

$250

deductible

$200/month

Vision insurance

Up to $60 per year for eye exam if in-network; $120 annual allowance for lenses or contacts; $150 annual allowance for frames; 20% discount on other services, such as scratch-resistant or glare-reducing coatings

Dental insurance

Unscheduled plan; $100 annual deductible; 80/20 coinsurance; preventive treatments covered in full.

HSA

Has an annual pretax contribution of $6,000.

Cafeteria Plan In

fCherv~l

2018 Keir Financial Education, LLC Appendix A-47800-795-5347

EDMONDS CASE APPLICATION QUESTIONS

1.In order for the Edmonds to meet their goal, what lump sum do they need in their retirement accounts when Cheryl retires?

(Topic 52)

A. $4,054,586

B. $5,882,384

C. $6,024,470

D. $6,880,745

2.If Rick decides to retire as planned and begin taking Social Security right away, what will be the impact on his Social Security benefits?

(Topic 53)

A.His benefits will be permanently reduced by 25%.

B.His benefits will not be reduced since he has reached his full retirement age.

C.His benefits will be reduced $1 for every $3 of earned income he has over $41,880.

D.Hisbenefitsareunlikelyto be taxable.

3.If Ashley's parents were fully insured under Social Security at the time of their deaths, what is the amount of benefits to which Ashley is entitled?

(Topic 53)

A.75% of PIA through age 18

B.75% of PIA through age 16

C.50% of PIA through age 18

D.50% of PIA through age 24

4.If Edmonds, Edmonds, and Leap were to implement a defined-benefit plan, which type of funding formula would allow them to best skew benefits toward Rick, Mick, Sam, and Brian?

(Topic 55)

A.Flat amount

B.Flat percentage

C.Flat amount per year of service

D.Unit benefit

5.If Cheryl's employer wanted to make a profit-sharing contribution to her qualified plan account in order to be sure that she receives the maximum possible contribution and the employer still gets a tax deduction, what additional amount could the employer contribute?

(Topic 55)

A. $12,775

B. $33,112

C. $37,250

D. $55,000

6.If Edmonds, Edmonds, and Leap were to implement a qualified plan with a 3-year vesting schedule, which of the following employees could be excluded from coverage?

(Topic 56)

A.SamLeap

B.Brian Wall

C.Scott Jameson

D.Beth Jones

2018 Keir Financial Education, LLC Appendix A-48www.keirsuccess.com

Appendix A - Edmonds Case - Application Questions

7.If Edmonds, Edmonds, and Leap wants to implement a qualified plan and assure that most of the contributions/benefits are to the attorneys, as opposed to paralegals and administrative assistants, which of the following would best accomplish that goal?

(Topic 56)

A.A defined-benefit plan with a 6-year graded vesting schedule

B.An age-weighted profit-sharing plan with a 3-year cliff vesting schedule

C.A defined-benefit plan with Social Security integration

D.ASEPwithSocialSecurity integration

10.If Cheryl were to exercise the 10,000 stock options that expire next year, what would be the income tax consequences?

(Topic 57)

A.Noincometaxconsequenceson exercise

B.Nothing under regular taxes, but a

$150,000 AMT adjustment

C.$150,000 ordinary income

D.$150,000 ordinary income and a

$170,000 AMT adjustment

11.lfCheryl were to exercise the 5,000 stock options that were granted 6 years ago, what would be the tax consequences?

8.What is the smallest number of Edmonds, Edmonds, and Leap employees that could be considered highly compensated?

(Topic 56)

A.3

B.6

C.7

D.9

9.Which of the following is the maximum life insurance Cheryl can purchase within her qualified plan?

(Topic 56)

A.I00timestheexpectedmonthly benefit

B.$50,000 death benefit

C.3 times salary

D.Largest policy possible with the premium equal to 50% of contributions

(Topic 57)

A.No income tax consequences on exercise

B.Nothing under regular taxes, but a

$60,000 AMT adjustment

C.$60,000 ordinary income

D.$60,000ordinaryincomeanda

$100,000 AMT adjustment

12.How will Cheryl's restricted stock be taxed if she chooses the 83(b) election?

(Topic 57)

A.Ordinary income on the value at grant, then capital gains on the appreciation

B.AMT adjustment of the value at grant, then capital gains on the appreciation

C.Ordinary income on the value at grant, with an AMT adjustment on the remaining gain

D.Ordinary income on the bargain element and capital gains on the remainder if held at least 2 years from grant and I year from exercise

2018 Keir Financial Education, LLC Appendix A-49800-795-5347

Appendix A - Edmonds Case - Application Questions

13. If Greg wants to make contributions to a SEP for himself and Gina, what is the maximum that could be contributed for the two of them?

{Topic 57)

$61,250

A. Tax- and penalty-free

$62,000

B. Fully taxable but penalty-free

$75,000

C. Fullytaxablebutwitha10%

Edmonds,

Edmonds,

andLeap

premature distribution penalty

D. Fully taxable in part with a 10% penalty

A. $55,000 B.C.

D.

16. If Cheryl were to terminate employment with Mirage, Inc. today, which of the following best describes the treatment of any withdra als from her qualified retirement plan?

{Topic 60)

14. If

implements a qualified retirement plan, which of the following statements is true?

(Topic 58)

A.They must submit the plan to the PBGC for approval.

B.They must provide participants with a Summary Plan Description within 120 days of starting the plan.

C.Cheryl would not be considered a disqualified party under the plan.

D.The IRS will be responsible for overseeing those in charge of administering the plan.

15.All of the following might be reasons for Edmonds, Edmonds, and Leap to implement a 412(i) plan, EXCEPT:

{Topic 59)

A.The number and age range of employees

B.The ability to accumulate large amounts of retirement savings in a short period of time

C.PBGC coverage

D.Maximization of tax-deferred retirement savings for the owners

17.If Rick were to take a $10,000 distribution from his IRA to pay for Olivia's college tuition, which of the following best describes the tax treatment?

{Topic 60)

A.$10,000 taxed as ordinary income, plus a 10% penalty

B.$3,333 tax-free and $6,667 taxed as ordinary income, plus a 10% penalty

C.$3,333 tax-free and $6,667 taxed as ordinary income

D.$10,000 taxed as ordinary income

18.If Cheryl were to die today, which of the following best describes the tax treatment of her IRA?

{Topic 60)

A.Rick may roll it into his own IRA and defer distributions until he reaches age 70.

B.Distributions must begin by December 31 of next year and must be fully distributed within 5 years.

C.Distributions must begin by December 31 of next year and can be spread over Greg's life expectancy.

D.Distributions must begin by December 31 of next year and can be spread over Greg's life expectancy, and the other half over Olivia's life expectancy.

2018 Keir Financial Education, LLC Appendix A-50www.keirsuccess.com

Appendix A - Edmonds Case - Application Questions

19.If Rick were to take a lump-sum distribution from his profit-sharing plan, elect NUA treatment for the employer stock, and roll the remaining funds into an IRA, which of the following would be the tax results?

(Topic 60)

A.$50,000ordinaryincomeand

$150,000 deferred long-term capital gam

B.$200,000 long-term capital gain

C.$80,000ordinaryincomeand

$200,000 long-term capital gain

D.$280,000 ordinary income

....

2018 Keir Financial Education, LLC Appendix A-51800-795-5347