Case Study-AW-Q412

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Case Scenario and Questions

Today is November 4, 2012, and Barbara Lane has come to you, a financial planner, for help in developing a plan to accomplish her financial goals. From your fact-finding meeting together, you have gathered the following information.


Barbara Lane (Age 69)
Barbara is a retired homemaker. She is a recent widow. Barbara’s 70th birthday will be April 1, 2013.

Andrew Lane (deceased)
Barbara was married to Andrew who died in February (2012) at the age of 69, after a heart attack.

Andrew’s estate is in probate. Andrew was employed 46 years as a manager at XYC Co., Inc. before retiring at age 65.

The Lanes
They were married 50 years. Barbara’s health is fair.

The Lane’s Children
Barbara has two children from her marriage to Andrew: Ben (Age 50) and Bob (Age 49). Ben and Bob are each married, employed, and self-sufficient.

The Lane’s Grandchildren
Ben and his wife, Joni, have one daughter, Sarah (Age 18). Sarah is currently a senior in high school and will be a freshman at Rather University in the fall. The cost of tuition for Rather is currently $15,000. Barbara would like to pay the university for Sarah’s tuition for this year. As a graduation present, Barbara is paying for Sarah’s trip to Europe this summer. The cost of the trip is $3,000.

Bob and his wife San, have one son, Richard (Age 17). Richard is a junior in high school. Richard is in need of orthodontic work. Barbara is also considering gifting stock worth $13,000 to Richard because she wishes to treat each grandchild equally.


• Barbara wants to have sufficient income ($40,000 per year in today’s dollars including any Social Security benefits).
• Barbara will consider acquiring a smaller residence
• Barbara wants to explore long-term nursing home care alternatives (annual cost of a nursing home in today’s dollars $40,000). You will have to assume
a cost of long term care premiums.

• Barbara wants to donate to the American Cancer Society.
• Barbara wants to provide for her children and grandchildren.
• Barbara wants to pay Sarah’s tuition ($15,000).
• Barbara wants to gift stock to Richard ($13,000)
• Barbara wants to pay for Richard’s orthodontic work ($6,000).
• Barbara wants to send Sarah to Europe ($3,000).


• Inflation is expected to be 4% annually.
• There is no state income tax.
• A slow growth economy is expected, and stocks are expected to grow at 9.5%.

Bank lending rates are as follows:
• 15-year mortgages 6.5%
• 30-year mortgages 7.5%
• Secured personal loan 10.0%

Life Expectancies from MDIB Table:
70 26.2
71 25.3
72 24.4


Life Insurance
Irrevocable Life Insurance Trust (ILIT)
Andrew created an ILIT 10 years ago. The only asset in the trust is a permanent life policy with a face value of $200,000. The income beneficiary of the ILIT is Barbara. She is also the trustee and has a general power of appointment over the trust assets. The remainder beneficiaries are the grandchildren.

Health Insurance
Andrew and Barbara were both covered under Medicare Part A.


Barbara’s investment risk tolerance is low.


The Lane’s filed as married filing jointly for 2011. Barbara and Andrew have always lived in a community property state.

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Andrew had a pension with XYZ with Barbara designated as the beneficiary. The pension currently has a lump sum death benefit of $150,000 (assume a federal/state combined tax bracket of 33.5%) . As the beneficiary, Barbara can choose to receive a life annuity of $6,000 annually or a lump sum payment from the pension.

Barbara currently has an IRA with Andrew as the named beneficiary. Barbara is the named beneficiary on Andrew’s IRA.

Both Andrew and Barbara began receiving Social Security benefits on their respective 66th birthdays. Andrew’s benefit for 2012 would have been $1,200 per month, and Barbara’s benefit for 2012 was estimated to be $600 per month.


Andrew’s will left all probate assets to Barbara. The grandchildren are named as contingent beneficiaries (equally).

Barbara does not have a will.


Credit card debt* $20,000
Cash 25,000
Primary residence** 400,000
Auto 18,000
Savings accounts 20,000
Stocks 20,000
IRA 50,000
Pension 150,000
Furniture 77,000
Vacation home*** 200,000

*All liabilities are community property
**Primary residence originally purchased for $110,000
***Inherited from Barbara’s mother. Adjusted taxable basis is $125,000


Primary Residence
• Purchased April 1, 1968



1. List Barbara’s financial strengths and weaknesses.
2. After reading the case, what additional information would you request from Barbara to complete your data-gathering phase?

3. Calculate the following financial ratios for Barbara:
Net Worth/Total Assets
Total Debt/Total Assets
Investment Assets/Total Assets

4. Comment on any of the above ratios that you think are important.
5. What are Barbara’s options with regard to Andrew’s IRA?
6. Barbara is considering selling her personal residence. What is Barbara’s cost basis for the personal residence?

7. If Barbara exercised her right to take a lump sum cash distribution from Andrew’s pension plan, how much money will she actually receive from the plan?
8. What happens to Barbara’s IRA upon her death, assuming she makes no changes to the account?
9. Assuming that Barbara has taken a lump sum distribution form Andrew’s pension plan, what combination of investments is appropriate for Barbara?

10. In December 2012, if Barbara decides to sell her personal residence for the FMV of $400,000. What will be her tax consequences?
11. Barbara is worried that she will need long-term custodial care because while her mother lived at home until age 95 she needed assistance in bathing, dressing, and toileting once she became 75 years old. Barbara is worried that there will be no family member around to care for her. What insurance would provide Barbara with such continued assistance in her home?

12. Assess how Barbara’s financial position looks for retirement.
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