Personal Background and Information

Nigel Buckingham (Age 27)

Nigel is an assistant in the marketing department for Energy Tech, Inc., a small company with 15 employees. His annual salary is $39,000.

Elizabeth Buckingham (Age 24)

Elizabeth is a legal research assistant with the law firm of Laurent, Heine & Merritt, LLC. Her annual salary is $30,000.

The Children

Nigel and Elizabeth have no children from this marriage. Nigel has two children, Wilfred, age 4, and Robert, age 3, from a former marriage. Wilfred and Robert live with their mother, Louise.

The Buckinghams

Nigel and Elizabeth have been married for two years. Nigel must pay $500 per month in child support until both Wilfred and Robert reach age 18. The divorce decree also required Nigel to create an insurance trust for the benefit of the children and contribute $175 per month to the trust. The trustee is Louises father. There are no withdrawal powers on the part of the beneficiaries. The trust is to be used for the education and maintenance of the children in the event of Nigels death. The trustee has the power to invade any trust principal for the beneficiaries at the earlier of the death of Nigel or Wilfred reaching age 18.

Personal and Financial Objectives

They want to save for an emergency fund.

They want to eliminate debt

They want to save for a 20% down payment on their first home. The current value of the house is $150,000. Property taxes would be $1,800 annually, and the annual insurance premium would be $1,125. Both taxes and insurance are expected to increase with inflation.

They want to contribute to tax-advantaged savings.

They plan to have additional children in seven years.

They both plan to retire in 29 years.

Economic Information

Inflation is expected to be 4.0% annually.

Their salaries should increase 5.0% annually.

There is no state income tax.

The after-tax investment rate of return is 6%.

Bank lending rates are as follows: 6.0% for a 15-year mortgage, 6.5% for a 30-year mortgage, and 8% for a secured personal loan.

Insurance Information

Life Insurance

	Policy A	Policy B	Policy C
Insured	Nigel	Nigel	Elizabeth
Face amount	$250,000	$117,0002	$30,000
Type	Whole life	Group term	Group term
Cash value	$2,000	$0	$0
Annual premium	$2,100	$267	$75
Who pays premium	Trustee	Employer	Employer
Beneficiary	Trust1	Louise	Nigel
Policy owner	Trust	Nigel	Elizabeth
Settlement options clause selected	None	None	None
1Wilfred and Robert are beneficiaries of the trust 2This was increased from $50,000 to $117,000 January 1, 2009

Group Term Life Insurance Section 79 Uniform Premium Schedule
Under age 25	0.05 per month per $1,000
Age 25 to 29	0.06 per month per $1,000

Health Insurance

Nigel and Elizabeth are covered under Nigels employer plan, which is an indemnity plan with $200 deductible per person per year and an 80/20 major medical coinsurance clause with a family annual stop loss of $1,500.

Long-Term Disability Insurance

Nigel is covered by an own-occupation policy with premiums paid by his employer. The benefits equal 60% of his gross pay after an elimination period of 180 days. The policy covers both sickness and accidents and is guaranteed renewable. In the event of disability, the policy will pay benefits up to age 65.

Elizabeth is not covered by disability insurance.

Renters Insurance

The Buckinghams have a HO-4 renters policy without endorsements.

Content Coverage: $25,000; Liability $100,000.

Automobile Insurance

Both Car and Truck*

Type	Personal Auto Policy
Bodily injury	$25,000/$50,000
Property damage	$10,000
Medical payments	$5,000 per person
Uninsured motorist	$25,000/$50,000
Comprehensive deductible	$200
Collision deductible	$500
Premium (annual)	$4,950
*The Buckinghams do not have any additional insurance on Elizabeths motorcycle

Investment Information

The Buckinghams think that they need six months of cash flow net of all taxes, savings, vacation, and discretionary cash flow in an emergency fund. They are willing to include in the emergency fund the savings account and Nigels 401(k) balance because it has borrowing provisions.

The Federal Express stock was a gift to Nigel from his Uncle Sebastian. At the date of the gift (July 1, 1994), the fair market value of the stock was $3,500. Uncle Sebastians tax basis was $2,500, and Uncle Sebastian paid gift tax of $1,400 on the gift.

The TECHO stock of 100 shares was a gift to Elizabeth last Christmas from her Uncle Kyle. At the date of the gift (December 25, 2008), the fair market value was $8,000, and Uncle Kyle had paid $10,000 for the stock in 1996 (his tax basis).

The growth mutual fund (currently valued at $13,900) had been acquired by Nigel over the years 2011-2016 with deposits of $1,000, $1,000, $2,000, $2,000, $2,500, and $3,000. The earnings were all reinvested and reported via Form 1099 each year:

Year	Reinvested Earnings
2011	$0
2012	$200
2013	$400
2014	$400
2015	$650
2016	$750

The growth mutual fund has a transfer-on-death provision. The account is in Nigels name, and the beneficiary designation is Nigels mother. This provision was made prior to his marriage to Elizabeth.

Income Tax Information

The filing status of the Buckinghams for federal income tax is married filing jointly. Both the children (Wilfred and Robert) are claimed as dependents on the Buckinghams tax return as part of the divorce agreement. Their marginal tax rate is 22.65% (the federal marginal tax rate is 15%; FICA taxes are 7.65%). The Buckinghams live in a state that does not have state income tax.

Retirement Information

Nigel currently contributes 3% of his salary to his 401(k). The employer matches each $1 contributed with $0.50 up to a total employer contribution of 3% of his salary.

Gifts, Estates, Trusts, and Will Information

Nigel has a will leaving all of his probate estate to his children.

Elizabeth does not have a will.

The Buckinghams live in a common-law state that has adopted the Uniform Probate Code.

