Wealth Plan

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Wealth Plan

Category: Case Study

Subcategory: Geometry

Level: Academic

Pages: 35

Words: 9625

Case Name: The Janten Family
Name of Student:
Student ID Number:
Section 1: Identification of Goals and Potential Solutions
List of Goals Identified
1. Risk Management
2. Cash Flow Management
3. Retirement Income Funding
4. Grandchildren’s Education and Financial Care
5. Special Goals- Nick and Sarah’s mother
Why are they important goals to the client- main issues?
1. Risk Managements
Sarah and David presently do not have an emergency fund set up to address any emergencies that could come up unexpectedly that would have an impact on their income. Basic financial planning calls for at least 3 to 6 months of the net tax take home income to be set up as an emergency fund. These funds should be placed in a high-interest bearing account to access funds easily.
Sarah and David had been investing in stocks through a broker over the years, and they thought they had a fairly strong tolerance for risk. It is during the year 2008 when the Global Financial Crisis hit, and the couple’s portfolio values decreased 30 percent. After the Global Financial Crisis, Sarah and David realized that they are more risk-adverse than they thought previously.
Despite Sarah and David having limited knowledge in investing, the couple does not wish to see their portfolio take such a dramatic decline ever again, not when they are planning to retire in four years’ time. Sarah and David have agreed that they are in need of an advisor who will direct them towards strategies that involve less risk, maintain their wealth and lifestyle goals of traveling, becoming snowbirds, and possibly purchasing a winter home in Arizona or Florida.
Besides David and Sarah have more than $2 million in investable assets. These assets require not only to be invested but also maintained. The assets are expected to increase once David receives his share of his father estate. David’s sister Helen is against the idea of selling their father’s estate whose value is $1.5 million. The invested assets are also expected to increase when they sell Sarah’s dental practice in the next three to four years. At the moment, Sarah and David are not aware of the value of the dental practice. Grandchildren’s Education and house down payment
2. Cash Flow Management
The total income from the dental practice is $1.5 million annually. The annual expenditure that includes paying the hygienists, David, a receptionist, and advertising, are $800,000. The practice generates almost $400,000 annually for Sarah’s salary, as she has been working longer than the other dentist and sees more clients.
David’s elderly, widowed father died within the past month back in Australia, and left behind the property on the continent’s Gold Coast, estimated to be valued at approximately $1.5 million CDN. Although he had not done so, David is considering traveling back home to settle his father’s estate with Helen, his older sister. Helen, who resides in Australia, wants to keep the property in her family, so her children can enjoy it in the future. Since he lives in Canada, David has no interest in the property.
3. Retirement Income Funding
David gave up on his lifestyle of traveling to help Sarah establish the dental practice. The two of them are working in dental practice full time. At the age of 63, the couple has discussed retirement within the next three to four years. Winding down her established dental practice presents Sarah with some options, and she is seeking guidance to ensure her, and David makes the right choice not just for themselves, but the other dentist and their staff. Sarah is proud of all she has accomplished over the years, and although she realizes retirement will allow her and David to spend more time together traveling and enjoying life, she wants to do what is best not only for her but the business she spent so much time creating. One other main aim in retirement is to have sufficient funds to support spending $10,000 – $30,000 annually for world travel.
In addition to world travel, the Sarah would like to develop a financial strategy to spend every winter in the southern United States, in either Arizona or Florida, by purchasing or renting a home. In this case, we will have to determine the most convenient option between buying and renting a house for vacation.
4. Grandchildren education and financial care
Sarah and David want to secure the financing of their grandchildren education. They want to ensure that their grandchildren are given every opportunity to pursue their dreams. Sarah and David want to be sure that they make right decisions in managing their $2 million investable assets. They also want to leave money to be used to pay down payment on their first homes in the future.
Both Danielle and Jason has benefited from his parent’s generosity, with them paying off their university education and contributing towards the costs of their wedding and down payment for their houses. Sarah and David have four grandchildren, all under the age of five. With David and Sarah’s wills out of date, the couple wishes to update their wills and leave money for all four grandchildren to be used towards their education, and the down payment on their first homes in the future. They are unsure about the best options available for them and their grandchildren and need guidance.
5. Special Goals- Care for Nick and Sarah’s mother
Nick is the youngest of David and Sarah’s three children. He was diagnosed with autism when he was still a child. Due to autism, Nick can only hold minor jobs in a food service sector, where the wages are small. The income that Nick gets is not enough to maintain him. Thus, it is important that his parents plan on how to meet his financial needs for the rest of his life. Sarah and David also want Nick to be independent so that they don’t have to worry that he is all by himself. Currently, he stays with his parents and enjoys simple pleasures, such as walking the dog, fishing with his father, meeting friends and accompanying his parents on short hiking trips.
At the age of 78 years, Sarah’s mother Mavis moved to low-level care section of a local aged care facility. Although she was still mentally and physically strong to take of herself, the death of her husband made it difficult to take care of herself, and also she felt lonely. The death of her husband was as a result of cancer. Mavis was a housewife, and she receives 50 percent of her late husband’s pension as a survivor, along with Old Age Security (OAS), and money from the Canada Pension Plan (CPP). The money is still not enough to cover the cost of her care which about $70,000. To pay for her care, she sold the house in which she lived with Harold for $200,000, at the moment she used all the money in paying for her care.
