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CASE STUDIES Jason and Andrea Dalton Personal Data Husband: Wife: Jason Dalton, age 51, Senior Executive for XYZ, Inc. Children: Andrea Dalton, age 48, Homemaker Ashley Dalton, age 14 (starting 9th grade) Jason's parents: Carl Dalton, age 11 (starting 6th grade) Andrea's parents: Father deceased, Mother, age 77, in nursing home Mother, age 68, and Father, age 69, in good health Financial Data Primary Residence (JTWROS) ............... .......... $850,000 Mortgage on Primary Residence.. .... ($325,000) Vacation Home (JTWROS).... ....... $350,000 Mortgage on Vacation Home ..... ..... ($125,000) Cash Accounts (JTWROS)......... ...... $80,000 Jason's 401(k) ..........." . $400,000 Jason's IRA........... . $125,000 Andrea's IRA ....................". .... $17,000 Investment Brokerage Account (JTWROS) .......... .....$375,000 XYZ, Inc. Stock (Jason) ....". .... $1,300,000 Single Premium Fixed Deferred Annuity (Jason) ... $72,000 Cash Value of Life Insurance .... $105,000 Jason's automobile............... ..... $25,000 Andrea's automobile ............ .. $13,000 Ashley's UTMA account (Jason custodian) .. .. $25,000 Carl's UTMA account (Jason custodian) ....... ........ $17,000 Income/Expense Data Jason's Salary ............ ........... $350,000 XYZ Dividends.......... ....... $52,000 Other Interest & Investment Income ............. ...... $12,000 Monthly expenses (excluding mortgage and taxes).. ...... $10,000 511CASE STUDIES Goals 1. Resolve divorce proceedings in an equitable manner for each of them Provide for college education for Ashley and Carl, assuming $12,500/ year (in today's dollars) for four years Economic Environment Current inflation, as measured by the CPI, is at 2% (however, college costs are inflating at 6%). 90-day T-bill rates are currently 16. Long-term government bonds are yielding 5.5%. Economic growth is expected to be 45% in the coming year, and unemployment is at 4.5%, Interest rates are expected to rise in the near future. Questions 1. If the Daltons get divorced tomorrow, and in two years, they transfer 50% of Jason's XYZ Stock to Andrea to equalize the post-divorce property, the gift tax consequences will be: a) b) Gain must be recognized on the transfer ( ) The basis in the stock for Andrea will its fair market value at the time of divorce The basis in the stock for Andrea will its fair market value at the time of the transfer d) Gain is not recognized on the transfer 2. The divorce decree states that Jason will be required to pay $5,000/month of alimony to Andrea for 10 years. The tax consequences of the alimony payments are: a) b) Not taxable or deductible by either party Taxable income to Andrea, not deductible for Jason because alimony is a personal expense () Taxable income to Andrea, and deductible for Jason d) Not taxable income to Andrea, but deductible for Jason 3. The divorce decree states that Jason will be required to pay $2,500/month to Andrea for child support until Ashley turns 18 and $1,500/month thereafter until Carl turns 18. The tax consequences of the child support payments are: a) Not taxable or deductible by either party b) Taxable income to Andrea, not deductible for Jason because child support is a personal expense c) Taxable income to Andrea, and deductible for Jason d) Not taxable income to Andrea, but deductible for Jason 4. Andrea's divorce attorney stresses the importance of obtaining a Qualified Domestic Relations Order (QDRO) as a part of the divorce proceeds. This is necessary in order to provide for Andrea's share of: a) All of Jason's assets b) Jason's 401(k) account C) Jason's IRA account d) Both B and C are true 51FINANCIAL PLANNING 5. If Andrea's parents were to be killed in a car accident tomorrow, and the divorce is still pending, how would Andrea's inheritance be treated for purposes of the divorce? ) Andrea will have to split the assets evenly with Jason, since they were inherited before the divorce was completed b) Andrea will not have to split the assets with Jason as long as she retains them in an account titled solely in her name c) Andrea would never have to split the assets with Jason, because she inherited them in the first place Andrea will have to split the assets evenly with Jason, since she did not sign a pre-nuptial agreement to protect them 6. How does the Dalton portfolio compare to their specified risk tolerance? The risk of the Dalton portfolio appears to be: Consistent with their risk tolerance c) b) Lower than their risk tolerance Much higher than their risk tolerance d) Unable to be determined with the information provided 7. If the cost of college for Ashley is $15,000/ year today, how much will a year of college cost her when she starts in 4 years if school expenses are inflating at 6% (to the nearest dollar)? a) $18,600 b) $18,937 c) $16,883 d) $17,842 8. If the cost of college for Carl is $15,000/year today, how much will a year of college cost him when he starts in seven years if school expenses inflate at 6% for the next four years, and then at 5% for the remaining three years (to the nearest dollar)? a) $22,554 b) $21,922 C) $23,018 d) $20,878 9. Carl's total taxable income for 2015 is generated solely from his UTMA account, which created $1,500 of interest. Carl's total federal income tax due for 2015 was approximately: a) $0 b) $55 $150 d) $495 10. Jason decides to invest Ashley's UTMA account assets in