Personal Financial Planning assignment113
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114 Private Monetary Planning: Instances & Purposes Textbook 11th Version 2020
At present is January 1, 2020. Clara Morrish has come to you, a monetary planner, for assist
in growing a plan to perform her monetary targets. Out of your preliminary assembly with
Clara, you might have gathered the next info.
Private Background and Info
Clara Morrish (Age 68)
Clara is a retired homemaker. She is a latest widow. Clara was born on April 15,
Tim Morrish (deceased)
Clara was married to Tim Morrish, who died November 1, 2019, on the age of 69,
after a quick battle with most cancers. His date of delivery was June 1, 1950.
Tim’s property is in probate. Tim was employed 45 years as a supervisor at ABC Co.,
Inc. (ABC) earlier than retiring at age 65.
They have been married for 50 years. Clara’s well being is honest.
The Morrishes’ Kids
Clara has two kids from her marriage to Tim: George (age 50) and Vince
(age 49). George and Vince are every married, wholesome, employed, and self-sufficient.
The Morrishes’ Grandchildren
George and his spouse, Kathy, have one daughter, Sarah (age 18). Sarah is presently
a senior in highschool and will likely be a freshman at a college in September. The price of
tuition for the college is presently $20,000. Clara wish to pay Sarah’s tuition for
this 12 months. As a commencement reward, Clara is paying for Sarah’s journey to Europe this summer time. The
value of this journey is $three,000.
Vince and his spouse, Laena, have one son, Kirby (age 17). Kirby is a junior in excessive
faculty. Kirby is in want of orthodontic work that may value $6,000. Clara wish to
pay for Kirby’s orthodontic work. Clara can be contemplating gifting inventory price $9,000
Private and Monetary Aims
1. Clara desires to have adequate earnings at retirement ($30,000 per 12 months in as we speak’s
together with Social Safety advantages).
2. Clara will contemplate buying a smaller residence.
three. Clara desires to discover long-term care alternate options (common annual value in as we speak’s
four. Clara desires to donate to the American Most cancers Society.
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Case eight | Clara Morrish 115
5. Clara desires to supply for her kids and grandchildren.
6. Clara desires to pay Sarah’s college tuition ($20,000).
7. Clara desires to reward inventory to Kirby ($9,000).
eight. Clara desires to pay for Kirby’s orthodontic work ($6,000).
9. Clara desires to ship Sarah to Europe ($three,000).
■ Inflation is predicted to be four% yearly.
■ She lives in a state with no state earnings tax.
■ Shares are anticipated to develop at 9.5%.
■ Financial institution lending charges are as follows: three.5% for a 15-year mortgage, four% for a 30-year
mortgage, and 10% for a secured private mortgage.
Life Expectations from Desk III, Uniform Lifetime
Age Life Expectancy Issue
Insurance coverage Info
Life Insurance coverage
Irrevocable Life Insurance coverage Belief (ILIT)
Tim created an ILIT 10 years in the past. The one property within the belief are $200,000 in proceeds from the life insurance coverage coverage the ILIT owned at Tim’s demise. The earnings beneficiary of the ILIT is Clara. The rest beneficiaries are the grandchildren. Clara presently receives an annual earnings of $10,000 based mostly on a return of 5% on the belief property.
Well being Insurance coverage
Tim and Clara have been each lined below Medicare Half A and B till the time of
his demise. Clara remains to be lined below Medicare Half A and B.
Clara’s funding threat tolerance is low.
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Earnings Tax Info
The Morrishes filed as married submitting collectively for 2018. Clara and Tim have at all times
lived in a group property state.
Clara has been making and promoting jewellery for six years with some success. Since
Tim’s demise final 12 months, she has devoted extra time to her craft and enjoys it tremendously.
Her grandson, Kirby, created a web site for her final 12 months and Clara is amazed on the gross sales
outcomes. Whereas she had been touring to jewellery exhibits for many of her gross sales, the web
gross sales this 12 months have eradicated the necessity to journey. As a result of Clara will likely be itemizing her
deductions this 12 months, she believes she will be able to report her earnings and bills on Schedule
C. Her product sales from the jewellery enterprise this 12 months are $19,500. Her bills in 2019
Price of products bought $12,900
Provides $ 500
Net-related prices $ 600
Online advertising $ 200
Postage/supply prices $ 1,200
She has saved detailed data from the start and may monitor her revenue and loss
from annually. In 12 months 1 she had a lack of $2,000; 12 months 2 was a lack of $1,000; 12 months three
confirmed a revenue of $three,000; 12 months four had one other lack of solely $500; 12 months 5 confirmed a revenue
Tim had a profit-sharing plan sponsored by ABC with Clara designated because the beneficiary. The plan has a worth of $150,000 as of January 1, 2020. The plan permits the
beneficiary to take a lump-sum distribution.
