In your presentation you should show the effect of cash flow and net worth.

It is January 1st.

You are a CFP professional. Hugh and Doris Parker have come to your firm looking for someone to help them with business, retirement, and estate planning.

Family Situation

Hugh and Doris are in their peak earning years. They have been married for ten years; it is the second marriage for both of them. Hugh has a daughter named Sarah from his first marriage. Hugh's first wife, Nancy, died of cancer when Sarah was three years old. Doris had two children from her first marriage: Janice and Connor. Doris divorced her first husband when her youngest child, Connor was just five months old. Doris' ex-husband has no interest in his children and Hugh has formally adopted both Connor and Janice and treats them as if they were his own children.

Family Member

Hugh Parker

Doris Bently-Parker

Sarah Parker

Janice Bently-Parker

Connor Bently-Parker

Employment

Birth Date

June 30th April 1st February 28th August 1st March 15th

Age as of January 1st

51 47 17 13 11

Hugh owns and operates a successful microbrewery together with an old friend, Barry. They both draw a salary of $l00,000 and dividends of $50,000 each year. Any remaining profit is used to finance further expansion.

Doris is the head of laboratory services for the Department of Biological Sciences at the local university. She has been working there for 23 years. Her current salary is $62,000 and it has been increasing annually at a rate of 1.5% above inflation. However, the university is downsizing, and it is offering a termination benefit of two weeks salary for each year of service for those who leave voluntarily.

FIN 5562 FINAL PLAN CASE STUDY

Personal Use Assets

Hugh and Doris own a large property that is mortgage-free. They also own an oceanfront retreat in Cape Cod where Doris spends 12 weeks each summer with the children. Hugh visits them when he can. They originally bought this U.S. property for $160,000 (CAD.) and it is now worth $290,000 (CAD). There is an outstanding mortgage of $50,000 against the Cape Cod property. Both properties are held in joint tenancy.

Hugh also has possession of some heirloom jewellery that he received title to when Nancy died. Through her will, Nancy left her entire estate to him. When Nancy inherited the jewellery from her grandmother, it was appraised at $30,000, and Hugh believes it is now worth $70,000. While he owns the jewellery, he feels it belongs to Sarah and he wants her to have it once she is responsible enough to take care of it, which he thinks will be when she reaches approximately age 25.

Tax-paid Capital Hugh and Barry started the Ballpark Ltd.12 years ago with contributions of $40,000 each. It is

now worth almost $3.8 million. They each own 50% of the company.

Ballpark is a qualified small business corporation. Barry and Hugh are thinking about the possibility of expanding their business by taking over two microbreweries in the next three years.

In a transaction unrelated to Ballpark Ltd, last year, Hugh realized a $260,576 capital gain from the sale of his shares of Totem Inc. in which he had a 25% interest. Totem Inc. is a qualified small business corporation so, Hugh was able to claim a capital gains exemption on the gain. This was the only time Hugh has ever used the capital gains exemption. Although Intercrude Ltd. has realized substantial growth, Hugh is worried about energy stocks being overvalued and his downside risk. On the other hand, he is reluctant to dispose of an investment that has performed so well especially, because doing so now would result in a substantial taxable capital gain. He asks how he can reduce his downside risk.

When they first incorporated the business, they established a simple buy-sell agreement to ensure that the survivor had a strong controlling interest in the business. However, they have never thought about how to finance such a purchase. Hugh is in excellent health, but Barry is 66 years old and has a long history of medical ailments. They never really understood how a buy-sell agreement would work; how the surviving shareholder retains all the shares and how the deceaseds heirs receive the value and how to finance it.

To access capital, Hugh is considering selling 40% of his interest in Ballpark Ltd. now and expects he will incur expenses of $50,000. He would like to know by how much his tax liability increase, assuming his marginal tax rate has not changed from last year.

Hugh and Doris have built a modest investment portfolio outside of their RRSPs. The current value of the portfolio and the adjusted cost base of the investments are shown in the statement of net worth.

FIN 5562 FINAL PLAN CASE STUDY

Retirement Assets Hugh now has about $180,000 in his RRSPs and he has named their children as the

beneficiaries.

Doris joined the university's defined benefit pension plan after completing exactly two years of service. The plan has a normal retirement age of 65 and a qualifying factor of 90. The plan will provide a non-indexed retirement pension of 2% of final earnings (average over the last three years) per year of service. Her average salary over the last three years was $59,350. The plan is not integrated with the CPP and Doris must contribute 6% of her salary each year.

If Doris accepts the severance offer, she will also cease to be a member of her pension plan. The pension administrator has indicated that she could choose either to receive an unreduced retirement pension based on her current pensionable service beginning on January 1st of the year that follows the year she turns age 60 or she could receive a lump sum now.

RRSP contributions for Doris are limited by her participation in the pension plan. She has about $60,000 in her RRSP.

Doris is deciding on whether to accept the severance package. She is wondering what the earliest age she could retire and still receive an unreduced retirement pension.

Doris is also trying to decide on whether a lumpsum payout or receiving the monthly pension would be better if her life expectancy is 90. Her unreduced pension would otherwise commence in January of the year when she was 60 years of age and would be payable at the beginning of each month. She feels she could earn a return of 8% compounded monthly on her investments and is asking you to calculate the minimum she would require to be better off accepting the lump sum versus the monthly pension.