Section 1: Potential Solutions
Goal 1: Risk Management
Sarah and David are 63-year-old. At this age, they should be more conservative with their investments. The two are planning to retire in the next three to four years. Thus, this is not the time to risk their investable assets that are more $2 million. Sarah and David though they have a high level of risk tolerance until they lost 30% of their investment during 2008 global financial crisis. Investment options with minimal risks are characterized by a low return. Low return on investments is not the main factor in determining the best investment strategy; instead the major factor of consideration is to maintain the investment. The couple is planning to retire in the next three to four years. Thus, they do not have time to recoup losses thus it is essential they shift their risk.
Solution 1- Invest In Liquid Assets
The Invest in cash equivalent assets is a type of investment that is mostly used in Canada. It includes treasury bills and the short term deposits. They are known as liquid assets since they can be converted into cash easily. Their returns are lower but have a very high degree of security.
Advantages 1
They are easily converted to cash that accompanies the advantage of being a financial cushion in cases of emergencies. Liquid assets are necessary to Sarah and David because they are easy to sell.
Advantage 2
Liquid assets have lower risks as compared to the non-liquid. During the matters of the financial crisis, the couple did not have to worry about who could buy their non-liquid assets. They cannot loss value because they are insured by the Canadian government so they can be termed as unlimited.
Disadvantage 1
The Liquid assets are associated with the investment returns that are limited. Their returns after a certain period are only dependent on the holding cash. A big disadvantage that makes the liquid assets to be discouraged is that they do have very minimum interest rates. To get greater interests, financial bodies have to make the investment stay for a long time that is not economical at all. During deposits, there should exist certificates that include general yield returns that if they do not exist, there will always be a fine for any transaction that is made. The strong returns of the liquid that has a disadvantage of one waiting for the stock selling that have high risks.
Disadvantages 2
Sarah and David have the risk of not growing their investment in an effective way if the proper measures and the rules are not followed. This factor applies if the family wants to spend some of their cash, they can easily convert the available liquid cash that will not change their budget.
Solution 2- Invest In Growth Assets
Another solution that can be taken by the couple is investing in growth assets. Even though they had had the chance to invest in stock, there would be no harm in repeating the act again. Investment on stock returns has high returns as compared to other opportunities. High risks come with the availability of greater rewards in the market.
Advantage 1
Stocks have always had high rates of returns as compared to other assets over the long term. Housing, bonds, and cash are some of the assets that have not had high returns than the stocks. This factor gives the stocks a high advantage that should be taken into consideration. Market downturns have had fewer impacts when investing as a comparison to the investment in equities. This idea has been raised by the competition that has been started by the rapid change in technology. The results have been majored to only ten years period.
Advantage 2
The advantage of inflation proofing should be taken as major to the liquid assets. As inflation is set to have increase in the next coming years, most of the central banks have had to do quantitative research on the idea of inflation. In most parts, inflation has had high increases that the interest rates. The preference of the growing of income over a long period to the equities which has the main focus on income.
Disadvantage 1
The Drop in share price is not always within the control of any company. They always have the effects on the value of the share price. It depends on how the share price is controlled by most of the companies.
Disadvantage 2
Also, share prices can be affected by the economic turn downs that are always affected seasonally. Stock markets keep on fluctuating as one invest for long run yields. The investing in the stock market should be done on a ten-year view that will involve the companies all efforts and facilities for the investment.
Goal 2: Cash Flow Management
Sarah and David need a cash flow budget that focuses their attention to direct their maximum allowed cash flow towards paying off all their loans as soon as possible. Once they have completed paying the loans, Sarah and David can then start to apply their increased cash flow to accumulating wealth and also increasing their net worth with an efficient tax focus while maintaining their current lifestyles. Selling the dental practice will contribute to retirement funding.
Goal 1: Evaluation of the Dental Practice
Solution 1- Rule of Thumb
Rules of thumb method can be used to determine the value of Sarah’s practice. This method is common among practitioners and is used to determine the value of personal assets. In Canada according to the most common rule of thumb is that value of the practice is 50% worth of the goodwill plus the value of the equipment.
Advantage 1
The rule of thumb is simple to use. This method is mostly used by individuals who limited information on evaluation.
Advantage 2
The data required to be used for computation is readily available in the organization. One does not have to search in data from the various databases.
Disadvantage 1
The method is characterized by misapplication of the numbers in the computation of the value of assets. This is as a result of insufficient knowledge in the use of the value computation formulae.
Disadvantage 2
The formulae of calculating the value of practice vary from one country to another. For instance, in the US the value of the practice is 60% the worth of goodwill plus the value of the equipment.
Solution 2- Market Approach
Market approach method can also be used to evaluate the value of Sarah’s practice is the Comparable Market Analysis. To determine the value of the practice one conducts a comparable study on the recently sold practice within the same geographic location. This method tends to provide more accurate evaluation of the practice compare to the rule of thumb.
Advantage 1
The method produces a relative accurate evaluation of the practice. Thereby ensure that Sarah sells her practice at a fair market price.
Advantage 2
The method involves less computation thus less chance of making errors. Instead, one take the time to search information over the internet.
Disadvantage 1
The information required in most cases is not readily available on the internet. This is also a chance that important details are omitted to the data shared with the public.
Disadvantage 2
The method fails to take into important account information such as the age of the equipment.
Goal 2-Practice Sale Options
After the evaluation of the practice, Sarah and David want to sell the practice in the next three to four years. Sarah wants to do what is best for the practice and also for the family. The two option of selling dental practice discussed below are an Associate Buy-Out and Direct sale.
