EXECUTIVE SUMMARY

Personal Recommendations

Life Insuranceo Universal Life on both Charles and Kay

Recommended amount: $5,000,000 each Survivorship Life Insurance

o For Estate Equalization

Recommended amount: $6,000,000 Irrevocable Life Insurance Trust

o Used for Survivorship Life Insurance

Special Needs Trust (for Andrea)o Amount needed: $350,000

o Funded through Universal Life Insurance

Auto Insuranceo Increase deductible to $500 per car

o Add under- and uninsured motorist coverage

o Increase coverage to $250,000/$500,000/$100,000

Medical Insuranceo Increase deductible to $2,000

Personal Umbrella Policyo Add Personal Umbrella Policy for $1,000,000

Emergency Fundo Increase to $84,000

Update Willo Include pretermitted children

o Include Special Needs Trust

Farm Note Payment Scheduleo Recommend lowering annual payments

Investment Risko Consult Investment Advisor on:

Kay’s 401(k) Emergency Fund Brokerage Account

Mortgage o Refinance

Homeowners Insurance

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o Increase coverage

o Increase deductible

o Schedule property

o Inflation guard endorsement

o Home business insurance coverage endorsement

Disability-Income Insuranceo Add for both

Long-Term Care Insuranceo Add for both

Business/Farm Recommendations

Liability Insurance for the Family Farmo Add Commercial General Liability policy

Convert Fertilizer Company to LLC Buy-Sell Agreement (Fertilizer Company)

o Funded through Life Insurance

Liability Insurance for Fertilizer Businesso Purchase

Errors and Omissions Insuranceo Add for Kay

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INTRODUCTION

We have examined the information you provided us last time we met and have recognized certain areas in which your risk coverage can be improved. Due to your unique and specific circumstances, in order to accomplish your desired goals, we have set forth our recommendations on how to manage risk exposures.

The analysis is divided between your personal and business/farm risk exposures. Each section identifies a risk exposure, explains the need to compensate for that risk, and our recommendation on how to manage that particular risk exposure. In doing so, we hope that you use our recommendations to consult with specialists and other advisors who can help you carry out our recommendations.

Risk can be expensive to manage, however, the consequences of failing to do so can be drastic and prevent you from accomplishing those goals which you have mentioned. We believe at WCM Financial Group that risk management is a vital area of the financial planning process. Alleviating risk exposures can help to eliminate future complications as well as providing a peace of mind for our clients.

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PERSONAL RECOMMENDATIONS

Life Insurance

When analyzing your life insurance coverage we assessed your capital needs at death. We determined that your current coverage is not sufficient. Currently, you each have term life policies: $700,000 for Charles and $500,000 for Kay. The company that provides your current life insurance is rated poorly by Moody’s rating agency. Companies with poor ratings run higher risk of default, thus leading to a higher risk of not receiving your death benefit. We determined that your needs will be best satisfied through the purchase of three new life insurance policies from a life insurance agency with a rating of A or better.

Universal Life Policy on Charles’s and Kay’s Liveso Each person will have a policy on their life

o Policy will have a minimum level premium and guaranteed death benefit

o We recommend $5,000,000 policies on each life

Our analysis calculated that $5,000,000 is required to satisfy debt obligations, as well as other needs, at the death of either Charles or Kay. The needs we included are

Final Expenses Readjustment Fund (one month) Emergency Fund (six months) Education Fund Current and long-term debt obligations Andrea’s lifetime care costs 80% income need

(Please reference Appendix A – Life Insurance Capital Needs Analysis)o Universal life allows you to have flexible premiums in the event of a need to

increase or decrease Increasing or decreasing premiums alters the final death benefit paid to the

beneficiary or cash value during the life of the policy Survivorship Life Insurance

o Additionally, we recommend you purchase a survivorship life insurance policy to

satisfy your desire for estate equalizationo Survivorship policies pay the death benefit after the death of the second spouse

o We recommend that you purchase $6,000,000 of survivorship life insurance to

satisfy your goal of estate equalization

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This amount is relatively large due to your desire to transfer the farm ($2,500,000) to Sarah at death

Therefore, you must compensate the same value to Chelsea, Dennis, and Derek

This assumes that through the use of each individual life policy (mentioned above), Andrea’s needs are satisfied separately through the Special Needs Trust

o Funded through an Irrevocable Life Insurance Trust

Irrevocable Life Insurance Trust

Irrevocable Life Insurance Trusts (ILITs) are established so that the grantor (creator) can transfer assets into the trust and the trust can, in turn, purchase life insurance on that grantor. This results in the trust owning the policy on the grantor and it designates those individuals whom the grantor wishes to be the beneficiaries of the life insurance policy. This ensures that the insured individual owns no interest in the policy, meaning that it will not be includable in his or her gross estate. Therefore, it will not be subject to estate taxes at death.