Clara presently has an IRA with Tim because the named beneficiary. Clara is the named
beneficiary on Tim’s IRA. That they had each determined to defer IRA withdrawals till they
are obligatory after age 72. Clara has no plans to alter this since Tim’s demise. She
will transfer Tim’s IRA into an IRA in her identify early in 2020. Each Tim and Clara
started receiving Social Safety advantages on their 66th birthdays. Tim’s profit for 2020
would have been $1,200 per 30 days, and Clara’s profit for 2020 was estimated to be
$600 per 30 days.
Items, Estates, Trusts, and Will Info
Tim’s will left all probate property to Clara. The grandchildren are named as contingent beneficiaries (equally). Clara doesn't have a will.
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STATEMENT OF FINANCIAL POSITION
Tim (deceased) and Clara Morrish
As of January 1, 2020
Assets1 Liabilities and Internet Value
Money and equivalents Liabilities2
CP Money $ 25,000 Credit score cards3 $ 20,000
CP Financial savings account 20,000
Complete money and equivalents $ 45,000
S1 Stocks6 $ 20,000 Complete liabilities $ 20,000
CP IRA - Clara's 40,000
CP IRA - Tim's 50,000
CP Revenue-sharing plan7 150,000 Internet price $ 980,000
Complete invested property $ 260,000
Private use property
CP Main Residence4 $ 400,000
S2 Trip Home5 200,000
CP Auto 18,000
CP Furnishings and private property 77,000
Complete private use property $ 695,000
Complete property $1,000,000 Complete liabilities and internet price $1,000,000
Notes to monetary statements
Belongings are acknowledged at honest market worth.
Liabilities are acknowledged at principal solely as of January 1, 2020, earlier than January funds. All liabilities are group property.
Rate of interest 18.three%.
The first residence was initially bought for $110,000. There have been no additions or upgrades. The FMV was $400,000
on Tim's date of demise.
The holiday dwelling was inherited by Clara from her mom. Adjusted tax foundation is $125,000.
Inherited from a sibling.
Current worth of Tim's profit-sharing plan.
Different notes to monetary statements
The earnings beneficiary of the ILIT is Clara. The rest beneficiaries are the grandchildren. The ILIT isn't listed on the Assertion of
S1 - Tim
S2 - Clara
CP - Group property
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118 Private Monetary Planning: Instances & Purposes Textbook 11th Version 2020
Info Concerning Belongings and Liabilities
■ Bought April 1, 1984
■ Market worth $400,000 as of November 1, 2019, and January 1, 2020
■ Unique buy worth $110,000
■ This house is owned by Clara (payment easy).
■ Clara inherited the house from her mom who paid $75,000 for it. The honest market
worth on the date of switch to Clara was $125,000 in July 2003.
■ The present honest market worth is $200,000.
■ The holiday house is positioned in a noncommunity property state. All funds
for repairs and upkeep have been made through the use of group property property.
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Case eight | Clara Morrish 119
1. What's Clara’s federal earnings tax submitting standing for 2019, 2020, 2021, and 2022?
2. On November 1, 2020, Clara decides to promote her private residence for the honest market
worth as of January 1, 2020. What will likely be her tax penalties? Disregard the holiday
three. Clara will attain age 72 in 2023. If she elects to take a distribution from Tim's profitsharing plan in 2023, to what extent will she be required to incorporate it in her gross
four. How ought to Clara report the earnings and bills from her jewellery enterprise for 2019?
5. Ten years in the past, Tim and Clara gave their grandchildren inventory in a U.S. home company that's publicly traded. Due to an vital advance in know-how within the final
12 months, the corporate is rising quickly and in 2020 it pays $three,000 in certified dividends
to every little one. What are the kiddie tax implications of the dividends on the earnings of
the grandchildren in 2020? To their dad and mom (assume a marginal tax charge of 22%)? To
6. Reasonably than let the holiday dwelling sit unused throughout Tim’s final sickness, Tim and Clara
rented it to vacationers for 180 days in 2019. Nonetheless, Clara used her trip dwelling
for the final 40 days of the 12 months after Tim’s demise in 2019. The one bills for the
dwelling have been utilities, taxes, and upkeep. How a lot of those bills could she
deduct? The place does she report the earnings and bills on her tax return in 2019?
