COMPREHENSIVE CASE

Willa Jane and Henry Background

Willa Jane and Henry have been married for 50 years and are both in good health. Willa Jane and Henry live in a community property state. They have the following children and grandchildren:

Children		Grandchildren
Olivia	Age 45	3 children
Truman	Age 35	3 children
Tara	Deceased	1 child

Olivia, an estate planning attorney, is married, healthy, and happy. Willa Jane and Henry adore Olivias husband, Wade, and their three children.

Truman, a high net worth investment consultant, was recently divorced and his ex-wife, Catherine, has custody of their three children. Willa Jane and Henry, never quite cared for Catherine, as she always seemed to be quite snooty. Since the divorce, the relationship between Willa Jane and Catherine has been very strained. Since his divorce, Truman has had somewhat of a mid-life crisis. He recently rented a penthouse apartment and bought a new Jaguar. Truman has also been dating Kate, a 21-year-old swimsuit model. While Willa Jane and Henry are confident that this is only a passing phase, they are concerned about giving any gifts to Truman or his children outright.

Tara, Willa Jane and Henrys third child, was a bit of a wild child. Tara died in a tragic motorcycle accident in her senior year of college while she was on her way home to tell her parents about a big secret she had been keeping. The summer before, Tara had given birth to a baby girl named Grace. At the time, Tara gave the baby to the babys father, an older married man, although no official adoption was ever transacted. Willa Jane and Henry still do not know about Grace.

Willa Jane and Henry own The Human Bean, a popular chain of coffee shops. Wade, Olivias husband, has worked at the store since he was a kid. Wade is now the manager and handles most of the day-to-day functions, with very little input from Willa Jane and Henry. Willa Jane and Henry would like to reward Wade for all of his hard work by giving Wade and Olivia 3/4 of the business and giving the remaining 1/4 of the business to Truman. They do not want Truman to have any control over the business, just to have an income interest.

Olivias youngest child, Andrew, was born with a serious physical disability. To provide additional support for Andrew, Henry created an irrevocable trust with Andrew as the sole beneficiary with a $8,014,000 transfer of separate property in 2013. The trust meets the requirements of Section 2503(c).

Henry and Willa Jane made the following additional lifetime transfers:

In 2013, Henry gave Olivia, Truman, and their spouses $200,000 each of community property.

In 2016, Henry gave Olivia, Truman, and their spouses $200,000 each of his separate property. Henry paid gift tax of $347,760 on these gifts.

Henry and Willa Jane paid $162,500 in the years 1992-1996 directly to Texas Christian University for Olivia to achieve a degree in Management (assume $32,500 per year).

Henry and Willa Jane paid $72,000 in the years 2000-2004 directly to Texas Tech University for Truman to achieve a degree in Finance (assume $12,000 per year).

Henry and Willa Jane paid $150,000 to Childrens Hospital for a lung transplant for Andrew in 2015.

In 2006, Willa Jane gave Olivia $100,000 of her separate property as an anniversary gift.

In 2014, Willa Jane gave each of the grandchildren of which she was aware (assume all grandchildren had been born by 2014) $100,000 of her separate property.

Willa Jane and Henry have never elected to split gifts of separate property.

Henry and Willa Jane estimate the following at each of their deaths:

The last illness and funeral expenses are expected to be $100,000 per person. Estate administration expenses are estimated at $250,000 per person.

Wills

Willa Jane does not have a will. Henry has an outdated will leaving most of his probate assets to Willa Jane.

Clauses from Henrys Statutory Last Will and Testament

I, Henry, being of sound mind and wishing to make proper disposition of my property in the event of my death, do declare this to be my Last Will and Testament. I revoke all of my prior wills and codicils.

I have been married but once, and only to Willa Jane with whom I am presently living. Out of my marriage to Willa Jane, three children were born, namely Olivia, Truman and Tara. I have adopted no one nor has anyone adopted me.

I leave my Vintage Mustang and House Boat to my son, Truman.

