ESTATE PLANNING

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					Winter 2002                           ACC 664 – Final Exam                     1

THE MEETING
Tom Neil (the client service partner) and you (the tax specialist) have just
come from a meeting with Ken and Dorothy Newland. They own
Newland Inc., which has been a client of your firm for many years.

A local financial planner has approached Ken and Dorothy about doing
some estate planning. As a result of receiving a proposal (attached) from
the planner they have asked Tom to take a look at it and provide his
comments. He brought you along to the meeting because he doesn’t know
anything about the planning issues involved and you do, although you
don’t know the Newlands. He introduced you to them as the expert in this
topic area within the firm.

During the meeting Tom asked if he could review the proposed estate plan
and provide a proposal outlining what your firm can do for them. He has
promised them that he will report back to them in four days.

Tom is going to be away for the next few days so he has asked you to do
the following:

1.   Provide him with a memo with an evaluation of the proposed estate
     plan. (30%)

2.   Draft a letter to the Newlands indicating the process you would take
     them through to address their needs. (10%)

3.   Propose a comprehensive plan (including non-tax issues) for them to
     consider, based on the information we have so far. (60%)

Tom has prepared the attached memo to provide some of the background
details on the Newland family and the business.
Winter 2002                          ACC 664 – Final Exam                      2

     ESTATE PLAN PROPOSED BY THE FINANCIAL PLANNER
               FOR THE NEWLAND FAMILY
1.   Ken and Dorothy will transfer their common shares of Newland Inc.
     to a newly incorporated company, Holdco Inc. As consideration
     they will receive the following:
     a) 5,000 Class A preference shares to each of them, and
     b) a $1,000,000 note payable to each of them.

     The Class A preference shares will have the following
     characteristics:
     a) One vote per share
     b) Redeemable at $1,000 per share
     c) Dividend rate of 6% per annum

2.   Ken will establish a trust to hold the newly issued common shares of
     Holdco. Ken will contribute a gold coin to establish the trust. The
     trust will borrow $100 from the bank to purchase 100 common
     shares of Holdco. This loan will be repaid by a dividend paid to the
     trust. The assets of the trust will be distributed equally to the child
     or children active in the business at the end of five years. The
     trustees of the trust will be Ken and Dorothy and they have total
     discretion to decide who is active in the business and who is not at
     the end of the five-year period. Decisions of the trustees will be
     made based on majority vote.

3.   Ken and Dorothy’s wills leave their assets equally to all three
     children. Mary will be the executor. The estate is to cause Newland
     to pay a capital dividend to Holdco which is to redeem the same
     value of Class A shares. This money will be used to pay the tax on
     death.

4.   Under the terms of the trust Mary and Bill will enter into a
     shareholder agreement. Under the terms of this agreement there will
     be an automatic buyout under the following events:
     a) Death
     b) Continuous disability for 30 days with the disability
          determined by a doctor,
     c) Age 65
     d) Bankruptcy
     The agreement also allows for a “shotgun” clause.

5.   Mary is to be appointed President. Ken and Dorothy will each be
     co-chair of the board of directors.
Winter 2002                          ACC 664 – Final Exam                     3

                            MEMORANDUM
To:           File
From:         Tom Neil
Date:         March 28, 2002
Subject:      The Newland Family


Current Ownership

Ken (65) and Dorothy (65) each own 500 Common shares of Newland
Inc.

            Dorothy                               Ken

           500 common                        500 Common



                           Newland Inc.


History

Ken’s mother and father incorporated Newland Inc. in 1972 when they
were 60 years old. Each of them owned 500 common shares. They
continued to operate the business until 1990 when, at 80 years of age, they
both died in a car accident. Because Ken and Dorothy’s marriage was
strong and because they were both active in the business, Ken’s parents
left the shares equally between Ken and Dorothy. In 1990 the company
was worth $2.0 million. The capital gains exemption was used to its
maximum on the final returns.

Ken and Dorothy

Ken and Dorothy enjoy working in the business; Ken is the chairman and
Dorothy is the president. Both are active in and vital to the ongoing
success of the business. Ken is in good health, but a few years ago
Dorothy had cancer. It is now in remission, but they continue to worry
about it returning.

Ken and Dorothy each have a will. Ken leaves everything to Dorothy and
Dorothy leaves everything to Ken. On the second death the residue of the
estate is left to the three children equally. Ken and Dorothy are the
executors of each other’s estate with Mary as the alternate.

Ken and Dorothy’s personal net worth is shown on Schedule 1.
Winter 2002                           ACC 664 – Final Exam                    4

The Children

Bill, Mary and Joan are the three children of Ken and Dorothy.