7. How a lot of Tim’s IRA should Clara embrace in taxable earnings in 2019?
eight. How a lot of Clara’s Social Safety is taxable in 2020?
9. What's Clara’s gross earnings in 2020?
10. Assume that in 2021, Clara decides to promote the inventory she inherited from Tim that now
has a good market worth of $24,000. She directs the dealer to make the examine payable to
her sons, George and Vince, as a result of she doesn't want the additional earnings from the sale.
What are the tax penalties to Clara, George, and Vince on account of this inventory sale
within the 12 months of the sale?
11. A thief entered Clara’s dwelling on New 12 months's Day in 2020 whereas she was away from
dwelling and stole an vintage gun that had been one in every of Tim’s treasures that he had bought for $three,500. Sadly, whereas Clara had the gun appraised after Tim’s demise,
she didn't particularly insure it and solely recovered $200 for the gun that had been valued at $four,500. Assuming her AGI is similar in 2020 as in 2019, how a lot could Clara
declare as a casualty loss on her tax return for 2020?
12. Assume that Clara’s finest good friend, Marlene, who's 67 and legally blind, is sick
and has solely a meager Social Safety earnings of $three,250 yearly. Clara invited her to
dwell together with her starting January 1, 2020, and is offering greater than 50% of her whole
assist. Assuming her AGI is similar in 2020 as in 2019, how will this have an effect on Clara’s
tax return in 2020?
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120 Private Monetary Planning: Instances & Purposes Textbook 11th Version 2020
13. Sarah, Clara’s granddaughter, has a certified tuition plan (QTP) presently valued at
$195,000. Contributions from varied members of the family have been $145,000 through the years.
Sarah has the next bills for her first 12 months on the college:
Room and board $ four,000
College charges $ 900
Books for lessons $ 600
Laptop computer required by the college $ 2,500
Auto to make use of on campus $11,000
Complete 1st 12 months expense $39,000
If Sarah pays for all of her bills utilizing a distribution from her certified tuition plan,
what impact does it have on her gross earnings?
14. On April 2, 2020, Clara obtained a refund of $four,800 from the hospital the place Tim died.
She had paid the hospital $5,600 late within the prior 12 months for the medical invoice and deliberate
so as to add the expense to the remainder of the unreimbursed medical bills from Tim’s demise.
Her son, Vince, instructed her to permit the property to reimburse her when she paid the invoice, however
Clara selected to forego reimbursement. Confronted with the examine from the hospital, Clara
fears she could have made a mistake in how she dealt with the expense. She consults her
monetary planner in regards to the $four,800 refund. The 2019 earnings tax return has not been
filed. How ought to the monetary planner advise Clara?
15. George and Kathy vacationed in Guatemala in 2018 and after a go to to an area orphanage, determined to undertake a three-year-old little boy. George and Kathy felt their annual
AGI of $260,000 may adequately present for one more little one and that their time and
value can be enormously rewarded. Sarah is worked up about her new little brother and appears
ahead to his arrival within the US. In February 2019, Marcus got here to dwell with the household
and his adoption turned closing in August 2020. The couple incurred certified adoption
prices in 2019 of $9,000 and an extra $7,500 in 2020. How a lot of an adoption
credit score can the couple use on their earnings tax return in 2020? Assume they file MFJ.
16. Clara is contemplating promoting the holiday dwelling she inherited from her mom. Her mom
paid $75,000 for the house 20 years earlier than she died and Clara inherited it. If Clara sells
it as we speak for its full honest market worth of $200,000, how a lot would her taxable acquire be
on the sale of the home?
17. Assume a forest fireplace destroyed Clara’s mountain trip retreat in Could 2020. Clara’s
foundation within the property is $125,000. The insurance coverage firm paid Clara $226,000 in July
2020 to rebuild. Clara determined to not rebuild in such a distant space and purchased a trip dwelling close to a lake in November 2022 for $220,000. How ought to Clara deal with the
acquire, if any, on this involuntary conversion?
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