Use the information above to answer the following questions

11. If the Sanders re!nance their mortgage for a 5/1 ARM thirty-year loan at 6.25 percent, and have closing costs of $4,000 which are also re!nanced, the monthly total principal and interest payments on the new mortgage will initially be (to the nearest dollar):

a) $1,078 b) $1,088 c) $1,102 d) $1,113

12. Phillip and Marsha provide $500 to help cover the cost of Marshas mothers prescription drugs. The tax consequences of these payments for Phillip and Marsha are:

a) Not deductible, since the payments are not for Phillip or Marsha or their children

b) Not deductible, because Marshas mother pays more than half of her own expenses and is not a dependent

c) Fully deductible as medical expenses, once Phillip has reached the 10 percent threshold for medical expense deductions

d) Fully deductible as an above-the-line prescription drug deduction for parents

13. Marshas mother is considering a sale of her residence to live permanently with Phillip and Marsha, after owning and living in the house for the past twenty years until she moved in with the family last month. The house has a cost basis of $50,000. The tax consequences of this sale will be:

a) $150,000 of long-term capital gains

b) Tax-deferred as long as she purchases another piece of real estate of equal or greater value

c) Tax-free, because the sale was necessitated by Phillips disability

d) Tax-free, because Marshas mother has owned and lived in the house for the past two years of the last five years

14. Phillip would like to move his 401(k) funds to an IRA, since he does not plan to return to work at his employer. He has requested a full distribution of his 401(k) account balance to be sent to him by check. The tax consequences of this distribution are:

a) Fully tax-free, because Phillip is disabled

b) Fully tax-deferred and not subject to withholding, because Phillip intends to roll over the proceeds to an IRA within sixty days

c) Fully tax-deferred, but subject to 20 percent withholding; Phillip will need to make up the 20 percent to the IRA within sixty days

d) Fully taxable no matter what, because Phillip did not execute this transaction as a trustee-to-trustee transfer

PHILLIP AND MARSHA SANDERS Personal Data Husband: Wife: Children: Phillip Sanders, age forty-four, disabled Marsha Sanders, age forty-four, grade-school teacher Darlene Sanders, age seventeen (starting twelfth grade) Fred Sanders, age twenty-one (starting junior year of college) Both deceased Mother, age sixty-eight, living with Phillip & Marsha, in good health; Father, deceased Phillip's parents: Marsha's parents: Financial Data Primary Residence (JTWROS).......... Mortgage on primary residence...... Cash accounts ITWROS).... Phillip's 401(k).................. Phillip's traditional IRA (no nondeductible contributions)........ Marsha's 403(b)............. Mutual fund account (TWROS)...... Cash value of life insurance... Marsha's automobile.... Fred's UTMA account (Phillip custodian)................... Darlene's 529 college savings plan (Phillip owner)....... ... $450,000 ....... ($175,000) $22,000 $125.000 .....$105,000 $65,000 .. $14,000 $2.000 .... $9.000 ........$8,000 $27,000 Income/Expense Data Phillip's monthly disability income............ Marsha's annual salary ........ Interest & investment income...... Monthly expenses (excluding mortgage and taxes)...................... --... $4,000 $38,000 $2,700 .....$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 Phillip's income (for merly $80,000/year) The Sanders state that they are moderately conservative, and their investment account is primarily (60 percent) equity investments Phillip's 401(k) account is associated with his former employer before he left his job due to the accident FINANCIAL PLANNING Marsha's currently contributes $500/month to her 403(b) Darlene's 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 other's 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 Marsha's employment: the Sanders have adequate homeowner's 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 Marsha's mother has come to live with the family since Phillip's 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 Phillip's health declines 2. Provide for college education for Darlene and Fred, assuming $15,000/year (in today's 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 75 percent. Economic growth was 5.0 percent Last year, and unemployment is at 45 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. PHILLIP AND MARSHA SANDERS Personal Data Husband: Wife: Children: Phillip Sanders, age forty-four, disabled Marsha Sanders, age forty-four, grade-school teacher Darlene Sanders, age seventeen (starting twelfth grade) Fred Sanders, age twenty-one (starting junior year of college) Both deceased Mother, age sixty-eight, living with Phillip & Marsha, in good health; Father, deceased Phillip's parents: Marsha's parents: Financial Data Primary Residence (JTWROS).......... Mortgage on primary residence...... Cash accounts ITWROS).... Phillip's 401(k).................. Phillip's traditional IRA (no nondeductible contributions)........ Marsha's 403(b)............. Mutual fund account (TWROS)...... Cash value of life insurance... Marsha's automobile.... Fred's UTMA account (Phillip custodian)................... Darlene's 529 college savings plan (Phillip owner)....... ... $450,000 ....... ($175,000) $22,000 $125.000 .....$105,000 $65,000 .. $14,000 $2.000 .... $9.000 ........$8,000 $27,000 Income/Expense Data Phillip's monthly disability income............ Marsha's annual salary ........ Interest & investment income...... Monthly expenses (excluding mortgage and taxes)...................... --... $4,000 $38,000 $2,700 .....$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 Phillip's income (for merly $80,000/year) The Sanders state that they are moderately conservative, and their investment account is primarily (60 percent) equity investments Phillip's 401(k) account is associated with his former employer before he left his job due to the accident FINANCIAL PLANNING Marsha's currently contributes $500/month to her 403(b) Darlene's 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 other's 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 Marsha's employment: the Sanders have adequate homeowner's 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 Marsha's mother has come to live with the family since Phillip's 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 Phillip's health declines 2. Provide for college education for Darlene and Fred, assuming $15,000/year (in today's 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 75 percent. Economic growth was 5.0 percent Last year, and unemployment is at 45 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