Solution 1- Associate Buy-Out
Under Associate Buy-Out, the associate takes six to two years to buy-out the Sarah. This option gives Sarah the option to stay working in the practice under the associate. But the intention of Sarah is to sell the practice and spend some quality time David. Sarah will have a chance to mentor the associate, and the associate takes a time to learn the secret of the practice before buying the practice. In case the associate changes mind there is still a chance to work away. This may result in frustration on the side of the seller. Thus, it is important to have formal agreement between the associate and the seller. The associate should also commit himself or herself to the practice financially at the start of the process. Also, all the details are agreed upon between the two parties to avoid conflicts and misunderstanding.
Advantage 1
There is a high possibility of smooth transfer of ownership of the practice. The associate takes to time interact and understands the staff that increases the chance of smooth transition.
Advantage 2
The associate gets to learn the secret of the practice before buying it.
Disadvantage 1
The process is time-consuming it takes six months to two years.
Disadvantage 2
This option is risky to the seller. The associate can have a change of mind after learning the secret of the practice.
Solution 2- Direct Sale
A Direct Sale takes place after one to two months after the parties agree on terms and condition of purchase. The process involves the following evaluating the practice, advertising the practice, meeting with the potential buyers, and finally transacting. The above step takes approximately a period of six months. The proprietorship is transferred at closing, and the new proprietor takes over patient care and administration of the practice on day one.
Advantage 1
Under Direct Sale, there is reduced the chance of conflict. This is because direct sale avoids the personality conflicts.
Advantage 2
The time taken to complete the transaction is less compare to Associate Buy-Out, which can take up to two years.
Disadvantage 1
Direct sale fails to consider the way forward for the staff members and even the patient care.
Disadvantage 2
The buyer buys the practice with limited information. For instance, if the reason for the sale is as a result of the medical practice issues, the buyer may not be aware.
Goal 3: Retirement Income Funding.
From our discussions, Sarah and David want enough retirement income to maintain a similar retirement lifestyle as they enjoy now. They also want to travel extensively, live a comfortable life, entertain friends, maintaining their focus on healthy living. Sarah and David want to be able to spend $10,000-$30,000 on travel every year. They have spent more than 30 years saving for retirement at the age of 63 it is time to convert savings into retirement income.
Solution 1-Annuties
Sarah and David are approaching retirement, and they seem to be on the conservative side of the fence. The two clearly state that the do not wish to see their portfolio take a dramatic decline. To maintain their assets, annuities seems like an attractive option. Annuities offer a certain income for a period defined in the annuity policy, preventing one from making major losses in investment, and they do not require to be managed by an individual. Thus, annuities are an attractive option to Sarah and David.
Advantages 1
Annuities guarantee one an income stream that is unaffected by the market condition. The stock market is becoming more volatile, and the life span is increasing. Hence, annuities are key in maintaining investable assets. Also, annuities with varying size and shapes are available today. It is important that one understands the type of annuities that serve client better depending on their needs and goals. A cashable annuity is the better option for Sarah and David as it provides a guaranteed payout that is not less than the original premium. With a cashable annuity, in the case of death, the named beneficiary receives a lump sum equals to the difference.
Advantage 2
Another advantage of annuities is that the tax on the investment is deferred. Profits gained from investment under annuity are not taxed until the money is withdrawn. Unlike Registered Retirement Saving Plan, annuities do not have a limit on the amount of money that is placed on them. Sarah and David can place any amount of money they want into the annuity; this will result in cost saving from taxation. The income from the annuity depends on the amount of money placed into them. Sarah and David can place money in an annuity that will guarantee enough money to meet the expenses of Nick for a lifetime. The flexibility on the amount of money one can place into the annuity, give annuities an added advantage over Registered Retirement Saving Plan.
Disadvantages 1
Even though annuities have a potential to generate tremendous benefit to Sarah and David if they are used correctly, they tend to complex to those with limited information on annuities. Sarah and David agree that that they have limited knowledge on investing. Thus, it is likely that contracts such Indexed and variable will be complex to them. Even seasoned investors at times have difficulty understanding annuities. Thus, Sarah and David require a great deal of education to understand how annuities work.
Disadvantage 2
Annuity Withdrawal Penalties is another disadvantage of annuities, majority annuities contracts have a back-end abating the surrender charge schedule that expires with a range of one to ten years from the date when the annuity is purchased. The surrender charge in the first year of annuity purchase can be as high as 10 and even 15 percent, the surrender charge then declines by one or two every year before expiring. Nevertheless, some annuity carriers allow investors to access a percentage of the money in their contracts under certain conditions.
Solution 2- Registered Retirement Income Fund
The second option is to convert Registered Retirement Saving Plan (RRSP) to Registered Retirement Income Fund (RRIF). Sarah and David are 63 years old, and it is necessary that they convert RRSP into retirement income. At the age of 63, Sarah and David will benefit from the tax-free transfer of Registered Retirement Saving Plan fund to Registered Retirement Income Fund. Above the age of 71 years, one can one can no longer transfer RRSP funds to an RRIF on the tax-free basis. In case, Sarah and David transfer their RRSP saving to RRIF at the age of 63 years they will start receiving retirement income at the age of 72 years.
Advantages 1
Estate preservation in that if there’s money left in RRIF when one dies, it goes to beneficiaries or estate named. This money will be subjected to taxes unless it goes to your spouse or common-law partner. The RRIF can be used to buy the annuity that guarantees income for a fixed period.
Advantage 2
Registered Retirement Income Fund is more flexible compared to annuities. RRIF offers flexibility to determine the amount of money to withdraw, and also one can increase the amount of money invested with a lot of ease if the limit is not exceeded. In contrast, the income from annuities is fixed which result in loss of flexibility but result in stability of the income.