STATEMENT OF CASH FLOWS Nigel and Elizabeth Buckingham January 1, 2016 to December 31, 2016 (Expected to be similar in 2017)
CASH INFLOWS
Salaries
Nigel salary	$	39,000
Elizabeth salary		30,000
Investment income*		1,635
Total inflows			$	70,635
CASH OUTLOWS
Savings house down payment	$	1,800
Reinvestment of investment income		1,635
401(k) contribution		1,170
Total Savings			$	4,605
FIXED OUTFLOWS
Child Support	$	6,000
Life insurance payment (to trustee)		2,100
Rent		9,900
Renters insurance		720
Utilities		1,080
Telephone (home)		540
Telephones (cell)		900
Auto payment principal and interest		5,400
Auto insurance		4,950
Gas, oil, maintenance		3,600
Student loans		3,600
Credit card debt		4,500
Furniture payments		1,952
Total fixed outflows			$	45,242
VARIABLE OUTFLOWS
Taxes Nigel FICA	$	2,984
Taxes Elizabeth FICA		2,295
Taxes federal tax withheld		7,393
Food		4,800
Clothing		1,500
Entertainment/vacation		1,920
Total variable outflows			$	20,892
Total cash outflows			$	70,739
Discretionary cash flows (negative)					$	(104)
*$510 from dividends and $1,125 from other investment sources.

STATEMENT OF FINANCIAL POSITION Nigel and Elizabeth Buckingham January 1, 2017
ASSETS1			LIABILITIES AND NET WORTH
Cash and equivalents			Liabilities2
Cash	$	500	Credit card 1	$	8,000
Savings account		1,000	Credit card 2		1,862
Total cash and equivalents	$	1,500	Student loan Nigel3		45,061
			Auto loan Elizabeth		21,179
Invested assets			Furniture loan		2,300
Federal Express stock (100 shares)4	$	5,000	Total liabilities	$	78,402
TECHO stock (100 shares)		7,200
Growth mutual fund		13,900
401(k) account		1,500	Net worth	$	(78)
Total invested assets	$	27,600
Use assets
Auto Elizabeth	$	26,474
Truck Nigel		4,000
Motorcycle Elizabeth		1,000
Personal property and furniture		17,750
Total use of assets	$	49,224
Total assets	$	78,324	Total liabilities and net worth	$	78,324
Notes to Financial Statements 1Assets are stated at fair market value. 2Liabilities are stated at principal only as of January 1, 2017, before January payments 3Nigels parents took out the student loans, but he is repaying them. Nigel paid $2,732 in interest in 2016. 4Federal Expresss current dividend is $3.40 per share.

Information Regarding Assets and Liabilities

Home Furnishings

The furniture was purchased with 20% down and 18% interest over 36 months. The monthly payment is $162.69.

Automobile

The automobile was purchased January 1, 2015, for $26,474 with 20% down and 80% financed over 60 months with payments of $450 per month.

Stereo System

The Buckinghams have a fabulous stereo system with a fair market value of $10,000. They asked and received permission to alter their apartment to build speakers into every room. The agreement with the landlord requires the Buckinghams to leave the speakers if they move because the speakers are permanently installed and affixed to the property. The replacement value of the installed speakers is $4,500, and the non-installed components are valued at $5,500. The cost of the system was $10,000, and it was purchased last year.

QUESTIONS

Please answer the following questions clearly showing the calculations wherever they are required. Do not just give the final number as the answer where calculations are required. Show the workings. The signature assignment needs to be uploaded to Blackboard.

List the Buckinghams financial strengths and weaknesses. (10 points)

After reading the case what additional information would you request from the Buckinghams to complete your data-gathering phase? (5 points)

Assume that Nigel is in a serious automobile accident during 2016 and is unable to perform the duties of his occupation for 208 consecutive days. What benefits will be receive under his long-term disability insurance policy? Assume 260 working days in a year. (5 points)

Assume that in 2017, Nigel is driving his car on a foggy night and the car collides with a deer in the road. As a result, Nigel incurs medical expenses of $1,000, and his friend, Bill, who is riding with him, incurs medical expenses of $2,000. The front bumper of the car also sustains damage of $1,500. If Nigel files a claim for these items under his personal auto policy (PAP), what amount will the policy pay? (5 points)

Calculate the following financial ratios for the Buckinghams (10 points)

Liquid Assets / Debt Payments

Net Worth / Total Assets

Total Debt / Total Assets

Annual Housing and Debt Payments / Annual Gross Income

Annual Savings / Annual Gross Income

Calculate the original purchase price of the furniture that Nigel and Elizabeth own (Hint: Use time value of money calculations). (5 points)

Assuming that the Buckinghams are planning to buy their dream house seven years from now and expect house prices to increase at the same rate as the general economic inflation rate, how much will they have to save at the end of each month to make the down payment if they plan to earn the assumed after-tax investment rate of return? (Hint: Compute the future value of the house price at inflation rate to get how much they will have to put down as down payment) (10 points)

Nigel is trying to determine which is the better choice: the traditional IRA or the Roth IRA. Which do you recommend and why? (5 points)

In 2015, Elizabeth sustains injuries while playing with Wilfred and Robert. Medical expenses totaled $1,800 of which $1,600 were covered. The insurance company paid medical expenses in what amount? (Assume that the Buckinghams had no other 2015 medical claims prior to this claim.) (5 points)

If there was a fire in the Buckinghams apartment building and their in-wall speaker system was destroyed, would they be covered under the HO-4 policy, and if so, to what extent? (5 points)

What does guaranteed renewable mean with regard to Nigels disability policy? (5 points)

What is the approximate 2016 federal adjusted gross income (AGI) for the Buckinghams? (10 points)