1. A young couple (both age 30) come to a financial planner with the desire for assistance inimproving their family’s financial position. They have two healthy children, ages three and six. The husband is a foreman for a manufacturer of auto parts. His current salary is $30,000 per year. The wife is a marketing professor for a state university. Her current sal- ary is $40,000 per year. The couple recently purchased a riverfront home for $100,000 using their entire savings of $20,000 as a down payment. In addition to an $80,000 mort- gage, the couple’s only debt is an automobile loan having the balance of $12,000. Both husband and wife have very good family health insurance from their employers. The wife has employer-paid life insurance equal to two times her annual salary.
A. The couple wants to start an investment program as soon as possible. To correct the weak- ness in their financial planning before beginning the investment program, they should
1. Establish an emergency fund with stock mutual funds.
2. Start a college savings fund for the children.
3. Purchase disability insurance for the wife and the husband.
4. Prepare wills for the wife and the husband.
5. Secure credit life insurance for the auto loan.
a. (5) only
b. (1) and (2) only
c. (1) and (3) only
d. (3) and (4) only
B. When the couple are able to begin an investment program, they want to begin making investments for their retirement and their children’s education. All of the following ac- tions will help accomplish their goals in a tax-efficient manner except
1. Investing in individual Roth IRAs.
2. Investing through a 403(b) program for the wife.
3. Investing in a growth and income mutual fund.
4. Investing in education IRAs for each child.
2. Harold and Mary Anne Miller are a married couple in their early 40s with three children, ages 7, 10, and 12. Harold earns $350,000 per year as General Counsel of a mid-sized IT firm and Mary Anne is a homemaker. They have major assets of $1,500,000 cash and $1,000,000 in stock options. They have done no estate planning. Harold has life insurance of two times his salary from his employer. Harold plans on working full-time until age 62. Harold has the potential to receive more options and restricted stock based on his compa- ny’s performance, but has requested that this not be included in his assets for now given the uncertainty. College planning is of great concern to the Millers, currently they have no plan in place. They estimate that they will need $150,000 for each child in current dollars to fund their education. The Millers have constructed a budget and have determined that their household expenses are $12,000 per month, after tax. Assume that the Millers are in the 35% tax bracket and 6% state bracket.
Given the facts above, which is the most important piece of the plan that the Millers should implement first?
a. Establish wills with guardianship
b. Exercise stock options
c. Diversify cash investments
d. Establish an irrevocable life insurance trust (ILIT)