Disadvantages 1
RRIF is allow one to determine the amount of money to withdraw. Thus, Nick has to handle benefiting from RRIF. The more funds he withdraws in the short term will result in less money available into him long run. RRIF does not grantee payment over a lifetime it all depend on the amount of money withdrawn; it can be limited to some years if the amount of money withdrawn is high. The expenses vary from years to year, to reduce the risk of Nick running out of money, Sarah and David should combine annuities and RRIFs.
Disadvantages 2
The marginal tax rate depends on the amount of money withdrawn. In case one decide to withdraw a large amount of money. One will end up losing more money to the tax man. Thus, withdrawing a large amount of money will not only make the RRIF run out of money but also pay more tax.
Goal 4: Grandchildren Education and Financial Care
Payments for college and university education are one of the best gifts that a grandparent can give to their grandchildren. The right channel for contribution should be made in the process so as to avoid the instance where there is the declination of funds. This approach will help the value of the money that has been put to education grow faster after a short period. The best approach is the contribution to the Education savings plan that will have the reduced taxes. One should not only stick to this method since there are other methods that can be used.
Solution 1- The Registered Education Saving Plan
The Registered Education Saving Plan (RESP) is one of the plans that has been sponsored by the Canadian government that majorly focuses on the post-secondary education. The subscribers make payments that build up tax-free that they cannot deduct any payments. The government also have some contributions to the plan which aid in the supporting the subscribers that will make contributions grow at a fast rate.
Advantage 1
There is a high yield on the investments that are made in the plan. Taking an example of first $2,500 in RESP contributions a year receive a matching 20-per-cent grant from the federal government. This contribution growth is only in a year, and if calculating are done for more than a year, the yield will have grown at a high percentage.
Advantage 2
REPS is one of the educational savings plans that has been made to cater for educational purposes. Only the proof of the student’s enrollment should be done to make the correct transactions and be accepted.
Disadvantage 1
There is the increased inflexibility that is experienced. This factor comes up when there is no freedom on what to do with your earnings. Individuals will have to stick to the educational factor only such that the money will only be used for educating and not any other thing. It has no limit on the amount of money that you will have to save in the plan. Students can do their higher education still within the plan, and there is no cost that will be incurred.
Disadvantage 2
The greatest disadvantage is that most of the students will not have the mind to pursue their higher education. Their parents will have invested their capital for other people who will have the thinking of taking higher educations. If a parent passes a certain age, the refunding of the money can be impossible even if the child cannot go the college or the university level of education. This disadvantage has made most of the people not to have the concern to do their savings in the plan.
Solution 2- Trust Accounts
Another option in the taking of grandchildren education financially is by the use of Trust Accounts. This organization is an unregistered investment account that one can use to save future education costs. Consulting of lawyers should be done before the setting of such an investment plan because it has risks that come with it since it has the lack of terms and conditions. It can provide a platform for the saving of education together with other daily activities plans.
Advantage 1
The main advantage of Trust Account is that there is no maximum limit that is applied which is basically through an in-trust account. Another advantage is that even if the child does not go for higher education, the money can be used for other purposes by the child without any limitations.
Advantage 2
Trust Accounts offers tax saving opportunities. This opportunity will be of many beneficiaries if the savings are for a child’s education purposes only.
Disadvantage 1
The contributors to Trust Account are likely to pay more to the taxman due to the interest and the dividends that are earned. Taxes can be done away with if there is the correct setting up by having the capital gains taxed separately.
Disadvantage 2
Another disadvantage of Trust account is that the fund can be used for another purpose apart from education. This is likely to result to the Trust Account failing to care of education financially as planned by Sarah and David. Under Trust Account, the grandchildren have more freedom to use the fund that is not even accessible to contributors.
Goal 5: Special Goals- Nick and Sarah’s mother
Sarah is very close to her mother, she usually contribute $30,000 yearly for her long term care. Mavis sold her house to cater for her care, and she goes to the extent of using all her benefit to pay for the care. Even the income she gets is no longer enough to pay for her care; it show that Mavis does not want to bother her daughter. Sarah expects that her mother will be dead before she retires, it is necessary to take to consider the possibility that she might be alive when she retire.
Knowing that their autistic son Nick requires care, David and Sarah want to plan their estate so his financial needs will be taken care of for the rest of his life, separate from any inheritance to Jason and Danielle.
Solution 1- Registered Disability Savings Plan
Sarah and David are concerned about the future financial well-being of Nick. The couple is considering the possibility of establishing a registered disability savings plan (RDSP) for the Nick but they are not sure if he qualifies for RDSP. Nick receive $1,500 for Disability Tax Credit from Canada Revenue Authority. Thus, he qualifies for RSDP. It is important to note that, funds placed into an RDSP can grow on a tax-deferred basis and guarantee future income for Nick. With RDSP Nick can also benefit from the government grants. The RSDP will result to tax cost saving as the income from RDSP is taxed as income of a disabled person. The only money taxable in RDSP is the gain as a result of the contribution, but the income tax does not apply in the event the contribution made to RDSP is withdrawn. Income from RDSP is a combination of taxable income and tax-free contributions.
Advantage 1
The main advantage of an RDSP is that money earned in the RDSP is not taxed until paid out from the RDSP account. Consequently, this lets income to be compounded on a tax-deferred basis for the interest of the disabled individual. In other words, a 5 percent gain inside the RDSP is a 5 percent gain, not a 2.5 percent gain after taxes. Thus, the power of compounding comes into play, for instance, if Sarah and David contribute $200,000 to RDSP and pay monthly amounts of $308.61 and earning a constant 5 percent rate of interest will have amounted to $980,090 after 54 years.
