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Principles of Financial Planning
The Smith Family
Ricky Smith is 46 years old, and his wife Jill is 37 years old. Ricky and Jill were married 8 years ago; it was his second marriage and her first marriage. They have one child, Blake, who is 6 years old. Ricky has two children by his prior marriage: Lynn, who is 14 years old and Abby, who is 12.
Ricky is a biology professor at the university and is a partner in Wizard Research Associates, a biotechnology firm that he started with three of his associates from the university.
Asset Information

The Smiths own their personal residence in joint tenancy with right of survivorship, and it is valued currently at $250,000. They purchased the home 7 years ago for $175,000. They have finished the basement and have added a room and bathroom at a cost of $40,000. They have a mortgage balance of $150,000. Their household furnishings are value at $70,000, and Jill’s jewelry and furs are valued at $30,000. They live in a state that follows the common-law forms of property ownership.
Ricky and Jill have a joint checking account with a $7,000 balance and a joint savings account with $15,000. Interest income on the savings account last year was $450. The Smiths also have $12,000 in money market mutual funds that paid dividends last year of $515. Ricky owns shares in a growth stock mutual fund that he purchased 3 years ago for $5,000, is now worth $5,750, and paid dividends of $100 last year. Dividends on these shares are expected to grow by 8% per year, and he believes that a 10% rate of return would be appropriate for these shares with their degree of risk. Jill owns shares in a municipal bond fund purchased for $6,300, currently valued at $7,000 and yielding $400 per year tax- free. The Smiths jointly purchased 500 shares in Power Station, Inc., a public utility company. These shares were acquired at a cost of $6,250, are currently valued at $8,000, and pay annual dividends of $480.
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Ricky’s father died 2 years ago, and his mother died last year, leaving him an inheritance of $150,000 in US Treasury notes paying 8% interest ($12,000 annually) and a one-half interest in common with his brother in a Florida condominium. The condominium was valued in his mother’s estate at $120,000 and was purchased six years ago for $125,000. Real estate taxes on the condominium, half of which Ricky includes among his itemized deductions for federal income tax purposes, total $1,000. Both of Jill’s parents are still living.
The Smiths are also joint owners of a parcel of undeveloped land in the mountains, where they plan to build a vacation home. The parcel of land cost them $75,000 and is currently valued at $70,000. They have a $30,000 mortgage on the property. Interest on the mortgage is $2,700 per year. Real estate taxes are $700.
Ricky owns an apartment building near the university that he rents to students. It was purchased four years ago for $95,000 and is currently valued at $125,000. The annual gross rental income from the property is $11,000. Ricky has a mortgage balance of $60,000 and his interest payments total $4,950. His real estate taxes and maintenance expenses are $3,000 and depreciation is $2,850.
The Smiths are joint owners of 2 vehicles, with a value of $25,000 and $17,500. Ricky owns a sailboat that he bought for $35,000 and is valued now at $40,000.
Ricky has a one-fourth interest in the partnership Wizard Research Associates, which is engaged in research for genetic engineering of various plants. There are no employment contracts for the partners. In addition to the partners, the firm has 8 employees, including 4 research assistants, two secretaries, and two maintenance/hothouse workers. The research assistants are paid $30,000 each, the secretaries are paid $18,000 each, and the other workers are paid $20,000 each.
Ricky and his partners believe that the value of Wizard Research Associates is approximately $1 million. There has been no objective valuation, however. The largest assets of the firm are its building and grounds, where the firm has a laboratory, hothouses, and fields for growing experimental plants. The building and land were purchased for $250,000, and $150,000 was allocated to the building and $100,000 to the land. Additional buildings have been added at a cost of $75,000 and the current value is estimated to be $400,000. The firm has a mortgage balance on the building and land of $150,000. The partnership has been depreciating the building for tax purposes under the original accelerated cost recovery system.
Income Tax Information

Ricky earns $60,000 in annual salary from the university, and he reports another $48,000 of net taxable income from the biotechnology firm. Jill earns $30,000 working in public relations for a hospital. She also receives $5,000 at the beginning of each year from a trust established by her grandfather, with securities values currently at $100,000. At Jill’s death, the trust income will be paid to Blake, or if Blake is over age 25, the principal will be distributed to him. The Smiths file joint tax returns.
Ricky pays child support for his two daughters in the amount of $600 each per month, and these payments are probably 75% of their support annually. His daughters are in the custody of their mother and live with her for approximately nine months of the year. Ricky is required by his divorce decree to maintain a $500,000 term life insurance policy to provide child support in the event of his death.
Several years ago, Ricky established custodial accounts for his daughters. Lynn’s generates annual income of $900 and Abby’s account has annual income of $850.
Ricky and Jill incur home mortgage interest cost of $12,000 per year. Real estate taxes on their home are $6,000. There is no state income tax. Their contributions to charities totaled $2,000.
Retirement Information

Jill owns IRA accounts totaling $17,000. She is now an active participant in a defined-contribution pension plan through the hospital where she works and her vested account value is $35,000. Eight percent of Ricky’s gross salary at the university is deducted each year and contributed to a tax-deferred annuity. The university contributes an additional six percent dollar-for-dollar on a tax-deferred basis. The plan is projected to pay Ricky $2,500 per month when he retires at age 65 or to Jill at his death.
One of the partners at the biotechnology firm is 65 years old and about 2 years away from retirement. Two other partners are age 55. The partners would like to prepare for the expected retirement of the 65-year-old partner, as well as the unexpected death or disability of any partner.
Insurance Information

The university provides disability income coverage for one-third of Ricky’s salary, group medical expense insurance covering Ricky and his family through a health maintenance organization, and group term life insurance for Ricky with a death benefit of $50,000. Ricky owns a whole life insurance policy that will pay a death benefit of $100,000 and has a cash value of $5,500. He owns a universal life policy with a face value of $150,000 and a cash value of $3,000. The annual premium on the whole life policy is $2,000 and the annual premium on the universal life policy is $800. Jill has group term life insurance through her employer in a face amount that is equal to her salary.
Property and liability insurance that insures the Smiths’ house for its replacement cost has an annual premium of $1,200. The Smiths’ cars are insured under a personal auto policy providing limits for bodily injury of $100,000/$300,000, property damage of $25,000, uninsured motorists coverage of $10,000/$20,000, no-fault benefits, and a collision deductible of $250. Ricky’s sailboat is insured under a yacht policy.
Estate Planning Information

Ricky’s will leaves his entire estate to Jill, but if Jill predeceases Ricky, the estate will be left in trust for Ricky’s 3 children equally. Jill’s will leaves her entire estate to Ricky, or if he predeceases her, to Blake.
College Saving Information

Currently the Smiths have not saved for Blake’s college. They want him to attend UIW, just like his mother. They would like to start saving now and want to make the last payment when Blake starts college.
Inflation rate: 3% per year
Portfolio or any other investments: 8% per year
College tuition increase: 6% per year
Current tuition
ASSIGNMENT: Financial statements for the clients (Income and Net worth).
• Ratio analysis based on financial statements.
• Life insurance analysis and recommendations for both spouses. Over insured? Underinsured?
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