I leave the life insurance proceeds on my life to my daughter, Olivia.

I leave Vacation Home 1 to my daughter, Tara.

I leave Auto 1 to the Methodist Church, a qualified charity.

I give the residual of my estate to Willa Jane, my wife.

In the event that Willa Jane predeceases me or fails to survive me for more than six (6) months from the date of my death, I leave any interest of my estate determined to be payable to her to my children, Olivia, Truman and Tara, in equal and 1/3 shares.

In the event that any of the named legatees should predecease me, die within six months from the date of my death, disclaim, or otherwise fail to accept any property bequeathed to him or her, then such interest will pass to the said legatees descendents, otherwise his or her share of all of my property of which I die possessed shall be paid equally among the surviving named legatees.

I name my best friend Keith to serve as the executor of my succession with full seizin and without bond.

I direct that the expenses of my last illness, funeral, and the administration of my estate shall be paid by my executor as soon as practicable after my death and allocated against the residual estate.

Since I have made numerous lifetime gifts to my children, all inheritance, estate, succession, transfer, and other taxes (including interest and penalties thereon) payable by reason of my death shall be allocated to the childrens share, regardless of whether my spouse survives me.

STATEMENT OF FINANCIAL POSITION (HENRY & WILLA JANE)

Notes to Financial Statements:

Assets are stated at fair market value (rounded to even dollars).

Liabilities are stated at principal only (rounded to even dollars).

The adjusted basis of the personal residence is $600,000.

Willa Jane received vacation home 2 from her grandmother, Lois. Willa Jane and Lois were always very close and Lois gave her the home when Olivia was first born so Willa Jane could enjoy motherhood as much as Lois had. Lois purchased the vacation home for $30,000 and the FMV of the home at the date of transfer was $200,000. The FMV when Lois died was $250,000.

The life insurance policy has Willa Jane listed as the designated beneficiary. The inherited stock portfolios are Transfer on Death accounts with Olivia and Truman as the listed beneficiaries of both Henry and Willa Janes shares.

The Yacht was purchased by Henry after his House Boat was destroyed by a Hurricane.

Property Ownership: CP - Community Property.

H - Husband separate. W - Wife separate.

Insurance face value (death benefit) and the cash value of $1,000,000 are the same.

Answer the following questions. Assume the facts given in the fact pattern and that the 2018 estate and gift tax rates and annual exclusion apply unless otherwise indicated. (Numbers are rounded for convenience.)

Which of the following transfer mechanisms would be appropriate for the transfer of The Human Bean to Truman and Olivia assuming Willa Jane and Henry did not want to make an outright gift of the company to them? For full credit, explain for each transfer option below why it is or is not appropriate.

Private Annuity.

SCIN.

Family Limited Partnership.

QPRT.

If Henry died today, which of the following statements is true regarding the transfers made in his will? For full credit, explain why each statement is true or false.

Willa Jane will receive Henrys interest in the inherited stock portfolio.

Olivia will receive the proceeds of the life insurance policy.

Truman will receive the yacht in place of the house boat.

Grace may potentially receive Vacation Home 1 as Taras rightful heir.

Assuming Henry died today, calculate his gross estate.

Assuming Henry died today, calculate his probate estate.

Ignoring the above data, assume that Henry died today and the estate tax due was $2,355,888 and Keith is appointed executor. Unfortunately, Keith forgot to file an Estate Tax Return (Form 706) and pay the estate tax due until 45 days after the returns due date. How much is the failure-to-file penalty?

Identify and value each taxable gift made by Henry during his life. Where appropriate,

explain any exemptions or exclusions that applied.

Calculate Henrys gift tax due in each year he made a taxable gift. Show your work. Even if the tax due is zero, show your calculation in each year there is a taxable gift.

Identify and value each taxable gift made by Willa Jane during her life. Where

appropriate, explain any exemptions or exclusions that applied.

Calculate Willa Janes gift tax due in each year she made a taxable gift. Show your work. Even if the tax due is zero, show your calculation in each year there is a taxable gift.