Bill (36) is active in the business as the VP finance. He is an accountant
by training. He is divorced with a son who is 13 years old. Bill is very
hopeful that his son will eventually take over the business.

Mary (33) is the chief operating officer of Newland Inc. She is married
with two children who are 10 and 8. Mary’s husband is a dentist. Mary is
anxious to grow the business and is willing to be aggressive in the
expansion plans. Ken and Dorothy have great confidence in Mary’s
ability to run the business. She has both the administrative skills needed
to run the business and a vision for the future. Mary graduated with an
MBA ten years ago and joined Newland Inc. at that time.

Bill and Mary get along well although Bill often has to constrain Mary’s
expansion plans since he does not like the company being in very much
debt. Bill also resents that Mary is better at running the business than he
is.

Joan (30) is not active in the business. She is married with one child. Her
husband is unskilled and can only get low-paying jobs. Joan always needs
money to support her family. She is looking forward to owning the shares
personally since she wants to have more control over the payment of
dividends.

Ken and Dorothy have not discussed any of their plans with the children
since they don’t want to deal with any disagreements. The estate plan that
has been proposed has not been discussed with the children.

The Business

The company owns a $1.0 million second-to-die life insurance policy on
the lives of Ken and Dorothy. The policy was purchased six years ago to
address the bank’s concern about the transition when Ken and Dorothy
die. This is not such a big issue with the bank today, given how well Mary
is performing as COO. The policy has an adjusted cost basis of $50,000.

According to your valuation department Newland Inc. is worth
approximately $12,000,000. Schedule 2 shows the most recent balance
sheet.

The business has been very successful over the past thirty years. Since
Mary has been involved sales have increased dramatically. At the same
time their need for financing to support this growth has increased and they
are near the limit on their line of credit. Mary has great plans for the
future as she sees new market for their products. All she needs is the
financing.
Winter 2002                             ACC 664 – Final Exam                 5

Bill and Mary are well paid by the company and enjoys their fringe
benefits such as a company car and club membership. Unfortunately, Joan
sees these benefits and feels she should get some of her personal expenses
paid as well.

SCHEDULE 1
                          KEN AND DOROTHY
                         PERSONAL NET WORTH

                                              Ownership            FMV
Bank account                                    Joint          $    25,000
Home (cost $125,000)                            Joint              250,000
RRSP                                            Ken                130,000
RRSP                                           Dorothy             450,000
Shares in Public Inc. (cost $125,000)          Dorothy              50,000
Newland Inc. common                             Ken              6,000,000
Newland Inc. common                            Dorothy           6,000,000
                                                               $12,905,000
Liabilities                                                         Nil


SCHEDULE 2
                            NEWLAND INC.
                           BALANCE SHEET
                       AS AT DECEMBER 31, 2001

                               ASSETS
Term deposits                                                  $ 4,000,000
Accounts receivable                                              3,000,000
Inventory                                                        3,000,000
Prepaid expenses                                                   100,000
Land, at cost (FMV = $1,000,000)                                   800,000
Building, at NBV (FMV = $1,500,000)                              1,200,000
Equipment, at NBV (FMV = $7,500,000)                             8,000,000
                                                               $20,100,000
                             LIABILITIES
Operating loan                                                 $ 4,000,000
Accounts payable and accrued liabilities                         4,000,000
Mortgage                                                         2,500,000
                                                                10,500,000
                         SHAREHOLDER EQUITY
1,000 Common shares                                                  1,000
Retained earnings                                                9,599,000
                                                               $20,100,000
Winter 2002                        ACC 664 – Final Exam                                       6

                                 Format Requirements
This exam must be completed individually. You may discuss this exam with other students but
all the work you submit must be yours alone.

Format requirements:

   1.    Times New Roman 12 pt
   2.    1” margins
   3.    1.5 spaced
   4.    Maximum page limit, including everything, 15 pages
   5.    1 copy, corner stapled

Basis for marking:

   a. Content – 100 %
      I will be evaluating you competence based on the advice you give. Address both
      technical and non-technical issues.

   b. Clarity of the written communication – up to a 10 percentage point reduction in the
      content mark for lack of clarity.

   c. Grammar and spelling – up to a 10 percentage point reduction in the content mark for
      poor grammar and spelling

   d. Format – a 10 percentage point reduction if the format requirements are not met.


Due date:         Monday, April 15, 2002 at 9:00 a.m.


Email:            sbussey@kpmg.ca
                  This is to be in a Word document.


Fax:              519-747-8830


You may email or fax the assignment to me by the due date.

				
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