Bill and Natalia Martinez Today, January 1, 2021, Bill and Natalia Martinez have come to your firm
Question:
Bill and Natalia Martinez
Today, January 1, 2021, Bill and Natalia Martinez have come to your firm for help in developing
a plan to accomplish their financial goals. From your initial meeting together, you have
gathered the following information:
I. Personal Background and Information
Bill Martinez
Age 60 employed 25 years as a Vice President for an oil field services company.
He participates in a 401k plan at work where the company matches $.25 on each
$1.00 Bill contributes up to 5% of his salary. Currently, Bill is putting the
5% in to get his employer's match. His salary is currently $100,000 and he
generally, gets a 2% raise each year (assume this continues).
Natalia Martinez
Age 48 owns Publications, Inc. and Natalia's Advertising, Inc. Natalia takes
$40,000 in withdrawals combined, as a salary from the two businesses.
The combined fair market value of the businesses, though since she is the
primary employee, should she decide to liquidate the businesses, it is assumed
she would net $100,000.
Bill and Natalia Martini
They met July 4, 1995 on a cruise, fell in love, and married November 23, 1995.
They have no children together.
Bill's children from a previous marriage
Michaela
Age 34
Jameel
Age 32
Bob
Age 30
Lucy
Age 28
All are healthy, employed, married, and not living with Bill and Natalia.
II. Personal and Financial Goals
1. Natalia plans to sell her businesses.
2. Bill planned to retire in 5 years, but would like to do it now (life expectancy is 25
years)
3. They plan to sell their primary residence which is not paid off. (Could net $300,000)
4. They plan to refinance their vacation home and have that be a temporary home
base. Fair market value of vacation home is $150,000. Original mortgage at 9%, 15
years. Current mortgage balance is $120,000, remaining term is 120 months and the
current payment is $1,522 per month (principal and interest).
5. They would like to be able to travel extensively before deciding where to
permanently relocate.
6. Bill and Natalia think they would need 2/3 of the current combined income in order
to live the lifestyle they currently think they live. You need to determine if this is
possible, and/or required.
III. Economic Information
-
They expect inflation to average 3.0% (CPI) annually over both the short and long-
term.
-
Expected stock market return of 8% on the S&P index (this is the Martini's guess)
-
T-bills are currently yielding 1%
-
Current mortgage rates are:
o
Adjustable 5 year balloon
2.25%
o
Fixed 15 year
2.75%
o
Fixed 30 year
3.25%
-
Closing costs are expected to be 3% of any mortgage
-
They will finance closing costs in any refinance
IV. Insurance Information
Life Insurance
Policy 1
Policy 2
Insured
Bill
Natalia
Owner
Bill
Natalia
Beneficiary
Children (25% each)
Booth
Face Amount
$200,000
$150,000
Cash value
0
0
Type of Policy
Term
Term
Settlement Options
Lump Sum
Lump Sum
Premium (annual)
$750
$550
Health Insurance - Employer provides during employment only. The current coverage is for Bill
and Natalia.
Disability Insurance - Neither has disability insurance
Homeowner's Insurance - HO3 on both primary residence and vacation home.
Residence
Vacation Home
Dwelling
$300,000
$150,000
Co-Insurance
80/20
80/20
Deductible
0
0
Umbrella Policy - $3,000,000
Automobile Insurance - Maximum liability, no comprehensive or collision.
V. Investment Data
- Emergency fund is at $20,000
- The Martinez couple can accept moderate risk
- Bill's IRA investment portfolio is $300,000 with half invested in low to medium risk equity
mutual funds. Of this amount invested in low to medium risk equity mutual funds, is in Roth
IRAs. Natalia is beneficiary
- The other half is in staggered maturity short-term treasury notes.
- Bill Martinez expects to use the income from the treasury notes to make up any short fall
between his retirement needs and his 401(k) plan for period of time until Social Security
benefits are received (would like to start at 62, understands benefits will be reduced).