a 529 college savings plan. In this situation, when Ashley turns 18: a) She will take over full control of the account, because she has reached the age of majority for the UTMA account b) Jason will retain control over the account, because he was established as the owner of the 529 plan account c) She will be required to immediately recognize all unrealized gains in the account d) Both a and c are true 514ONINNVI TV CASE STUDIES The Dalions have decided to send Ashley to a private high school, and need to use $20,000 of their assets In may the current tuition bill. The tax consequence of taking a $20,000 withdrawal from Jason's annuity for this education expense is: a) Recognition of $20,000 of ordinary income, but there is no early withdrawal penalty because this is a quali- fied education expense. b) Recognition of $20,000 of ordinary income, and a 10% early withdrawal penalty Recognition of $17,000 of ordinary income, and a 10% early withdrawal penalty of) No recognition of income at all, because this is a qualified education expense 12. If Jason decides to liquidate Ashley's UTMA account now to pay for her private high school expenses, the tax consequences of this sale will be: b) Entirely reportable on Jason's tax return, since he is the custodian Nontaxable because Ashley is age 14 c) Generally taxable at Jason's marginal tax rate because Ashley is age 14 d) Nontaxable because the account is used to pay for private high school expenses 13. The Daltons recently remembered that Ashley's grandmother purchased savings bonds in Ashley's name when she was born, for use for her future college expenses. The tax consequences of the liquidation of these bonds for Ashley's future school expenses will be that they are: a) Excluded from income, no matter what, under the bond interest exclusion rules. b) Included in income, because Jason and Andrea's Adjusted Gross Income (AGI ) is so high that they do not qualify for the bond interest exclusion rules () Included in income, because the bonds are titled in Ashley's name, making them ineligible for the bond interest exclusion rules d) Excluded from income, as long as Andrea's income in that year remains below the AGI limits 14. If you were to draft a Personal Financial Statement for the Dalton family, the total value of Jason and Andrea's assets would be: a) $3,712,000 b) $3,754,000 $3,304,000 d) $3,262,000 15. Jason's maximum 401(k) contribution for 2015 is: a) $17,500 b) $18,000 () $23,000 d) $24,000 16. The Daltons have decided to replace Andrea's automobile with a new vehicle that will cost $30,000 after the trade-in of Andrea's current car. The dealer offers them a choice of 0% financing costs for three years with a balloon payment at the end of three years, or $2,000 off if they make a lump-sum payment now. Any available cash or savings that the Daltons have from these choices will be invested in a 3-year CD at the bank at 1.25%. The Daltons should choose to: a) Make a lump-sum payment now at the discounted price b) Select the 3-year 0% financing deal 515FINANCIAL PLANNING 17. The Daltons plan to purchase an automobile for Ashley as her future graduation present from high school. The car they would like to purchase costs $25,000 today and they expect its cost will increase at 2% per year. In addition, they can purchase a four-year bond at 4%. How much do the Daltons need to set aside in the CD now to have the appropriate dollar amount available to purchase the car in four years (to the nearest dollar)? $20,964 b) $22,212 $23,555 d) $23,132 18. If Jason were to become disabled, his disability insurable benefits would be: a) Tax-free b) Taxable as ordinary income c) Partially taxable and partially tax-free d) Unable to be determined from the information provided 19. Assume for this question that the Daltons do not intend to get divorced. The Daltons have stated that they intend to keep their vacation home until retirement, and to make it their permanent residence once they retire. The Daltons have also stated that they are comfortable using a mortgage as 'leverage" to help grow their overall net worth, but would like to be debt-free when they retire in approximately 10 years, even if that means paying off their outstanding balance in a lump sum at that time. In light of this, the Daltons should: a) Refinance their mortgage to a 30-year fixed-rate loan b) Maintain their current mortgage as is c) Refinance their mortgage to a 10/1 ARM d) Pay off their mortgage immediately 20. The Daltons come to visit you for a preliminary free consultation to decide if they would like to hire you as a financial planner. At this meeting, you mention how risky it is to hold such a substantial portion of your net worth in a single stock, although you acknowledged that you did not have any knowledge about this company in particular. Two days after the meeting, Jason contacts you to inform you that he has liquidated all of his company stock, "as you advised." Under the CFPD Code of Ethics, you should: a) Not be concerned, because diversifying is always good advice b) Not be concerned, because it was only a preliminary consultation and you did not have a signed planning agreement c) Be very concerned, because the client may no longer need your services, since he has already received quality investment advice d) Be very concerned, because the client acted on advice you gave when you did not have all of the available information