Advantage 2
Another advantage of RDSP is that one is not restricted on how to use RDSP money. Both the provincial and the federal government lack the restriction on how to use RSDP. Nick can use the income from RDSP the way he wants. As much Nick qualifies for RDSP, he works in a food industry, and Sarah and David want him to be independent, Nick is capable of making an informed decision on how to use income from RDSP.
Disadvantage 1
In the event where Sarah and David are dead who are the holder of the plan can be, Nick will probably be the holder of the plan if he is mentally competent. However, there is a possibility that Nick will not be mentally competent. Thus, the need for property guardian arises. In most cases, The Public Guardian will take the responsibility for managing these plans. If it is necessary to apply for a property guardian, difficulties will be experienced in obtaining bonding.
Disadvantage 2
If the Nick is mentally unable, he will not be able to make a will. As a result, letters of administration are required to distribute the RDSP of the beneficiary when Nick dies. This problem can be avoided if Sarah and David use the testamentary discretionary trust as the method of providing for Nick.
Solution 2- Lifetime Benefit Trust
Another option is that Sarah and David have been the Lifetime Benefit Trust (LBT). LBT’s aim is to address the complication that arises in case Nick become mentally incompetent. Under the LBT proposal, Sarah and David can leave their RRSP or RRIF on a tax-deferred foundation to a trust meant for a mentally incompetent and financially dependent children. The terms of the trust permit the trustees to distribute incomes to the beneficiary. The trustees have discretionary authorities to make distributions, taking into account the needs of the beneficiary, including his or her well-being, care, and maintenance.
Advantage 1
The advantage of the Lifetime Benefit Trust is that the properties are placed in a trust. This means that the Nick does not have the total right to withdraw the funds on call. Instead, the trustee of Nick’s LBT is the one who determines the amount of money Nick will get. The trustee can defer the distribution to Nick to a later date depending on the amount of money he is earning food industry.
Advantage 2
The assets in the Lifetime Benefit Trust are sheltered from certain liabilities Nick may encounter, such as if Nick is declared bankruptcy, in the case of car accidents and definite other types of lawsuits.
Disadvantage 1
The beneficiary freedom to use the money the way he sees fit is limited. The trustees have discretionary powers to make distributions, taking into consideration the needs of the beneficiary, including his or her comfort, care, and maintenance.
Disadvantage 2
The Lifetime Benefit Trust requires the property to be re-registered in the name of the trust. The process is cumbersome and there payments to be made such as filing fees.
Section 2: Analysis
Risk Management
David and Sarah should be prepared for the uncertainties that may fall their way in terms of their investments, their son Nick, their retirement lifestyle, and inflation or financial predicament such as the 2008 global crisis. David and Sarah need to diversify their investment options into ways that are more conservative and less risky, to shield themselves from the effects of large financial losses that may crash all their income sources or deplete them within a short time. The investment into RRIFs is their primary income source; however, other investments into annuities and stocks may be a way of guaranteed income source. They also have to plan for the life of their autistic son Nick, to whom they are to provide support in terms of estate inheritance. David and Sarah also have to plan for a comprehensive health cover for Nick to guarantee insurance contributions are made every month. To insure Nick, David and Sarah have to ensure they set up an emergency fund for him and also for the family, clear all the debts that are billed on their assets that they will transfer to Nick, and increase the value of disability income that is at Nick’s disposal. For the emergency fund, David and Sarah have to plan for 3 to 6 months of net tax take home income to be set up as an emergency fund. David and Sarah should be committed to paying minimum premium monthly till their emergency fund is entirely financed. David and Sarah also need a life insurance that will cover their traveling vacations and winter snow birding. The insurance should be a comprehensive cover to avoid draining their money in the short term. Taking up permanent residence in the United States will prompt a supposed disposition of all the Canadian property that David and Sarah owns. The resulting tax bill from such convictions is hefty, and hence, David and Sarah need to understand cross-border tax and financial issues before buying a permanent home in Arizona or Florida.
Solution 1.1
Converting their assets into more liquids assets would give readily available options of David and Sarah converting them to cash when they need them. Liquid assets are a viable option if David and Sarah forego the option of setting up an emergency fund. They can also come in handy if an event requires more money that what will be held in their emergency funding. The $800000 that David and Sarah hold in stocks is a target fund source for this kind of risk funding since most of the money is in liquid assets and conversion of the rest won’t attract heavy taxes.
Solution 1.2
Growth assets investments usually include investing in the stock markets, mutual funds, and segregated funds. The interest earned from these options is higher when the risk is more. David and Sarah already have some of their money invested in the company’s stocks. This option would see about $1600000 that they hold in RRSP be transferred into stock investments. The RRSP needs to be converted into RRIF to allow these investments in a tax conservative manner.
Cash Flow Management
David and Sarah plan to dispose of the dental practice once they retire in three to four years’ time. The tangible assets of the practice are roughly valued at $650000 according to the current market. Since it has not been appropriately valuated, Sarah and David should hire a private property valuator to assess its net worth before putting it on the market. With revenue of $1500000 annually, the clinical center can be valued in between $1000000 and $2000000. The proceeds that David and Sarah receive from the sale of the practice should be directed towards retirement investments and estate inheritance planning. David also expects to cash in on his inheritance from his father in Australia. The estate that they are to share with Helen, his sister is valued at $1500000. When shared equally, David is to receive more than $700000 from the house sale. The income generated from these avenues need to be distributed in accordance with the needs of David and Sarah. Some of the money should go to retirement income, some as part of the inheritance to their children, and also a contribution to their grandchildren’s education and first home cover.
