CASE STUDIES

 

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FINANCIAL PLANNING

Tax - Investment - Estate & Trust
Planning - Audit

My objective is to create tangible financial benefits for my clients. I have found many ways to do this over the years. In the following paragraphs I have provided some representative examples.

Financial Planning College Planning,
Financial Aid, Etc.

My clients were experiencing downturns in their businesses with one child in college and one soon to start. They had substantial amounts in Uniformed Gifts to Minors Accounts (UGMAs). They were a good candidate for financial aid, except for how the financial aid rules treated UGMAs.

The UGMAs were invested in stock funds and some individual stocks that had declined in value significantly just before their oldest child started college. They did not want to sell the funds and stocks since they were hoping they would go back up. Therefore, rather than using their sonís UGMA to pay for his first year in college, they had used credit card debt.

They had made some mistakes that were costing them a lot of money. First, as children get closer to college, college funds should be moved from equities to short-term bonds. Had they been my clients a few years earlier, I would have had them in short-term bonds at the time the market went down. This would not have been a result of me correctly timing the market. It would have been the result of applying the philosophy that money to be spent within five years should be in short-term fixed income investments so as to avoid market risk.

Second, they had too much money in UGMAs. They should have used this money to pay for non-support obligations for their kids and then replace the savings with accounts in their names. Third, they should have used their sonís UGMA to pay all of his college costs so that they would qualify for financial aid in future years. Forth, they should not have held on to the UGMA investments in hopes that they would go up. Where an investment has been in the past is not important. The important thing is whether the investment is appropriate in the present and for the future. This was a classic case of investing based on emotion rather than logic.

I advised them that money to be spent within the next five years should be in short-term secure fixed income investments and that they should sell all the stock investments in the UGMAs. I recommended that they use the UGMAs first to pay for college and any other non-support expenditures they were paying for their children. This way once they depleted the UGMAs they would qualify for much more financial aid. I suggested they treat the amount they paid for their sonís first year in college as a loan and pay it back from his UGMA.

In addition, I advised them to refinance their home and pay off any remaining charge card debt. The mortgage interest was over 10 percentage points less than the credit card interest plus it was tax deductible. I also assisted them complete the financial aid paperwork in an effort to maximize the financial aid they would receive for the coming year.

Financial Planning Ė Retirement Planning

I prepared a retirement projection to identify the rate of return my clients needed on their investments to provide for a secure retirement once they fully retired, which they expected to do within a few years. I was able to show them the rate of return they needed to make their retirement plan work. This was important input into the appropriate investment strategy so that they need not take more investment risk than they had to or be too conservative and thus risk running short of funds should they enjoy a long life.

I illustrated the importance of optimizing their after tax rate of return by showing them that a 3% rate of return would result in them running out of money 13 years sooner than a 5% rate of return. I then made numerous recommendations towards the objective of increasing after tax return without increasing or in some cases decreasing risk.

Employer stock represented over 10% of their net worth. I advised them to sell this to avoid single company risk. A large percentage of their net worth was in money market and bank accounts. I advised shifting most of this to a portfolio of short-term high quality bonds to increase the return with a nominal increase in risk.

Over a third of their net worth was in Individual Retirement Accounts. I recommended that they hold their taxable bonds inside the IRA and hold stocks and municipal bonds outside of the IRA in order to maximize their after tax rate of return.

I advised that high quality municipal bonds would provide a superior return to the after tax yield from high qualify taxable bonds until retirement, thereafter, taxable bonds would provide a higher yield.

I recommended that they use cash to finance the construction of their vacation home since mortgage interest would cost them more than they were likely to earn on the cash given their conservative investment strategy. I advised them to pay off their mortgage on their primary residence for the same reason. I also advised them to cancel certain insurance policies since they no longer needed life insurance and the cash value could be better invested elsewhere.

The wife was retiring and had the option of starting to collect Social Security and her pension immediately or wait to normal retirement age. I determined and advised them as to their best strategy.

I inquired about their estate plan and determined that some additional work needed to be done to minimize the federal governmentís share of their estate.