-Bill is currently earning 4.0% on the short-term treasury notes, though when they mature, 1.0%
will be the going rate on any new investments in this type of security.
-Other than IRAs, Natalia's business, and any other retirement accounts, all assets are listed as
JTWROS (joint tenants with rights of survivorship).
VI. Income Tax Information
- Bill and Natalia Martinez file a joint tax return and are both average and marginal 28%
taxpayers with state income tax of 5%.
VII. Retirement Information
-The present value of Bill's Social Security benefits at 65 is $13,500 per year or 80% of that
amount at age 62. Social Security benefits are expected to increase at the same rate as
inflation (listed above).
-Bill has the 401(k) plan at work which currently has a value of $750,000.
-Natalia has no IRA funding, but created a SEP-IRA plan for her business and it has a balance of
$200,000 (split into a guaranteed investment contract fund and a money market fund)
VIII. Gifts, Estates, Trusts, and Will Information
Gifts - In 1996, Bill gifted $200,000 to each of his four children. The $800,000 was put into an
irrevocable trust. Natalia has made no taxable gifts during her lifetime.
Estates - For purposes of estimating estate tax liability (of either spouse):
-
Last illness and funeral estimated at $20,000
-
Estate administration expense estimated at $30,000
Wills - Bill and Natalia have simple wills leaving all probate assets to the other. Debts and taxes
are to be paid from the inheritance of the survivor.
IX. Statement of Financial Position
Bill and Natalia Martinez
Statement of Financial Position
ASSETS
LIABILITIES and NET WORTH
Cash and Equivalents
Liabilities
Cash (money market)
$40,000
Current:
Total Cash
$40,000
Credit Card (hers)
$15,000
Invested Assets
Credit Card (his)
$25,000
Publications, Inc.
$100,000
Auto (his) note balance
$20,000
Natalia's Advertising, Inc.
$90,000
Auto (hers) note balance
$10,000
Natalia's Investments
$200,000
Home Equity Line of Credit
$40,000
Bill's Investments
$300,000
Total Current Liabilities
$110,000
Bill's 401(k) (vested)
$750,000
Total Investments
$1,440,000
Long Term:
Mortgage - Residence
$100,000
Personal Use Assets
Mortgage - Vacation Home
$120,000
Primary Residence
$300,000
Total Long-Term Liabilities
$220,000
Vacation Home
$150,000
Personal Prop./Furniture
$100,000
Total Liabilities
$330,000
Auto (his)
$40,000
Auto (hers)
$22,000
Net Worth
$1,762,000
Total Personal Use
$612,000
Total Assets
$2,092,000
Total Liabilities & Net Worth
$2,092,000
All assets are stated at fair market value.
Liabilities are stated at principal only.
Gifts - In 1996, Bill gifted $200,000 to each of his four children. The $800,000 was put into an
irrevocable trust. Natalia has made no taxable gifts during her lifetime.
Estates - For purposes of estimating estate tax liability (of either spouse):
-
Last illness and funeral estimated at $20,000
-
Estate administration expense estimated at $30,000
Wills - Bill and Natalia have simple wills leaving all probate assets to the other. Debts and taxes
are to be paid from the inheritance of the survivor.
IX. Statement of Financial Position
Bill and Natalia Martinez
Statement of Financial Position
ASSETS
LIABILITIES and NET WORTH
Cash and Equivalents
Liabilities
Cash (money market)
$40,000
Current:
Total Cash
$40,000
Credit Card (hers)
$15,000
Invested Assets
Credit Card (his)
$25,000
Publications, Inc.
$100,000
Auto (his) note balance
$20,000
Natalia's Advertising, Inc.