David and Sarah also need to be equipped on how to manage the cash flow of the money that they expect from several events soon. They expected a lump sum from selling the dental practice that has a net worth market value of $550000. David also expects a share of his father’s inheritance since he hopes to sell the estate that they are to share with Helen, his sister. Split equally, the value of the estate guarantees that David will receive about $750000 should Helen agree with him on selling it. Alternatively, if Helen keeps the building and takes some credit settle David, the net capital that he gets is around $600000. The monies need to be converted from the prospective need to be managed carefully to not only satisfy the needs of Sarah and David but also of the son Nicki.
Solution 2.1
Valuation of the dental clinic will make the practice to be sold at its actual and best price to benefit both Sarah and the buyer. The price of the practice, when valuated in this manner, comes to between $1100000 and $1400000 since the value is the assets of the practice plus 30% to 50% of the gross income.
Solution 2.2
The market approach method is also viable especially since it would allow Sarah’s dentist partner to buy out the practice over time. David and Sarah should sell out the clinic in a way that allows them to stay until they retire. This sale can be through the buyout option to the partner who would allow Sarah and David to stay as employees until they retire in three to four years.
Retirement income fund
Sarah and David want enough retirement income to maintain a similar lifestyle in retirement as they enjoy now. They also want to travel extensively, live a comfortable life, entertain friends, maintaining their focus on healthy living. Their desirable expense for travel around the world amounts to between $10000 and $30000. In addition to these travel expenses, they also plan to have enough money to rent or buy a house in Arizona or Florida in the United States, which shall be their destination for winters. Currently, David and Sarah have been individually contributing in their Registered Retirement Savings Plan (RRSP) accounts, whose amount has totaled to $500000 and $900000 respectively. The total amount of assets invested by the couple in stocks and term deposits is $900000. The total investment assets for the duo are $2356000, with the remaining $56000 being held in Tax-Free Savings Accounts, equally split among the two. Another important factor that is considerable while planning for their retirement income sourcing is the expected capital to be raised from the sale of Sarah’s Practice. David also considers his share of inheritance form his father’s home to be used as part of the travel funds that they will need once they retire. The RRSP fund is an important consideration in determining the Janten’s retirement income source. The amount in the RRSP accounts has to be converted to an income-based investment asset by the time David and Sarah retires and the practice is sold out. The investments that are held in risky portfolios such as stock assets should also be converted to more conservative options. The options that are applicable in their case include conversion of their money into a regular stream of income through annuities or convert the money from RRSP to a Registered Retirement Income Fund (RRIF).
Solution 3.1
An annuity is a contract that a retiree signs with a life insurance corporation, as part of the retirement income fund. Under this type of contract, David and Sarah would be required to make a lump-sum cash payment to their preferred life insurer. This money could come from the RRSP accounts or other investments. They would then be receiving a guaranteed income stream payable for a specified period or as long as they live. To withdraw their money from their RRSP accounts, they would be taxed heavily for lump sum withdrawal. They also have the option of buying the annuities directly from the funds in their accounts. An RRIF plan is where one converts the retirement savings into a retirement income source. David and Sarah have an option of converting their accumulated amounts of saving in their RRSP account into an RRIF income plan. The conversion is tax-free for individuals up to the age of 71 years, and thus David and Sarah would still be tax-exempted if they decided to do the conversion after they retire. The money that is being held at the RRSP up until the time David and Sarah will retire can only be converted into an RRIF, annuity, or withdrawn as a lump-sum. The latter of which would attract a tax with no set deference of tax on all investments, if any, that are carried out by the money.
Solution 3.2
The RRIF income fund serves the purpose of the income source for the retirees. David and Sarah should convert their RRSP into an RRIF fund to ensure continued income source, payable monthly. The income fund is flexible and can be adjusted to meet the needs of the retiree, depending on the set rate or amount of pension to receive monthly. The individuals would handle managing their money and hence capable of fulfilling their needs in the short term or ensuring extended income over the long term. The monthly receivable pension is taxable accordingly whereas any earning on the investments in an RRIF is not taxable. The RRIF account can hold assets in terms of bonds, stocks, mutual funds, etc. while there is a minimum amount of money that one must withdraw per year, there is no maximum limit on the withdraws. David and Sarah should convert the $1400000 savings in their RRSP accounts into an RRIF fund to ensure they will receive guaranteed income for their lifetime. Another option would convert the savings into income fund in four years’ time once they retire. The savings fund will have increased to about $1600000, which guarantees longer and higher income benefits.
Grandchildren’s Education and Financial Care
David and Sarah feel obligated to cater for their grandchildren’s educational cover and also contribute towards them buying their first home. The options available for them to fulfill this option are to fund education policies that shall cover their grandchildren’s education in the future. The education cover is, however, different from the fund that they set aside for each of the children to aid in purchasing their first principle residences once they are done with school. David and Sarah should thus have a Registered Education Savings Plan (RESP) for each of their grandchildren. Annual contributions should come from their retirement investments.
