Case Study: Grant and Julie Scott

Transcription

1 Case Study: Today is January 1, have come to you, a financial planner, for help in developing a plan to accomplish their financial goals. From your initial meeting with the Scotts, you have gathered the following information. PERSONAL BACKGROUND AND INFORMATION Grant Scott (Age 50) Grant is an executive with the Pelican Development Company (PDC), a closely held corporation. He has been employed with the company for 12 years and has a current annual salary of $100,000. Julie Scott (Age 47) Julie is a stay-at-home mom. She volunteers each afternoon at Meals-2-You, a charitable organization delivering dinners to the elderly in her community. The Scotts Grant and Julie have been married for 10 years. Grant has two children from a previous marriage, Sam and Justine. Grant and Julie have two children of their own, Abby and Katelyn. They have always lived in the community and expect to remain in their current residence indefinitely. Children and Grandchildren Sam is 24 years old. His date of birth is January 1, He and his wife, Cheryl, have a one-year-old son, Stephen. Sam is an engineer for an international oil company. Justine is 18 years old. Her date of birth is July 1, She will be graduating from high school this year and will be attending State University in the fall. Justine lives with her mother, Sandra. Grant provided child support until Justine attained age 18. The $3,600 paid in 2016 will not be an expense for Abby is 10 years old. Her date of birth is October 1, She attends Oak Tree Middle School and is cared for after school by her grandmother, Rose. Katelyn is 4 years old and is developmentally disabled. Her date of birth is September 10, She is also cared for by Rose when Grant is at work and Julie is volunteering. PERSONAL AND FINANCIAL GOALS Pay for Justine s college education and save for Abby s college tuition and other expenses. Pay off all consumer debt by retirement and travel extensively afterwards. Review both Grant s and Julie s life insurance coverage.

2 2 Case Study: Prepare a proper estate plan, including any necessary documents. Pay off the mortgage by retirement. Retire at age 62 with 75% of preretirement salary. ECONOMIC INFORMATION The Scotts expect medical inflation to be 6% annually and the annual CPI to average 3% over both the short and long terms. The average annual interest rate on their credit cards is approximately 16%. Current mortgage rates are 6% for 30-year fixed mortgages and 5.5% for 15-year fixed mortgages. Closing costs will be approximately 3% of any mortgage refinanced and will be included as part of any new mortgage. Grant expects annual salary increases of 5% for the foreseeable future. INSURANCE INFORMATION Health Insurance The entire family is insured under Grant s company plan (an indemnity plan). The plan features a $500 deductible per family member with 80/20 major medical coverage and a $5,000 stop-loss limit. The plan does not have a lifetime coverage limit and provides preventive services without charging deductibles, co-payments, or coinsurance. Grant s employer pays the entire premium. Life Insurance Grant has a group term life insurance policy with a face amount of $50,000 provided by his employer. Premiums are paid entirely by Grant s employer. The beneficiary is Julie. Grant and Julie know that neither of them have adequate life insurance coverage, especially Grant as the family s main source of income. Disability Insurance Grant has a private own-occupation disability insurance policy with a 30-day elimination period. In the event Grant is disabled, as defined under the policy, the benefit is $3,500 per month until he reaches age 65. Premiums are paid entirely by Grant s employer. Homeowners Insurance The Scotts have an HO-3 policy with dwelling extension and replacement cost on contents. The policy has a $500 deductible and an annual premium of $2,500. Automobile Insurance The Scotts have automobile bodily injury/property damage liability coverage with limits of $100,000/$300,000/$100,000. They have both comprehensive (other than collision) and collision coverage. The deductibles are $250 for comprehensive and $500 for collision. The annual premium is $1,400.

