Estate Planning: Case Study

EDWARD & TANYA

Edward, age 62, and Tanya, age 23, have been dating for about a year and a half. Edward and Tanya met when Edward was on a vacation in the south of France. Tanya was a beautiful French artist selling paintings at the market by Edward's hotel. After a month-long romance, Edward asked Tanya to return to the United States with him. Although not a United States citizen, she has maintained residence in the United States for 15 months.

They have no plans to marry at this time; however, they recently found out that Tanya is expecting her first child. Although no paternity tests have been conducted, both Edward and Tanya are confident the child is Edward's. When they found out Tanya was pregnant, Tanya moved into the 4-bedroom home Edward owns so they could prepare for the baby, whom they plan to name Chase. To prove to Tanya that he was serious about them being a family, Edward gave Tanya $11,200,000 in a money market account last month. The money market account is the only asset Tanya owns. Edward also purchased a $2,000,000 life insurance policy on his life and named Tanya as the beneficiary.

Edward was previously married and has two children from that marriage, Chelsea, age 38, and Christi, age 28. Both girls are happily married and have children of their own. Chelsea has two children, Kyle, age 3, and Kate, age 13. Christi was unable to have children of her own; therefore, she adopted a little girl, Raven, age 2, from Russia last year.

Edward and his first wife, Debra, have been divorced for ten years and are not on speaking terms. After their marriage, Edward was required to pay Debra alimony in the amount of $10,000 per month. When the court order expired at the end of last year, Edward felt bad so he continues to give Debra $10,000 per month on the first of each month.

Although Edward has high blood pressure, he is otherwise healthy. Tanya has never been married. She is in excellent health, and learned just a few days ago that they are having a baby boy, who is expected to be healthy. Edward is retired and owns TransMet, a local bar and grill, while Tanya is currently unemployed. Edward and Tanya live in a community property state.

Edward's mother, Faye, also lives with him. Faye is 82 and in failing health. She was recently diagnosed with Parkinson's disease. While she is unable to feed or bathe herself, she is expected to live for several more years. Faye has already spent all of her retirement assets and relies exclusively on Social Security. The only substantial asset she owns is a life insurance policy covering her life. The policy has a $100,000 death benefit and is not a modified endowment contract (MEC). The policy does not have a named beneficiary.

For estate planning purposes, Edward estimates the following expenses at his death:

1.The last illness and funeral expenses - $100,000.

2.Estate administration expenses - $180,000.

WILL

Tanya does not have a will. Edward has written two wills in his lifetime. The first will was a statutory will executed during his marriage to Debra, and dated September 1, 1990. The second will is a handwritten will he wrote right after his divorce, but is not dated. For the second will, Edward did not want to seek advice from an attorney so he basically copied the first will and replaced the names. The second will is only signed by him and was not witnessed. Debra still has an executed copy of the first will and the second will is in the bottom of Edward's sock drawer. No one, other than Edward, knows the second will exists.

Edward's Last Will and Testament drafted and executed during his marriage to Debra.

I, Edward, 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.

1.I have been married but once, and only to Debra with whom I am presently living. Out of my marriage to Debra, two children were born, namely Chelsea and Christi. I have adopted no one nor has anyone adopted me.

2.I leave all assets to my wife Debra.

3.In the event that Debra predeceases me or fails to survive me for more than six (6) months from the date of my death, disclaims, or otherwise fails to accept any property bequeathed to her, I give my estate to my children.

4.In the event that any of my children 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 legatee's descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children.

5.I name my wife, Debra, to serve as the executor of my estate with full seizin and without bond.

6.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.

Edward's Last Will and Testament handwritten after his divorce.

I, Edward, 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.

1.I have two children, namely Chelsea and Christi. I have adopted no one nor has anyone adopted me.

2.I leave all assets to my children.

3.In the event that any of my children 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 legatee's descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children.

4.I name my daughter Chelsea, to serve as the executor of my estate with full seizin and without bond.

5.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.

CURRENT YEAR GIFTS TO GRANDCHILDREN

Edward made the following gifts to his grandchildren during the current year:

Seeing how Edward's mom outlived her assets, Edward is afraid his grandchildren may have the same fate. To assist them with their retirement income, Edward decided to establish a trust for the children. The trust is an irrevocable trust and he funded it in the current year with $400,000. The trust will accumulate income until each grandchild reaches age 50.When a grandchild reaches age 50, he/she will begin receiving an annuity for their life.When all of the grandchildren die, if there is any remaining assets then the trustee may distribute those assets to a charitable organization of his choosing.

Edward sent a check in the amount of $6,000 directly to Kate's private school to pay her tuition.

Edward also gave both Kyle and Raven $6,000 each.

Assume Edward paid gift tax of $1,362,518 in 2016 for taxable gifts made in 2015. These were his first taxable gifts.

EDWARD'S STATEMENT OF FINANCIAL POSITION (AFTER THE GIFT TO TANYA)

ASSETS LIABILITIES AND NET WORTH Cash` Cash Equivalents Liabilities Cash $120,000 Primary Res 200, 000 Total Cash` Cash Equiv . $120.010 Auto !) 10, 000 Total Liabilities 210.000 Invested Assets The Bungalow $1, 500,000 Investment Portfolio 8.00, 0.00 Qualified Plan 500, 000 Total Investments $2,800, 00 0 Personal Use Assets Net Worth 3. 290, 000 Primary Residence $400, 000 Vacation Property 100, 0.00 Auto !' 20,000 Boat 50, 000 Total Personal Use Total Assets $3. 500, 000 Toul Liabilities and Net 3, 500, 000