Brad (53) and Gwen (52) have been married for 32 years and decided to divorce due to irreconcilable differences. They have one grown child, Emilee, who lives away from home. Brad started his own insurance wholesale business 12 years ago. Gwen is a 50% partner in the business and helps with some clerical and administrative work. The business was valued at $485,000 by an independent appraiser. Gwen is currently in school to become a certified home health care provider. She will earn her certificate in two years and is expecting to get a job right away making $45,000 per year. Brad pays himself an average of $185,000 per year. Brad and Gwen's budget indicate that they each expect to spend $42,000 a year excluding housing. The family home is valued at $360,000 with a current mortgage balance of $120,000 and a monthly mortgage payment of $1,047. Gwen loves the house but understands that she might have to move into a smaller place. Five years ago, the couple inherited a brokerage account from Gwen's uncle valued at $315,000, including $115,000 in cash and the balance in ABC stock. The value of the stock was pretty flat in the first year. The current value of the account is $276,862 in stock and $27,280 in cash. The couple did not execute any trades in the account but used some of the cash and dividend in Brad's business. The portfolio has averaged $5,538 in dividends annually. Gwen has an IRA worth $52,000, and Brad's 401(k) is worth $225,000. Brad has an inflation protected pension from his old job (where he began working after he was married to Gwen). It will pay him a monthly benefit of $3,000 per month starting at age 65. Brad has a life expectancy of 26.29 additional years. The pension administrator indicated that the plan uses a discount rate of 3.53% and an inflation rate of 2%. The couple also has credit card debt of $15,800 which Brad offered to pay off himself. Brad offers Gwen the equity in the home, half of the brokerage account, and her IRA. The following 25 questions pertain to this case: 1. Based on the case facts, what percent of the pension is marital property? a. 100% b. 50% c. 78% d. 0% 2. In order to calculate the present value of Brad's pension, what effective discount rate should be used? a. 3.53% b. 2% c. 1.5% d. 4% Page 7 of 9 3. Based on the case facts, how much money is required to be in the plan at his age 65 in order to provide Brad with the promised benefit $3,000 per month? a. $331,425 b. $461,921 c. $304,630 d. $502,550 4. What is the present value of the pension? a. $331,425 b. $461,921 c. $304,630 d. $502,550 5. What is the value of the marital estate? a. $1,224,353 b. $1,290,342 c. $1,594,972 d. $444,071 6. Based on Brad's offer, what percent of the marital estate will he end up with? a. 72% b. 50% c. 62% d. 87% 7. The properly drafted QDRO should include all of the following except: a. Retention of jurisdiction b. Continuation of jurisdiction c. Limitation of language choices d. IRC Section 415 limitations 8. What is the cost basis in the stock account? a. $276,862 b. $304,142 c. $304,552 d. $200,000 9. If the stock account were to be liquidated, how would the gains be taxed? a. As dividends. b. As long-term capital gains. c. As short-term capital gains. d. This would not be a taxable transaction if the sale is stipulated in the divorce decree. 10. Which of the following is the most viable option for the disposition of the business that is part of the marital estate? a. One spouse keeps the business. b. Both spouses stay as partners. c. They could sell the business. d. They could give the business to Emilee. Page 8 of 9 11. If Brad were to keep the business, which of the following statements is not true? a. Gwen is entitled to half the value of the business in most, if not all, states. b. Brad's attorney needs to be concerned with the potential for double dipping since the business's value is based on the income that it produces. c. The business should not be considered marital property because there wouldn't be a business without Brad. d. It is in everyone's benefit for Brad to keep the business. 12. In order to offset the value of the business, the couple has several options. Which of these is the least likely to be agreed upon? a. Brad offers Gwen another asset of equal value. b. Brad offers Gwen to settle up when the business is sold when he retires. c. Brad offers to pay Gwen off with a property settlement note. d. Sell the business right now and split the proceeds. 13. If the couple agrees on the settlement note, which of the following is true? a. The note should be subject to current market interest rates. b. Since it is a property settlement note, Gwen has to claim the payments as income. c. Brad gets to deduct the payments to Gwen on his income tax return. d. The note has to be paid within a timeframe dictated by guidelines issued by the World Bank. 14. What is the tax impact of the payments on the payor and payee? a. Since the payments are due to a property settlement, they have no tax impact on the parties. b. The payments are deductible to Brad and taxable to Gwen. c. Brad gets to deduct the interest portion of each payment on his tax return. d. Gwen does not have to pay income taxes on the interest that is received. 15. Gwen asks her financial professional for some advice on the property settlement note. The professional should recommend: a. Gwen should take anything that Brad offers her in relation to the business. b. She should ask that the property settlement note payments should be treated as spousal support. c. She should let Brad have the business to show good faith. d. She should securitize the property settlement note in order to protect herself. 16. Which of the following is true about property settlement notes? a. They do not have to be put in writing. b. They can qualify as spousal support for tax purposes. c. They can be collateralized by a Qualified Domestic Relations Order. d. They are tax deductible to the payor. 17. Alternatively, Brad can get a bank loan to buy Gwen's share in the business. He gives her the proceeds of the loan in a lump sum equal to one half of the value of the business. Which of the following is true? a. The bank loan payment to Gwen is 100% taxable in the year that it is received. b. The payment to Gwen is not taxable since it qualifies for IRC 1041 treatment. c. The couple can opt out of the tax free treatment pursuant to the divorce. d. Brad can deduct the application fee as an expense. Page 9 of 9 18. Based on the case facts, how much of the marital estate needs to be moved to Gwen's side of the ledger to reach 50% of the marital estate? a. $353,415 b. $444,071 c. $780,282 d. $834,212 19. If Gwen is concerned with being financially secure in the short term, she should: a. Ask for 100% of the brokerage account. b. Ask for some of Brad's pension. c. Ask for Brad's 401(k) plan since she can access that money tax free using 71(t)(2)(c). d. Stop going to school and wait tables at the local diner. 20. The couple starts discussing spousal support and Gwen asks her financial professional to generally describe how alimony is determined. Which of the following is not a consideration? a. Need/ability to pay b. Health of the receiving spouse c. Education and work experience of the receiving spouse d. Fault of the paying spouse 21. Based on Brad's offer, what percent of income will he have? a. 100% b. 99% c. 76% d. 50% 22. Which of the following methods of dividing pension benefits should be a last resort for Brad and Gwen? a. Present value b. Deferred division c. Reserved jurisdiction d. Cash-out method 23. How much is Gwen's current income? a. $0 b. $2,769 c. $45,000 d. ($51,795) 24. Which of the following should a financial professional review, in addition to Brad and Gwen's tax returns? a. Social Security numbers on the tax return b. Paystubs c. W-2s and 1099s d. Charitable contribution receipts 25. Based on the case facts, what is Gwen's need in spousal support in the first year? a. $51,795 b. $54,564 c. $2,769 (monthly) d. $0