3 Case Study: 3 INVESTMENT INFORMATION PDC offers a Section 401(k) plan in which Grant is an active participant. The company matches contributions dollar for dollar up to 3% of Grant s salary. Grant currently contributes 3% of his salary. The maximum contribution allowed by the plan is 16%. INCOME TAX INFORMATION Grant and Julie tell you that they are in the 25% federal income tax bracket. They most recently paid $1,172 in state and city income taxes. RETIREMENT INFORMATION Grant wants to retire at age 62 with income equal to 75% of his preretirement income. He expects to receive Social Security benefits of $30,000 (today s dollars) for himself and $15,000 (today s dollars) for Julie at full retirement age 67. They will receive 70% of the full retirement benefit at age 62. EDUCATION INFORMATION Justine attends a public high school and will be attending State University next fall. She has received a four-year scholarship that will pay full tuition but not expenses for room, board, and books, which will be $12,000 for Justine s freshman year. The only funds saved for Justine s college education is a UTMA account with a value of $15,000. Abby is in the fifth grade at a private school. She will attend private school through high school. Grant and Julie have $1,450 in a savings account to which they contribute $750 each year for Abby. This account will be used for high school and is in Julie s name. Next year, Katelyn will attend a private elementary school for developmentally challenged children. Tuition will be paid by Rose, who invested the proceeds of her husband s $250,000 life insurance policy when he passed away five years ago. Due to Katelyn s disability, her parents are uncertain what type of education she will receive after elementary school. The current cost of college (including room, board, tuition, and books) is $20,000 per year per child. Grant and Julie expect Abby to start college at age 18. The Scotts expect an educational inflation rate of 5%. GIFTS, ESTATES, TRUSTS, AND WILL INFORMATION Grant s will, drafted six years ago, leaves everything to Julie conditioned on a six-month survivorship clause, otherwise equally in separate trusts for Sam, Justine, and Abby. Julie does not have a will.

4 4 Case Study: CASH INFLOWS STATEMENT OF CASH FLOWS Statement of Cash Flows (Expected) for 2017 Salary Grant $100,000 Investment income Interest (taxable) $1,800 Dividends 300 Total investment income $2,100 Total cash inflows $102,100 CASH OUTFLOWS Planned savings Reinvestment interest/dividends $1,500 Section 401(k) plan 3,000 High school fund 750 Total savings $5,250 Ordinary living expenses Food $6,500 Utilities 4,200 Travel and entertainment 5,200 Auto maintenance 1,800 Clothing 3,000 Church contributions 7,000 Total ordinary living expenses $27,700 Other payments Mortgage $28,540 Automobile loan 3,840 Credit cards 4,000 Personal loan 2,010 Total payments $38,390 Insurance premiums Automobile $1,400 Homeowners 2,500 Total insurance premiums $3,900 Tuition and education expenses Abby $2,700 Child support for Justine to Sandra 1 $3,600 Taxes Federal income tax (w/h) $10,715 State and city income tax 1,172 FICA 7,650 Property tax for real estate (principal residence) 1,000 Total taxes $20,537 TOTAL CASH OUTFLOWS $102,077 NET CASH FLOW (SURPLUS) $23 1 Child support of $3,600 will not be an outflow in 2017; therefore, net cash flow will be increased by that amount.

5 Case Study: 5 STATEMENT OF FINANCIAL POSITION As of January 1, 2017 ASSETS 1 Liquid assets Checking account $ 2,150 Savings account 1,450 Total liquid assets $ 3,600 Investments XYZ stock 2 $18,000 Section 401(k) plan vested balance 60,000 Total investments $ 78,000 Personal real estate residence $350,000 Other personal assets Automobile 1 $10,000 Automobile 2 11,500 Antiques 21,500 China and crystal 20,000 Furniture/household 83,500 Total other personal assets $146,500 TOTAL ASSETS $578,100 LIABILITIES 3 AND NET WORTH Current liabilities credit cards $5,200 Long-term liabilities Mortgage on residence $252,100 Personal loan 8,965 Total long-term liabilities $261,065 TOTAL LIABILITIES $266,265 NET WORTH $311,835 TOTAL LIABILITIES AND NET WORTH $578,100 1 Assets are stated at fair market value. 2 The XYZ stock was a gift to Grant from his father on October 1, His father originally paid $15,000 for it on April 1, The fair market value on October 1, 2010, was $16, Liabilities are stated at principal amount only.