Estate Taxes in the Future o On January 1, 2013 estate and gift unified credit amounts are likely to change.

Please be aware that the amount of unified credit allowed to individuals after this date is unknown and subject to legislative action. If no legislation occurs, unified credit amounts per individual will revert back to pre-2001 amounts of $1,000,000.

Special Needs Trust

Special needs trusts are important for families planning with special needs. In the event of your deaths, you wished that Andrea’s care be fully funded. In order to fund her care, we suggest that you add $350,000 to each of your life insurance policies. Special needs trusts are needed to keep Andrea’s assets outside of her ownership, thus allowing her to receive federal social security benefits. Based off of the social security administration benefits calculator, Andrea will receive $18661 in the event of your deaths. The estimated assisted living facility costs in Texas are $2800.2

Amount Needed: $408,000o (See Appendix B –Andrea’s Special Needs)

Existing Funds (Grandparent Trust**): $65,000 Total Amount of Insurance Needed: $350,000

1 http://www.ssa.gov/cgi-bin/benefit6.cgi (Assumed Birthdays: Kay – 12/15/1961; Charles – 12/15/1962)2 http://www.assistedlivingfacilities.org/directory/tx/

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**The Grandparent’s existing revocable trust assets should be transferred to the newly created special needs trust.

Auto Insurance

Your current auto deductible of $100 is very low compared to industry standards. We suggest you raise the deductible in order to save money on your monthly premiums. We recommend that you raise the deductible on each car to $500. This amount is within your budget due to your current financial standing.

Additionally, we recommend the following:

Add underinsured and uninsured motorist coverageo This will mitigate the risk of being hit by someone with not enough or no auto

insuranceo Having this coverage is faster than recovering your loss from a lawsuit

Increase your coverage to $250,000/$500,000/$100,000o Your assets can become subject to a lawsuit in the event one of your family

members causes a car accident resulting in catastrophic losso This will help to protect your family’s personal assets

Medical Insurance

Your current major medical policy should be sufficient for your current needs. In order to save money on premiums, we suggest raising the deductible to $2,000. Considering the number of family members you have, satisfying the $2,000 deductible in a single year is likely to occur. Over the course of your lives, you should be able to compensate the increase in deductible through savings in premium payments.

Personal Umbrella Policy

In order to supplement your auto insurance coverage, we recommend purchasing a Personal Umbrella Policy on each of you. This will add to the existing auto insurance and protect the farm and other significant assets which you do not want subject to a lawsuit. Personal umbrella policies offer excess liability coverage and extend broad coverage to potential loss exposures. The umbrella policy will cover a loss if the loss is not covered by an existing policy. These policies are reasonable in cost. For example, you can receive a $1,000,000 personal

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umbrella policy for less than $350 per year.3 We recommend a $2,000,000 policy due to your existing net worth. (See Appendix C – Financial Statements)

Emergency Fund

We suggest that you increase the emergency fund to approximately $84,000. This will provide your family’s nondiscretionary needs in case of emergency for 6 months. Typically, we recommend that clients have a fund that will satisfy their needs for between 6 and 12 months. For your specific needs in the event an emergency occurs, the 6 months we recommend would suffice due to the stability of each of your jobs.

Update Will

As your will sits right now, it is inadequate to fulfill the goals you set forth, as well as the suggestions we have made to manage the risk areas of your lives. We suggest that you contact your attorney and update your wills so that your goals may be fulfilled in the event of your deaths. The following are concerns that you may want to bring up with your attorney:

Include Chelsea, Derek, Dennis, and Andrea in the will Testamentary Special Needs Trust

o This trust will be established to satisfy Andrea’s special needs

Distribution of Assets (Estate Equalization) Designation of Guardian (for Andrea)

o In the event of death, you will need a guardian to make decisions for Andrea

Designation of Guardian (for Chelsea, Derek, Dennis)

Farm Note Payment Schedule

Your current farm note payment is relatively high, at $200,000 per year. In order to satisfy some of the recommendations that we are making, we suggest that you consider lowering the payment amount if possible. Our recommendations are to help satisfy the risk areas in your lives. In order to fund these recommendations, the resources saved can be allocated to funding the certain risk management solutions in our analysis.

