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114 Personal Financial Planning: Cases & Applications Textbook 11th Edition 2020
Today is January 1, 2020. Clara Morrish has come to you, a financial planner, for help
in developing a plan to accomplish her financial goals. From your initial meeting with
Clara, you have gathered the following information.
Personal Background and Information
Clara Morrish (Age 68)
Clara is a retired homemaker. She is a recent widow. Clara was born on April 15,
Tim Morrish (deceased)
Clara was married to Tim Morrish, who died November 1, 2019, at the age of 69,
after a brief battle with cancer. His date of birth was June 1, 1950.
Tim’s estate is in probate. Tim was employed 45 years as a supervisor at ABC Co.,
Inc. (ABC) before retiring at age 65.
They were married for 50 years. Clara’s health is fair.
The Morrishes’ Children
Clara has two children from her marriage to Tim: George (age 50) and Vince
(age 49). George and Vince are each married, healthy, employed, and self-sufficient.
The Morrishes’ Grandchildren
George and his wife, Kathy, have one daughter, Sarah (age 18). Sarah is currently
a senior in high school and will be a freshman at a university in September. The cost of
tuition for the university is currently $20,000. Clara would like to pay Sarah’s tuition for
this year. As a graduation gift, Clara is paying for Sarah’s trip to Europe this summer. The
cost of this trip is $3,000.
Vince and his wife, Laena, have one son, Kirby (age 17). Kirby is a junior in high
school. Kirby is in need of orthodontic work that will cost $6,000. Clara would like to
pay for Kirby’s orthodontic work. Clara is also considering gifting stock worth $9,000
Personal and Financial Objectives
1. Clara wants to have sufficient income at retirement ($30,000 per year in today’s
dollars including Social Security benefits).
2. Clara will consider acquiring a smaller residence.
3. Clara wants to explore long-term care alternatives (average annual cost in today’s
4. Clara wants to donate to the American Cancer Society.
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5. Clara wants to provide for her children and grandchildren.
6. Clara wants to pay Sarah’s university tuition ($20,000).
7. Clara wants to gift stock to Kirby ($9,000).
8. Clara wants to pay for Kirby’s orthodontic work ($6,000).
9. Clara wants to send Sarah to Europe ($3,000).
■ Inflation is expected to be 4% annually.
■ She lives in a state with no state income tax.
■ Stocks are expected to grow at 9.5%.
■ Bank lending rates are as follows: 3.5% for a 15-year mortgage, 4% for a 30-year
mortgage, and 10% for a secured personal loan.
Life Expectancies from Table III, Uniform Lifetime
Age Life Expectancy Factor
Irrevocable Life Insurance Trust (ILIT)
Tim created an ILIT 10 years ago. The only assets in the trust are $200,000 in proceeds from the life insurance policy the ILIT owned at Tim’s death. The income beneficiary of the ILIT is Clara. The remainder beneficiaries are the grandchildren. Clara currently receives an annual income of $10,000 based on a return of 5% on the trust assets.
Tim and Clara were both covered under Medicare Part A and B until the time of
his death. Clara is still covered under Medicare Part A and B.
Clara’s investment risk tolerance is low.
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Income Tax Information
The Morrishes filed as married filing jointly for 2018. Clara and Tim have always
lived in a community property state.
Clara has been making and selling jewelry for six years with some success. Since
Tim’s death last year, she has devoted more time to her craft and enjoys it tremendously.
Her grandson, Kirby, created a website for her last year and Clara is amazed at the sales
results. While she had been traveling to jewelry shows for most of her sales, the online
sales this year have eliminated the need to travel. Because Clara will be itemizing her
deductions this year, she believes she can report her income and expenses on Schedule
C. Her gross sales from the jewelry business this year are $19,500. Her expenses in 2019
Cost of goods sold $12,900
Supplies $ 500
Web-related costs $ 600
Web advertising $ 200
Postage/delivery costs $ 1,200
She has kept detailed records from the beginning and can track her profit and loss
from each year. In Year 1 she had a loss of $2,000; Year 2 was a loss of $1,000; Year 3
showed a profit of $3,000; Year 4 had another loss of only $500; Year 5 showed a profit
Tim had a profit-sharing plan sponsored by ABC with Clara designated as the beneficiary. The plan has a value of $150,000 as of January 1, 2020. The plan permits the
beneficiary to take a lump-sum distribution.