Estate Planning and Insurance

Hugh and Doris do not have wills and have done little in the way of estate planning. Hugh is particularly worried about what will happen to his business when he dies and wonders how he could pass the business on to the children while minimizing any tax liability. Hugh does have a springing enduring power of attorney, which names Barry as his agent in the event Hugh is incapacitated due to disability.

Hugh has thought about leaving his shares in Ballpark to Doris upon his death but, he is not sure that she could manage them appropriately. Eventually, he wants the children to benefit from some or all the shares.

Hugh has a $300,000 term life insurance policy on his own life with Doris named as the beneficiary. Ten years ago, he purchased a long-term, guaranteed renewable disability insurance policy with a future income option, a provision for own occupation and a benefit for residual disability. When he purchased the policy, he bought coverage for $2,000 per month, which was 60% of his salary at the time. He has not exercised the future income option.

FIN 5562 FINAL PLAN CASE STUDY

Doris has group term convertible life insurance coverage of two (2) times her salary, group long-term disability coverage and group health insurance for the family that covers basic medical expenses.

Objectives

Doris and Hugh are not ready to retire. They expect to work for at least another ten years and perhaps longer if they still enjoy what they are doing. Retiring may be a gradual and long-term process. Doris is considering the possibility of taking the severance package and then opening a commercial laboratory. However, this would require a capital investment of $300,000. Hugh has offered to borrow the money from Ballpark and lend it to her on the condition that the loan must be repaid within three years. Hugh does not really care if Doris pays interest on this loan; he will leave that decision up to her. Doris would like to know what the implications are if she accepts the loan from Ballpark through Hugh.

Their main concerns are minimizing current and future income taxes, making effective use of their investments, analyzing their life insurance needs, and eventually passing their assets on to their children. Hugh specifically asks what would happen to his assets, probate fees and income tax payable, if he should die suddenly.

Assumptions

Inflation 3.00% Hugh's marginal tax rate for last year: 48.8% Doris' marginal tax rate for last year: 45.7% CPP YMPE for last year: $58,700 CPP YMPE for this year: $61,600 base lifetime capital gains exemption for qualified properties: $917,190

Financial Statements A statement of net worth and statement of cash flow follow.

Assets

Liquid Assets

Hugh

1,500 3,620 5,120

Doris

1,500 3,620 5,120

15,500 14,000 24,600 54,100

60,100 60,100

146,000 145,000 14,400

37,500 342,900 462,220

Doris

25,000

54,006 383,214

462,220

Total

3,000

7,240 10,240

1,880,000 19,600 9,600 36,000 57,000 15,500 14,000 24,600 2,056,300

180,000 60,100 240,100

292,000 290,000 28,800

75,000

70,000 755,800

3,062,440

Total

50,000 686,399 2,326,041

3,062,440

FIN 5562 FINAL PLAN CASE STUDY

Net Worth Statement: Doris and Hugh Parker as at December 31st of last year

Investment and Business Assets Non-registered

ACB

Ballpark Ltd. 40,000 1,880,000 ABC Corp Shares 13,400 19,600 Intercrude Ltd. Shares 5,000 9,600 BestCan Growth Fund 23,000 36,000 Foreign Equity Fund 36,000 57,000 CanBond Fund 12,000

5-year $20,000 Strip Bond 14,000 All Growth Canadian Fund 18,000

2,002,200

Investment and Business Assets Registered Hugh's RRSP 180,000 Doris' RRSP

Personal Use Assets

House $140,000 146,000 Cape Cod Property 160,000 145,000 Personal Vehicles 60,000 14,400 Furnishings Personal

Belongings 100,000 37,500

Nancy's Jewellery

Total Assets

Liabilities and Net Worth

Long-term Liabilities

30,000 70,000 412,900

2,600,220

Hugh

ACB

180,000

Mortgage on Cape Cod Property 25,000

Estimated Deferred Taxes 632,393 Net Worth 1,942,827

Total Liabilities and Net Worth 2,600,220

FIN 5562 FINAL PLAN CASE STUDY

Statement of Cash Flow: Doris and Hugh Parker for last year

Cash Inflows

Hugh's Salary Doris' Salary Dividend and Interest Income Total Cash Inflows

Cash Outflows

Income Taxes Mortgage (interest only) on Cape Cod Property Property Taxes Home Insurance Utilities Maintenance Landscaping and Security Food Household Expenses Telephone Personal Care Clothing Transportation Entertainment Eating Out Gifts Charitable Donations Holidays Private School Medical Expenses Life and Disability Insurance Sundry Payroll deductions Principal Repayment on Cape Cod Property Additions to Money Market Fund Foreign Equity Growth Fund CanBond Fund Strip Bond Hugh's RRSP Doris' RRSP Doris' RRP Total Cash Outflows

Unaccounted for Difference in Cash

100,000 62,000 53,240

$215,240

70,814

4,000

4,200 1,200 4,460 4,000 5,000 9,600

800

800 1,900 6,500 6,800 2,400 5,000 4,000 4,000 4,000 21,000 3,000 1,600 800

7,000

1,240 5,000 3,000

14,000 13,500 600 3,560 213,774

1,466