$90,000
Auto (hers) note balance
$10,000
Natalia's Investments
$200,000
Home Equity Line of Credit
$40,000
Bill's Investments
$300,000
Total Current Liabilities
$110,000
Bill's 401(k) (vested)
$750,000
Total Investments
$1,440,000
Long Term:
Mortgage - Residence
$100,000
Personal Use Assets
Mortgage - Vacation Home
$120,000
Primary Residence
$300,000
Total Long-Term Liabilities
$220,000
Vacation Home
$150,000
Personal Prop./Furniture
$100,000
Total Liabilities
$330,000
Auto (his)
$40,000
Auto (hers)
$22,000
Net Worth
$1,762,000
Total Personal Use
$612,000
Total Assets
$2,092,000
Total Liabilities & Net Worth
$2,092,000
All assets are stated at fair market value.
Liabilities are stated at principal only.
CASE ASSIGNMENT
Your job as a financial planner is to work collaboratively with a team of 2 - 4 classmates to
develop a comprehensive financial plan for Bill and Natalia Martinez. You can make
assumptions, but you must justify those assumptions with data and clarify the impact of those
assumptions on your recommendations.
Your team will work collaboratively to review the clients' current situation, define the scope of
the plan, and establish plan goals. Collectively, you will review the retirement, insurance, and
investment needs of the clients and analysis of those needs to guide the plan.
Further, your team will define any necessary modifications to the clients' current plan/situation
that will be required in order for the defined goals to be met and summarize
recommendations to be presented to the clients.'
A lot of data about this family has been presented in the previous pages. Carefully look over the
information. You must determine how to analyze and utilize this information and develop a
plan that maximizes the financial way of life for the Martinez family, without taking an
inordinate amount of risk.
In your financial plan your team must address the following areas:
?
Description and Scope of the plan
(10 points)
?
Statement of Goals - group collaboration
(10 points)
?
Overall needs analysis - retirement, insurance, and investment/savings - group
collaboration (
10 pts
)
?
Retirement Needs Analysis
(40 points)
o
Calculate the amount needed in retirement
o
Bring lump sum needed back to the present
o
Establish the current value of projected future investments
o
Compare resources and needs
o
Establish additional savings needed to reach goals (if any)
?
Insurance Needs Analysis
(40 points)
o
Determine amount/type needed to fund pre-retirement
o
Determine amount/type needed to fund the retirement period (based on life
expectancy of each)
o
Determine the total lump sum needed today
o
Establish Insurance needs
?
Investments/Savings Analysis
(40 points)
o
Determine status of financial asset allocation
o
Determine appropriate risk levels currently
o
Determine appropriate risk levels for retirement
o
Determine if the businesses should be sold, and when
o
Determine the status and rational for keeping residence and vacation home
properties (or liquidating)
?
Gifts, Estates, Trusts, Will Analysis
(10 points)
o
Estate planning issues
?
Who gets what/most efficient way?
?
Modifications to current situation in order to meet the goals
(30 points)
o
Submit a post-modification statement of financial position
?
Summary/Plan Recommendations
(40 points)
o
You must sell this plan to the Martinez couple as the plan then need to adopt.
In addition, you work will be evaluated regarding the following aspects:
?
Using research: Choose a variety of appropriate sources using multiple criteria
(relevance, currency, authority, audience, and point of view) based on the type of
information needed to effectively develop the plan
(10 points)
?
Team cooperation and engagement
(10 points)
?
Proficiency in written communication
(10 points)
o
Determine the status and rational for keeping residence and vacation home
properties (or liquidating)
?
Gifts, Estates, Trusts, Will Analysis
(10 points)
o
Estate planning issues
?
Who gets what/most efficient way?
?
Modifications to current situation in order to meet the goals
(30 points)
o
Submit a post-modification statement of financial position
?
Summary/Plan Recommendation
Expert Answer:
we developed a comprehensive financial plan for Bill and Natalia Martinez addressing several critical factors affecting their financial wellbeing Below we provide explanations for each section of our ... View the full answer
Concepts In Federal Taxation
ISBN: 9780324379556
19th Edition
Authors: Kevin E. Murphy, Mark Higgins, Tonya K. Flesher