Each grandchild’s plan requires to be funded with the maximum amount of $4000 annually totaling to $16000 for the four children. With these contributions, each child’s account will be eligible to receive the maximum government grant on the $2000 while the remaining $2000 shall grow tax deferred for use by the children during their education. David and Sarah should advise their children, Jason, and Danielle, to invest their children’s RESP funds in a balanced fund to help their funds grow. David and Sarah should also fund an inheritance contribution geared towards helping their grandchildren purchase their first residences. The fund should be invested in a balanced fund, with the prospects from the fund being used by the children to fund their personal needs during their educational period. With the help of a lawyer, David and Sarah should also update their will and inheritance plan to capture their wishes. Estate planning for inheritance by Nick is also important for David and Sarah to consider so that they can lay out the strategies of settling the debts on these assets to ensure they don’t transfer them to Nick.
Solution 4.1
An RESP would help the children be in a position to fund their post-secondary education from the funds in these accounts. Contributing the maximum $4000 into each child’s accounts helps them to earn free government grants. The growth of a part of the fund in tax-deferred status also helps the fund to grow hugely over the span of the 18 years. The contributions can be part of the expenses that David and Sarah will be covering using their annual retirement income. Planning of this disability plan should be well captured in their inheritance will so as to ensure that the details regarding the estate transference to Nick are clearly outlined.
Solution 4.2
David and Sarah can opt to open ‘in trust’ accounts in benefit to the grandchildren. This account can incorporate different saving needs geared towards the specific requirements of the person entrusted to it. With the proper considerations and advice, an in a trust account for each of the children can be aimed at providing their educational needs and also contributing to their purchase of the first permanent residence. The amount of money that David and Sarah can contribute towards each account is unlimited, but there is no tax deferral system for these accounts. Uncertainty on spending the money once the beneficiaries have control of the accounts is also at stake, and it might end up not fulfilling the purpose of education that David and Sarah intend.
Special Goals (Sarah’s mother + Nick)
Sarah has the concern to take care of her mother who is in a long-term health care facility. Mavis is expected to have passed by the time Sarah retires from practicing dentistry in three to five years’ time. Sarah currently contributes about $30000 annually towards her mother’s long-term care since she just moved into the high-level section. Mavis cannot feed or walk herself and at her current age of 90years, it is expected that she will pass away anytime in the period of the next five years. With an expected salary of over $350000 for Sarah before she retires in the next four years, it is possible to continue contributions towards her mother’s care for the remaining lifetime. Even if David and Sarah coverts their RRSP funds into an RRIF income source, the $30000 expense contributed towards Elvis’ care can be converted into a travel expense once the couple retires from the dentist practice. Additionally, David and Sarah need to manage their estate that they are planning to be inherited by Nick. They should ensure they settle all debts regarding the property and also put into place a mechanism that will allow Nick to meet the tax and utility bills that will be imposed on the house.
Solution 5.1
RDSP contributions are tax-free and Nick is fully qualified for the funds due to his disability. Nick receives an annual disability tax credit of $1500 from the Canada Revenue Authority, an indication that he qualifies for a disability savings plan. The annual contributions to an RDSP account from David and Sarah should amount to $3000. With these contributions to the tax-deferred interest earning account, David and Sarah can be assured of Nick’s self-maintenance from the fund. The amount that accrues from the accounts earns an untaxed investment interest of about 5% per annum. The RDSP contributions can be surpassed by the interest that accrues in a short time between five to ten years. The plan puts Nick in a protected care since the money can be used for any need that he requires money to accomplish. With this investment account on the disabled Nick, amount accruing for ten to fifteen years is sufficient to cater for Nick’s future estate tax as well as utility bills. The option is viable because Nick has demonstrated the ability to manage finances from the wages that he receives from working in a food resource
Solution 5.2
An LBT for Nick is applicable if he seems mentally impaired in such a way that it affects his financial management skills or prohibits him from making sound decisions on what to do with the money. The LBT is placed on Nick, and a registered trustee is appointed to manage his finances and help him withdraw any money he would need. The option is less preferable in Nick’s case since David and Sarah admit that he can be able to manage himself in his house. When they move Nick out to help him learn to live on himself, David and Sarah shall have raised the potential of Nick being less dependent and thus raise his management skills. The property that David and Sarah expect Nick to inherit is also put into the light with an LBT since all the property shall be registered under the name of the trustee about the beneficiary. With the preparations that David and Sarah are planning in terms of their estate inheritance to Nick, this option seems shadowed, and the best option in this case is to focus on an RDSP investment fund for him.
Section 3: Recommendations and Rationale
Risk Management
Recommendation
Sarah and David should invest in highly liquid investment assets to serve as their emergency funds alternatives. With the $800000 that Sarah and David currently hold in stocks, they should invest in more liquid assets. The logic of an emergency fund alternative is to allow high access to capital at any time when the need arises. The risk of any emergency is also covered partly by the investment in self-managed RRIF account which can allow adjustable withdrawal as long as the tax deductions are made. The options leave the investment exposed to tax systems, but it is applicable for stocks due to the Canada’s lower investment taxes. The money invested in liquid investments and liquid assets such as savings or current account are quickly accessible and convertible to cash in a short time.
Rationale
David and Sarah have a hand in stock investment since they had performed well in their invested portfolio until they were hit by the 2008 global financial crisis. Currently, Sarah has $650000 of her savings invested in company stocks, while David has a net $150000 ninvestment valued for stocks. These options of liquid investments allow for quick cash recovery and conversion if ever David and Sarah require quick emergency funds.