Clara currently has an IRA with Tim as the named beneficiary. Clara is the named
beneficiary on Tim’s IRA. They had both decided to defer IRA withdrawals until they
are mandatory after age 72. Clara has no plans to change this since Tim’s death. She
will move Tim’s IRA into an IRA in her name early in 2020. Both Tim and Clara
began receiving Social Security benefits on their 66th birthdays. Tim’s benefit for 2020
would have been $1,200 per month, and Clara’s benefit for 2020 was estimated to be
$600 per month.
Gifts, Estates, Trusts, and Will Information
Tim’s will left all probate assets to Clara. The grandchildren are named as contingent beneficiaries (equally). Clara does not have a will.
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STATEMENT OF FINANCIAL POSITION
Tim (deceased) and Clara Morrish
As of January 1, 2020
Assets1 Liabilities and Net Worth
Cash and equivalents Liabilities2
CP Cash $ 25,000 Credit cards3 $ 20,000
CP Savings account 20,000
Total cash and equivalents $ 45,000
S1 Stocks6 $ 20,000 Total liabilities $ 20,000
CP IRA – Clara’s 40,000
CP IRA – Tim’s 50,000
CP Profit-sharing plan7 150,000 Net worth $ 980,000
Total invested assets $ 260,000
Personal use assets
CP Primary Residence4 $ 400,000
S2 Vacation Home5 200,000
CP Auto 18,000
CP Furniture and personal property 77,000
Total personal use assets $ 695,000
Total assets $1,000,000 Total liabilities and net worth $1,000,000
Notes to financial statements
Assets are stated at fair market value.
Liabilities are stated at principal only as of January 1, 2020, before January payments. All liabilities are community property.
Interest rate 18.3%.
The primary residence was originally purchased for $110,000. There have been no additions or upgrades. The FMV was $400,000
on Tim’s date of death.
The vacation home was inherited by Clara from her mother. Adjusted tax basis is $125,000.
Inherited from a sibling.
Present value of Tim’s profit-sharing plan.
Other notes to financial statements
The income beneficiary of the ILIT is Clara. Remainder beneficiaries are the grandchildren. The ILIT is not listed on the Statement of
S1 – Tim
S2 – Clara
CP – Community property
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118 Personal Financial Planning: Cases & Applications Textbook 11th Edition 2020
Information Regarding Assets and Liabilities
■ Purchased April 1, 1984
■ Market value $400,000 as of November 1, 2019, and January 1, 2020
■ Original purchase price $110,000
■ This home is owned by Clara (fee simple).
■ Clara inherited the home from her mother who paid $75,000 for it. The fair market
value at the date of transfer to Clara was $125,000 in July 2003.
■ The current fair market value is $200,000.
■ The vacation home is located in a noncommunity property state. All payments
for repairs and maintenance have been made by using community property assets.
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Case 8 | Clara Morrish 119
1. What is Clara’s federal income tax filing status for 2019, 2020, 2021, and 2022?
2. On November 1, 2020, Clara decides to sell her personal residence for the fair market
value as of January 1, 2020. What will be her tax consequences? Disregard the vacation
3. 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 include it in her gross
4. How should Clara report the income and expenses from her jewelry business for 2019?
5. Ten years ago, Tim and Clara gave their grandchildren stock in a U.S. domestic corporation that is publicly traded. Because of an important advance in technology in the last
year, the company is growing rapidly and in 2020 it pays $3,000 in qualified dividends
to each child. What are the kiddie tax implications of the dividends on the income of
the grandchildren in 2020? To their parents (assume a marginal tax rate of 22%)? To
6. Rather than let the vacation home sit unused during Tim’s last illness, Tim and Clara
rented it to vacationers for 180 days in 2019. However, Clara used her vacation home
for the last 40 days of the year after Tim’s death in 2019. The only expenses for the
home were utilities, taxes, and maintenance. How much of these expenses may she
deduct? Where does she report the income and expenses on her tax return in 2019?
