Edward Thorpe of Reston, Virginia, was 65 when he retired in 2005. Victoria, his wife of 40 years, passed away the next year. Her will left everything to Edward. Although Victoria’s estate was valued at $2,250,000, there was no estate tax due because of the 100% marital deduction. Their only child, Brandon Thorpe, is married to Beverly; they have four children, two in college and two in high school. In 2007, Edward made a gift of Merck stock worth $260,000 jointly to Brandon and Beverly. Because of the two $12,000 annual exclusions and the unified credit, no gift taxes were due. When Edward died in 2009, his home was valued at $850,000, his vacation cabin on a lake was valued at $485,000, his investments in stocks and bonds at $1,890,000, and his pension funds at $645,000 (Brandon was named beneficiary). Edward also owned a life insurance policy that paid proceeds of $700,000 to Brandon. He left $60,000 to his church and $25,000 to his high school to start a scholarship food his wife’s name. The rest of the estate was left to Brandon. Funeral costs were $5,000 Debts were $90,000 and miscellaneous expenses were $25,000. Attorney end accounting fees came to $36,000 Use Worksheet 15.2to guide your calculations as you complete these exercises.

Critical Thinking Questions

1. Compute the value of Edward’s probate estate.

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2. Compute the value of Edward’s gross estate.

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3. Determine the total allowable deductions.

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4. Calculate the estate tax base, taking into account the gifts given to Brandon and Beverly (remember that the annual exclusions “adjust” the taxable gifts).

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5. Use Exhibit 15.7 to determine the tentative tax on estate tax base.

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6. Subtract the appropriate unified tax credit (Exhibit 15.8) for 2009 from the tentative tax on estate tax base to arrive at the federal estate tax due. Note that there is no credit for gift tax payable on post-1976 gifts because no gift taxes had to be paid.

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7. Comment on the estate shrinkage experienced by Edward's estate. What might have been done to reduce this shrinkage? Explain.