Case Study: Married Couple - Managing Proceeds of a Sale Children: Two sons, one attending a private East Coast College and the other a West Coast University Job Position: Michael - Scientist Anne - Music Instructor Michael, age 61 and Anne, age 58 live in Phoenix, AZ. Michael works at a major laboratory and Anne teaches music part-time at a local high school. Anne's family large owns a large concrete company in San Diego, of which she owned a partial interest. Her siblings purchased her share which amounted to around $7,000,000, and she has kept part of the money in cash. Since the housing market in California has severely declined, Anne wants to make set aside ample reserves to help her family's business weather through the difficult time. One of the concerns is that monies have been spread to various banks in Phoenix and much of it is uninsured. In addition, there is not a structure to provide for bond investments. Michael and Anne are self-sufficient from their employment salary and do not rely on either the income or principal of the family business proceeds. Preservation of the business proceeds is important; however, they appreciate the need for equity investments to provide diversification and to stay ahead of inflation. They hold no debt and are able to cover the educational expenses of their sons. What is important to Michael and Anne? Important Concerns Issues Action item Prepare for Emergency Savings Wants to determine an amount of cash to assist the family business if they need to continue to during this difficult economic environment. Work with family running the business to determine how much reserves might be needed. Investment Preservation Concerned that a significant amount of their cash is uninsured. They would like to conservatively invest to provide income with some appreciation Need to coordinate the maturities of bank deposits, bonds and equity to provide structure. Important Concerns Issues Action item Will and Estate Plan As a result of the sales proceeds a new estate plan must be implemented. Meet with an attorney specializing in estate plans. Retirement Plan Maximize retirement plan contributions to reduce taxes, rebalance investments Meet with human resource representative. Tax Concerns Invest in tax efficient bonds and stocks. Michael and Anne wish to work with existing banks and investment advisors. Meet with investment advisors to coordinate investments. Financial Diagnostics Net Worth Cash Flow Total Assets 7,800,000 Income 175,000 Less Total Liabilities - Less Expenses (125,000) Net Worth 7,800,000 Net Cash Flow 50,000 Tax Bracket: 33% Anticipated taxes: $40,000 Contributions to 401(k) plan: $100 per pay period or $3,600 per year. Retirement contributions are allocated to a conservative fixed income program. Issues for you to Consider Should the Bakers set aside any money to lend or invest in the family concrete business? Given the difficult economic environment, how much cash should be set aside for emergency purposes. On the 401(k), is there anything that needs to be done? Are there any tax issues that the Bakers should focus their attention on? Do you think municipal securities are a good investment candidate? What are your recommendations on asset allocation for a couple in this stage of the life cycle? Given the sizable assets they own, what should they do to minimize their estate taxes?
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