7. How much of Tim’s IRA must Clara include in taxable income in 2019?
8. How much of Clara’s Social Security is taxable in 2020?
9. What is Clara’s gross income in 2020?
10. Assume that in 2021, Clara decides to sell the stock she inherited from Tim that now
has a fair market value of $24,000. She directs the broker to make the check payable to
her sons, George and Vince, because she does not need the extra income from the sale.
What are the tax consequences to Clara, George, and Vince as a result of this stock sale
in the year of the sale?
11. A thief entered Clara’s home on New Year’s Day in 2020 while she was away from
home and stole an antique gun that had been one of Tim’s treasures that he had purchased for $3,500. Unfortunately, while Clara had the gun appraised after Tim’s death,
she did not specifically insure it and only recovered $200 for the gun that had been valued at $4,500. Assuming her AGI is the same in 2020 as in 2019, how much may Clara
claim as a casualty loss on her tax return for 2020?
12. Assume that Clara’s best friend, Marlene, who is 67 and legally blind, is in poor health
and has only a meager Social Security income of $3,250 annually. Clara invited her to
live with her beginning January 1, 2020, and is providing more than 50% of her total
support. Assuming her AGI is the same in 2020 as in 2019, how will this affect Clara’s
tax return in 2020?
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120 Personal Financial Planning: Cases & Applications Textbook 11th Edition 2020
13. Sarah, Clara’s granddaughter, has a qualified tuition plan (QTP) currently valued at
$195,000. Contributions from various family members were $145,000 over the years.
Sarah has the following expenses for her first year at the university:
Room and board $ 4,000
University fees $ 900
Books for classes $ 600
Laptop required by the university $ 2,500
Auto to use on campus $11,000
Total 1st year expense $39,000
If Sarah pays for all of her expenses using a distribution from her qualified tuition plan,
what effect does it have on her gross income?
14. On April 2, 2020, Clara received a refund of $4,800 from the hospital where Tim died.
She had paid the hospital $5,600 late in the prior year for the medical bill and planned
to add the expense to the rest of the unreimbursed medical expenses from Tim’s death.
Her son, Vince, told her to allow the estate to reimburse her when she paid the bill, but
Clara chose to forego reimbursement. Faced with the check from the hospital, Clara
fears she may have made a mistake in how she handled the expense. She consults her
financial planner about the $4,800 refund. The 2019 income tax return has not been
filed. How should the financial planner advise Clara?
15. George and Kathy vacationed in Guatemala in 2018 and after a visit to a local orphanage, decided to adopt a three-year-old little boy. George and Kathy felt their annual
AGI of $260,000 could adequately provide for another child and that their time and
cost would be greatly rewarded. Sarah is excited about her new little brother and looks
forward to his arrival in the US. In February 2019, Marcus came to live with the family
and his adoption became final in August 2020. The couple incurred qualified adoption
costs in 2019 of $9,000 and an additional $7,500 in 2020. How much of an adoption
credit can the couple use on their income tax return in 2020? Assume they file MFJ.
16. Clara is considering selling the vacation home she inherited from her mother. Her mother
paid $75,000 for the home 20 years before she died and Clara inherited it. If Clara sells
it today for its full fair market value of $200,000, how much would her taxable gain be
on the sale of the house?
17. Assume a forest fire destroyed Clara’s mountain vacation retreat in May 2020. Clara’s
basis in the property is $125,000. The insurance company paid Clara $226,000 in July
2020 to rebuild. Clara decided not to rebuild in such a remote area and bought a vacation home near a lake in November 2022 for $220,000. How should Clara treat the
gain, if any, on this involuntary conversion?
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