3 Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 557

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Investment Risk

We suggest you contact your investment advisor as to the following investments:

Kay’s 401(k)o Kay’s risk tolerance is low; however, an investment advisor may suggest some

allocation to equities due to her age and potential future goals Emergency Fund

o The Emergency Fund is for to fund immediate needs in the event of an

emergency.o Funds in this account should be allocated to cash or its equivalent

Brokerage Accounto You should ask your investment advisor as to the proper allocation between fixed

income and equities for this accounto Leaving this in cash runs the of the funds losing their purchasing power due to

inflation

Mortgage

We believe the current interest rate that you are paying on your mortgage is high. Due to your high interest rate, you are spending more than you need on interest payments per month. We suggest that you refinance to recapture some of the money you spend on interest. The following are current rates quoted:4

Fixed (APR): 4.229% ARM (APR): 2.975%

Homeowners Insurance

The current HO-3 policy you have on your home only covers $600,000 of the $685,000 value of your personal residence. We suggest that you increase the coverage to at least 100% of the replacement cost of the dwelling. Our recommendation is that you increase the coverage to $685,000. With your current coverage, you will not incur a penalty, due to it being at least 80% insured. However, increasing your policy coverage to the full replacement cost will eliminate the risk of loss having to incur the lacking coverage through self-funding in the event of a complete and total loss of your home. In addition to the increased coverage, we recommend the following:

Add personal property replacement cost loss settlement endorsement

4 https://mortgage.citimortgage.com

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o Under this endorsement, property will be covered on a replacement cost basis

rather than an actual cash value basis Make sure you look over your HO-3 policy exclusions

o Your coverage covers everything except those specifically excluded

1% deductible is sufficiento If you believe you can afford a higher deductible, your premium payments will

decrease Add scheduled personal property endorsement

o Currently, your policy only covers $1,500 worth of jewelry

o This will allow the full $45,000 value of the diamonds to be covered

Add an inflation guard endorsemento As your house increases in value with inflation, the increased value will be

covered by this endorsemento Otherwise, over time your house will become underinsured

Add a home business insurance coverage endorsemento Any essential assets used for the their businesses can be covered, including:

equipment, files, paperwork, and loss of business income

Disability-Income Insurance

It is important to you and your family that you seriously consider investing in some Disability-Income Insurance. An injury on the job can cause serious financial insecurity, and it is important that you have a way to fund these substantial work earnings lost from being disabled. We recommend that the two of you purchase a Disability Insurance Plan. Disability Insurance pays benefits in monthly income to those who have become Totally Disabled. It is important to note that you should always consider and understand what your insurance company defines totally disabled as. The most basic definition of being totally disabled is the complete inability of the insured to perform each and every duty of his, or her, own occupation.5 As shown in the graph below, there is a much higher chance of becoming disabled before age 65 than most would assume. We strongly encourage that you purchase Disability Insurance to cover any losses incurred from missed work and to help insure financial security.

Elimination Period o Disability Insurance policies usually contain an elimination period. This is a

waiting period in which the owner of the policy does not receive benefits from the policy. Elimination periods can range from 30 days to 365 days. We recommend that you have an elimination period of 90 days. Though this may seem like a substantial amount of time it can significantly lower your premiums. The longer your elimination period is the less you have to pay in premiums. After examining

5 Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 325

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your current financial position, we feel that 90 days is a sufficient elimination period.

Benefit Period o The benefit period is the length of time that disability benefits are payable after

the elimination period is met. Most Disability Insurance plans offer a benefit period of 2 years, 5years, 10 years, or up to age 65 or 70. 6 We recommend that your Disability Insurance policy have a benefit period that will cover you both up to the age of 65 or 70. This will cause the premium payments to be higher but the coverage is the most important thing to consider. You have a growing family and it is important to consider the costs and needs that will remain through age 65 to 70.

