4% Emerging Markets
INVESTOR PROFILE #2
Successful business owner, 47 years old, married, college educated. Business has average annual revenues of $7 million; line of credit available from lending facility; no outstanding debt; annual profit margin of 15 percent. Average total household income is $400,000. The business owner and spouse own their own home, valued at approximately $1 million, as well as vehicles. They have two children already in college, with financing already set. Their investment portfolio value is $90,000 in a broad variety of instruments including mutual funds and equities. They currently have $10,000 available to invest, and also have equity in life insurance. The couple's risk tolerance is moderate, with an investment time horizon of 15-plus years.
• Financial objective Plan for full retirement at age 65; buy a second home; establish trust fund and/or investments for their grown children/grandchildren.
Monthly Financial Statement
Income: $19,300
Expenses:
•Mortgage, life insurance, bills, etc.: $10,000
Leaving a net savings pool of $9,300 monthly.
Retirement
The business owner appears to be funding retirement with a variable universal life insurance policy and probably is hoping that he will be able to build enough equity from his company to sell it one day. Mr. Barajas suggests he also should consider establishing a defined contribution retirement plan for his company. Not only would the business owner be able to put away an additional retirement fund for himself, he also will help his employees meet their retirement needs. Deductions in the plan would be deductible by the company, and the business owner's personal salary deferral contributions would be deductible from his personal income. This should also provide significant reductions in his current federal tax bracket of 35 percent.
Second Home
Mr. Barajas suggests the couple use the $10,000 they currently have available to invest as a down payment to buy their second home. Current federal tax law allows a personal income-tax deduction of a second residence on the Schedule A of the 1040 tax return. With a 35 percent federal tax bracket, the deduction on mortgage interest and property taxes would help minimize the current tax liability.
Financial Security for Children
Mr. Barajas recommends working with an estate-planning attorney to establish a trust fund for the couple's children and future grandchildren. A revocable living trust with a generation-skipping feature could provide for the children and grandchildren, although the couple needs to be aware of the legal and tax implications of transferring real estate assets and stock of a company to children.
•Charitable contributions Charitable contributions also can be discussed, including creation of a charitable remainder trust to donate appreciated assets that can be sold by the charity without tax consequences. This allows the business owner to avoid individual capital-gains taxes he would have incurred, giving him a larger annuity (cash flow) from the investment.
