Instructions

Personal Data

Husband: Jason Dalton, age 51, Senior Executive for XYZ, Inc.

Wife: Andrea Dalton, age 48, Homemaker

Children: Ashley Dalton, age 14 (starting 9th grade); Carl Dalton, age 11 (starting 6th grade)

Jasons parents: Father deceased, Mother, age 77, in nursing home

Andreas parents: Mother, age 68, and Father, age 69, in good health

Other Pertinent Information

• Jason and Andrea have filed for divorce after 16 years of marriage
• Jason and Andrea do not live in a community property state
• Jasons cost basis in XYZ stock is $150,000, which he has accumulated over many years
• The Daltons are in a combined federal & state tax bracket of 41%
• The Daltons state that they are very conservative, and their investment account is primarily (80%) fixed income investments
• Jasons 401(k) account is also allocated to approximately 80% in fixed-income investments; Jason maximizes his 401(k) contribution every year
• Jason has a universal life policy purchased in 1989 with a death benefit of $500,000; Andrea is the beneficiary
• Jason has group term insurance through XYZ with a death benefit of $1,050,000 (3x salary) that is entirely paid for by XYZ; Andrea is the beneficiary
• Andrea has $250,000 of spousal group term life insurance through XYZ; Jason is the beneficiary
• Jason and Andrea are beneficiaries of each others retirement accounts
• Andrea is the beneficiary of Jasons annuity (where Jason is the owner and annuitant), which has a cost basis of $55,000
• Jason has disability coverage paid for by his employer as a nontaxable fringe benefit, providing 60% of monthly income up to $10,000/month; benefits are payable until 65 after a 90-day elimination period; disability is defined as the inability to perform the substantial duties of your regular occupation
• Jason receives adequate medical insurance coverage through XYZ for the family; the Daltons have adequate homeowners and automobile coverage
• The primary residence mortgage is a 30-year fixed-rate loan, and was originated 6 years ago at 6.75%
• The vacation home mortgage is a 5/1 ARM loan (payable over 30 years), and was originated 2 years ago at 5.25%
• Contributions of $500/month are being made to each of Ashleys and Carls UTMA accounts
• In the Daltons state of residence, minors receive full access to UTMA funds at age 18
• Jasons mother is utilizing her Social Security and survivorship pension income to cover nursing home costs, and will have very little other assets remaining
• Andreas parents have nearly $1,000,000 in retirement assets that they are spending minimally, which will ultimately be divided between Andrea and her sister

Financial Data

Income/Expense Data

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 3%. Long-term government bonds are yielding 5.5%. Economic growth is expected to be 4.5% in the coming year, and unemployment is at 4.5%. Interest rates are expected to rise in the near future.

Goals

1. Resolve divorce proceedings in an equitable manner
2. Provide for college education for Ashley and Carl, assuming $12,500/year (in todays dollars) for four years for each of them

9. Carl's total taxable income for 2009 is generated solely from his UTMA account, which created $1,500 of interest. Carl's total federal income tax due for 2009 was approximately: a) $0 b) $55 c) $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

11. The Daltons have decided to send Ashley to a private high school, and need to use $20,000 of their assets to pay the current tuition bill. The tax consequences of taking a $20,000 withdrawal from Jason's annuity for this education expense are: a) Recognition of $20,000 of ordinary income, but there is no early withdrawal penalty because this is a qualified education expense. b) Recognition of $20,000 of ordinary income, and a 10% early withdrawal penalty c) Recognition of $17,000 of ordinary income, and a 10% early withdrawal penalty d) 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: a) Entirely reportable on Jason's tax return, since he is the custodian b) Nontaxable because Ashley is age 14 c) Generally, subject to Jason's marginal tax rate because Ashley is age 14 d) Nontaxable because the account is used to pay for private high scholol expense