25 30 35 40 45 50 550%

5%

10%

15%

20%

25%

30%

35%

40%

Chances of Being Disabled before 65

Long-Term Care

6 Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 3267 https://advantageagentsalliance.com/Documents/MetLife%20Omni%20Advantage.pdf

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Age

The chance than any one person will need long-term care during their lifetime is relatively high. The U.S. Department of Health and Human Services estimates that those who reach the age of 65 will have a 40% chance of entering a nursing home.8 It is important that you purchase long-term care insurance because of the dramatic increase in nursing home costs. The financial burden caused by those who need long-term care can be alleviated with long-term care insurance.

The cost of long-term care can range between $70,000 and $100,000 annually.9 These facilities have significantly better resources and provide a better standard of living than those provided by Medicaid.

We recommend the following for your long-term care insurance:

Comprehensive Policyo Covers care in a nursing home, assisted living facilities, and hospice care

Elimination Periodo We recommend a 60 day elimination period

o Longer elimination periods reduce premiums

It more cost efficient to purchase long-term care insurance today, rather than purchasing it later in retirement where the costs can substantially increase.

BUSINESS/FARM RECOMMENDATIONS

Liability Insurance for the Family Farm

A Commercial General Liability or CGL policy would also be beneficial to own for your farmland. Workers whom you employ can subject your farm to potential liability due to the risk of injuries. This risk poses a threat to the large value of the farm. The CGL policy can limit the risk of your farm to potential lawsuits by providing insurance protection to pay in the event of a major accident.

Due to the farm’s value, we suggest you buy an additional Commercial Umbrella Policy to cover the value of the farm in excess of the CGL policy. This can supplement the retained limited covered by the CGL policy and provide additional coverage to prevent the full value of the farm from being subject to lawsuits.

Limited Liability Company

8 Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 3219 Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 321

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Limited Liability Companies (LLCs) are easily formed by filing with the Secretary of State in the state in which you reside. LLCs are formed by the owners (or partners) of a company which are now “members” of the LLC. The members of the LLC are protected from lawsuits, therefore limiting their exposure to risks. The LLC shields members from liability by limiting the members’ liability to the investment in which each member has in the LLC. The shield provided by the LLC protects the personal assets of each member from being drawn into lawsuits brought against members.10

Charles’ fertilizer business can benefit greatly by forming an LLC to replace the current general partnership in which Charles and his two partners run the company. Looking over our previous discussion, we noted that Charles has a concern that the partners of the fertilizer company had not signed any type of financial agreement (currently they distribute profits evenly between the partners).

In the by-laws of the newly formed LLC, the partners can set out an agreement as to the distribution of profits in the event that one or more partners contribute more to the business than the others.

Additionally, the LLC can help prevent liabilities such as the one arising from the former employee lost two fingers in a fertilizer accident.

o At the time of the accident, the fertilizer company’s assets were sufficient

to compensate the employee for his lost digits. o However, had the company lacked resources to pay the employee, the

partner’s personal assets could have been subject to a lawsuit. o Losses that could have been incurred upon your family were limitless – if

the victim died for instance. o The loss of a large, income producing asset, such as the farm, could prove

to be detrimental to your future earnings capacity. o However, the formation of an LLC for the fertilizer company will shield

your current personal assets from liability of the company – ultimately reducing your risk dramatically.

Buy-Sell Agreement (Fertilizer Company)

Closely held private companies have a major problem arising when a partner dies. Unless an agreement is written, the death of one or more partners results in the partnership being dissolved. Dissolving the partnership will cause the partnership assets to be liquidated (sold) and distributed between the surviving partners and the heirs of the deceased partner. If the surviving partners wish to continue the same line of business, they will be forced to fund the costs of recreating the partnership or reorganizing the partnership in some way. Additionally, the surviving partners, as

10 http://www.sos.state.tx.us/corp/businessstructure.shtml

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well as the heirs of the deceased partner may have issues such as estate settlement costs, heirs becoming partners, and buying the heir’s share in the partnership.11

These issues may be solved through a buy-sell agreement established by the partners of the fertilizer partnership. The most efficient means of funding a buy-sell agreement are through the use of an insurance policy. The steps of a buy-sell agreement with the use of life insurance are as follows:

First, the partnership enters into a buy-sell agreement. The agreement sets forth that the partnership will purchase the interest of which the deceased partner owns from the heirs at a predetermined price.

The partner purchases a life insurance policy on each partner’s life. It pays the premiums, is the owner, and the beneficiary of each policy.