Cash Flow Management
Recommendation
Sarah and David should sell their dental practice before they retire and also give room for a professional valuation and advice on the selling procedures. David and Sarah should hire a valuator along with a lawyer so as to be advised of; (1) valuation of the business using the best strategy and also in consideration to Sarah’s joint ownership benefits; (2) the best method of selling the practice once the value portion of Sarah is determined; (3)the procedures of the preferred sale method, either direct or buy out options; (4) the continuity of David and Sarah careers in the practice once the practice is sold out; and (5) the most opportune time of selling it out. David and Sarah should also be equipped with adequate knowledge on how to invest in the returns offered by the company sale. David is currently expecting in excess 0f $600000 as part of his father’s inheritance. The money is expected to fund their much-needed travel plans and vacations. The travel and vacations may not be adequately met until Sarah and David retire in three to four years and it should thus be invested into liquid investments to be accessible when needed. David should not count on his meager accounting knowledge to manage these funds but he and Sarah should also hire an accountant to aid them in carrying out the math.
Rationale
By selling the dentistry practice, David and Sarah have the opportunity of increasing their retirement investment cash and also raising cash to settle the debts, if any, on their estate. The valuation process validates to Sarah and her partner the real worth of their business, as well as each one’s share in that business. Tax payments are also considerably solved when professional advice is sought for toe ensure every piece of a fund that David and cSarah have in custody is taken care of.
Retirement income fund
Recommendation
Have Sarah and David convert their RRSP accounts funds into an RRIF as a source their income in retirement. The accounts funds are to be transferred at any preferable time once David and Sarah retire from the Dental Practice. The total fund to be converted into Sarah’s RRIF is more than $1000000 if she continues to contribute to RRSP until her retirement in three to four years’ time. David’s RRIF account shall be credited with about $550000 if he also guarantees to continue with the contributions. David and Sarah should thus continue with the contributions so as to ensure that there is growth in their investment fund. David and Sarah should also add up their NTSA savings into their RRF accounts so as to increase their funds. With the RRIF, higher investment ensures higher the sustainability of the funds in terms of longevity and higher income. The prospects that are to be realized from the sales of the clinic should also be used to contribute towards the funding of the RRIF. Forty per cent (40%) of the prospects from this sale is to be injected in the RRIF funding to increase the investment base. Thus, $400000 added up to the RRSP and NTSA savings gives David and Sarah an RRIF base fund of about $2000000.
Rationale
The RRIF fund will allow David and Sarah to enjoy continued income in retirement to sustain their preferred lifestyle of travels and winter vacations. The income prospects from the investment should be enough to allow them maintain their current lifestyle spending for more than 30 years after retirement. A fund base of $2000000 for the RRIF can sustain the duo for their next forty years of expected life. Considering that David and Sarah will drop their travel plans and hiking vacations when they advance their life by between fifteen to twenty years’ time, the fund invested in the RRIF is considerably sufficient to cater for their spending. At older ages, David and Sarah shall enroll into care facilities, which further cuts down their expenditure from the approximately annual spending of $250000 to about $80000 of care facility fees individually. The advantage that comes along with the RRIF fund is that they will name Nick as the beneficiary of the funds that shall have accumulated in the account at the time of their death.
Grandchildren’s Education and Financial Care
Recommendation
David and Sarah should contribute towards their grandchildren’s education through an RESP plan where they contribute a total of $4000 to each child’s account. A total of $16000 annual contribution towards their grandchildren’s education would ensure that the students can cater for their post-secondary education. Saving for the children in a period of between fifteen and eighteen years can be supported by the income from the retirement investments. David and Sarah also need to update their will to capture information regarding their inheritance preference. The will should capture information regarding Nick’s estate inheritance and also contributions to the children’s home fund. A balanced fund can be established to source the inheritance the children receive from David and Sarah.
Rationale
By making the RESP contributions, David and Sarah are lest assured that their grandchildren are guaranteed a covered education plan to see them through post-secondary education. The annual contributions are also supplemented by the government’s contributions towards the educational savings, which makes them remit $2000 for every $4000 that David and Sarah invest in every single RESP account for each child. The investments of the RESP is tax deferred, and thus, David and Sarah does not undergo hefty taxing from this contribution. A balanced fund set up for the children with an aim of funding their first homes also attracts good management options when managed from a balanced fund rather than from normal savings accounts.
Special Goals
Recommendation
David and Sarah to implement a strategy that will see them through to funding an RDSP fund entrusted to Nick. The savings they put on the disability fund should be maximum allowed of $3000 annually. With the retirement income from RRIF in place, Sarah and David should be able to fund the disability savings at least for the next fifteen years, a time at which the $3000 contributions shall be overtaken by the interest that accrues from the investment account. At that time, Nick shall have moved out to live in the community and taking care of himself according to Sarah and David’s wish. The investment shall allow Nick to take care of his rental needs while away from Sarah’s house. By the time they stop funding the disability account, they shall be moving out of their house into a care facility since they will be in their early eighties. This will leave the house at the disposal of Nick, which will cut down his need f spending on rent rather restrict his residence spending to property tax and utility bills. Sarah continues with the $30000 contributions that go to her mother’s care. The $30000 can later be used to cater for vacation house renting since Sarah’s mother is expected to have died by the time Sarah retires from the dental practice.
Rationale
With David and Sarah making disability contributions of $3000 annually in a RDSP for Nick, they will be saving highly in terms of tax deductions. The RDSP fund attracts an investment interest that is freed from taxing and hence any proceeds from the fund base are retained in the account. Added with the advantage of government contribution of $1500 towards every $3000 contributed, the funds shall have grown to self-sustainable amounts by the time Nick moves into his parents’ house.