When a partner dies, the partnership receives the death benefit (no income taxes). The partnership then purchases the deceased partner’s interest from the estate for the

predetermined price. The heirs of the deceased partner receive the proceeds of the sale.12

This agreement, as applied to the fertilizer business, will provide Charles and his partners a means of preventing the business from dissolving at one death and provide the heirs with adequate payments for the deceased partner’s shares.

(See Appendix D – Buy-Sell Agreement)

Liability Insurance for Fertilizer Business

The fertilizer business may also benefit from purchasing some form of commercial general liability (CGL) policy. CGL policies are used by businesses to cover potential exposures the business may have in the form of lawsuits. Charles’ fertilizer company has previously dealt with an employee which they had to compensate due to the loss of fingers on the job. The funds used to compensate this employee were paid for out of the partnership’s assets. In order to preserve these assets, purchasing a CGL policy can cover any future liabilities resulting from business related activities. In the event a claim is made against Charles’ fertilizer company again, the assets will not only be able to be preserved, but they can be retained to increase future earnings and expansion of the company.

Farm – Generational Transfer

11 http://vsa.fsonline.com/fso/library/txtech/1b1-05-S.pdf12 http://vsa.fsonline.com/fso/library/txtech/1b1-05-S.pdf

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In reviewing your desire to transfer the farm to Sarah over time, we have decided to recommend that you transfer her “working equity” in the farm in trust. Additionally, Sarah’s interest in the farm which she will gain in the event Charles or Kay dies should also be transferred to the trust. In doing so, the trust document should include a clause requiring Sarah to sign a prenuptial agreement with whomever she decides to marry. The prenuptial agreement should set forth that the farm is her separate property, and in the event of a divorce, it would not be subject to being divided with her husband.

*** Please consult an attorney to draft legal documents such as trusts. Our recommendations are to help guide the attorney understand your goals and objectives when drafting your legal documents. These recommendations are not legal advice.

Errors and Omissions Insurance

We recommend that Kay purchase an Errors and Omissions (E&O) Insurance policy. Errors and Omissions Insurance is a type of professional liability policy. Many professionals need E&O insurance, including:

Architects Insurance Agents Real Estate Agents Brokers Attorneys Engineers And many others who give advice to clients.

Errors and Omissions Insurance is designed to meet the needs of each different profession and professional. There are many new liabilities appearing the today’s service related industries. It is important to not only purchase insurance that covers a business’s basic needs and risks, but to also hold insurance to cover any damages that are created through the service that a business is providing. Errors and Omissions Insurance protects businesses and professionals from such claims and liabilities.13 It is generally paid on a claims-made basis. This is because the insurance covers errors made during the current policy period.14

It is important to note that while E&O Insurance has moderately few exclusions claims that result from dishonest, criminal, fraudulent, or malicious acts by the insured are specifically excluded.15

CONCLUSION

13 http://www.errorsandomissionsinsuranceco.com/14 Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 61115 Principles of Risk Management and Insurance; 11th addition; George E. Rejda, p. 611

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The detailed recommendations mentioned above were created after a thorough risk assessment. After examining your current risk coverage, we concluded that the current coverage was inadequate to you family’s needs. We separate your risk exposures into personal exposures and business/farm exposures. Along with the identification of each exposure we explained your specific needs in managing the risk and our recommendations on what we believe is the best risk management solution.

The first issue we analyzed was your personal risk exposures. We determined that a greater need for life insurance is needed to fulfill expressed goals. Concerning Andrea, a special needs trust is needed to meet her future needs in the event of your deaths. Your auto, medical, and homeowners policies need alterations to limit risk exposures and broaden coverage. Additionally, we recommend purchasing the following insurance policies: personal umbrella policy, disability-income insurance, and long-term care insurance. Other areas of concern are increasing your emergency fund, updating your will, decreasing farm note payments, mortgage refinancing, and consulting an investment advisor concerning your asset allocations.

The other issue analyzed was your business/farm risk exposures. First, we recommend that you purchase liability insurance for the family farm. We also recommended that Charles convert his fertilizer company to an LLC, create a buy-sell agreement with his partners, and purchase liability insurance on the company. Finally, we recommend Kay purchase Errors and Omissions insurance for her engineering occupation.

In future meetings we may discuss the following areas of concern:

529 Plans for education fundingo (See Appendix E – College Costs)

Andrea’s college needs as she approaches college age Retirement Planning Updates on what recommendations you chose to follow

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