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 Residence

$200,000

Total Cash/Cash Equivalents

$120,000

Auto

10,000

Total Liabilities

$210,000

Invested Assets

TransMet

$1,500,000

Investment Portfolio

800,000

Qualified Plan

500,000

Total Investments

$2,800,000

Personal Use Assets

Net Worth

$3,290,000

Primary Residence

$400,000

Vacation Property

100,000

Auto

20,000

Boat

60,000

Total Personal Use Assets

$580,000

Total Assets

$3,500,000

Total Liabilities and Net Worth

$3,500,000

Notes to Financial Statements:

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

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

3. TransMet was valued last week for insurance purposes. The valuation includes $100,000 for the land and $1,400,000 for the business.

4.The qualified plan has Debra listed as the designated beneficiary. The Investment Portfolio is a Transfer on Death (TOD) account with Chelsea and Christi as the listed beneficiaries.

5.The adjusted basis of the personal residence is $200,000.

6.Edward received the vacation property as a gift from his grandfather, Burt. Burt purchased the vacation property for $10,000 and the FMV of the property at the date of transfer was $30,000. The FMV when Burt died was $60,000. The annual exclusion did not apply to the transfer and the gift tax paid was $14,700.

7.The boat is owned joint tenancy with rights of survivorship with Debra. They each contributed 50% of the purchase price. The Statement of Financial Position only reflects Edward's interest.

8.Edward's state does not have any statutes that invalidate bequests or beneficiary designations to prior spouses.

9.This statement is prepared after all the gifts were made, including the one to Tanya, and the gift tax has been paid for the 2015 gifts.

1.Assuming Edward died January 1, 2018, calculate his gross estate.

a.$3,000,000.

b.$3,500,000.

c.$4,862,518.

d.$6,862,518.

2.Assuming Edward died January 1, 2018, calculate his probate estate.

a.$2,140,000.

b.$2,200,000.

c.$2,640,000.

d.$3,500,000.

3. Assuming Edward died January 1, 2018, calculate the Marital Deduction available for estate transfers to Tanya.

a.$0.

b.$1,000,000.

c.$2,000,000.

d.$2,140,000.

p e r

4.Assume Edward died January 1, 2018, and (assume for this question only) that the estate tax liability due is $266,881, and Chelsea is appointed executor. Unfortunately, Chelsea forgot to file an Estate Tax Return (Form 706) and pay the estate tax due until 68 days after the return's due date. How much is the total penalty for failure-to-file and failure-to-pay? (Note this is not the actual estate tax liability due.)

a.$4,003.22.

b.$36,028.60.

c.$40,032.15.

d.$44,035.37.

5. Assume Tanya and Edward had their baby today (January 1, 2018) and named him Chase. Which of the following individuals is a skip person in relation to Edward?

1.Raven

2.Chase

3.Tanya

a.1 only.

b.1 and 3.

c.2 and 3.

d.1, 2, and 3.

6. What is the total Generation Skipping Transfers for the current year reduced by any available annual exclusions or qualified transfer exclusions?

a.$387,000.

b.$11,200,000.

c.$11,585,000.

d.$11,612,000.

7. Which of the following is true with regard to Edward's transfer to the trust benefiting the grandchildren?

a.When distributions are made from the trust, the distributions will be taxable distributions.

b.The transfer was a transfer to a direct skip.

c.When the trust expires and the assets are distributed to a charitable

organization, then the distribution will be a taxable termination.

d.The trust is not subject to GSTT because of the charitable beneficiary.

8. Edward is thinking about transferring his Investment Portfolio and TransMet to a dynasty trust for the benefit of his natural heirs. Which of the following statements is correct?

a.Edward cannot transfer the investment portfolio without Chelsea's and Christi's consent.

b.Chelsea and Christi would be appropriate trust protectors.

c.Edward can name himself as the trustee and continue to make all of the business decisions for TransMet during his life while removing the assets from his gross estate.

d. Because of the blended family, generational subtrusts may be appropriate.

9. Assume for this question only, Chase was born today (January 1, 2018) and Edward was so excited after the delivery that he had a heart attack and died. Who would receive his probate assets under the will assuming the state follows the uniform probate law?

a.Debra.

b.Tanya.

c.Chelsea, Christi, and Chase.

d.It is unclear who would inherit the assets.

r

10.What is the amount of Edward's total taxable gifts for the year (2018) (less the annual exclusion

and qualified transfers)?

a.$5,502,000.

b.$11,200,000.

c.$11,670,000.

d.$11,712,000.

Use the following scenario to answer questions 11 through 15.

Assume, for Questions 11 through 15 only, that Edward and Tanya were married today. They went straight to Edward's lawyer's office to execute new wills. On the way home from executing a valid will leaving all assets to Tanya, Edward and Tanya were in a serious car accident. Edward was comatose for several days before dying. His unpaid medical expenses were $150,000. The day after Edward died; Tanya gave Edward's children and grandchildren each $22,000 then left for France to stay with her mother. Which of the following postmortem elections would be available to Edward's executor?

a.Yes, this election would be available.

b.No, this election would not be available.

11.

A QTIP election for the assets transferred to Tanya.

12.

A deduction on Edward's final income tax return for the unpaid medical expenses

expensesexpenses.

13.

A split-gift election for gifts Tanya made to Edward's children the day after

Edward's death.

14.

Special use valuation for TransMet.

15.

Married Filing Jointly filing status for the current year.

16. Edward is considering transferring his life insurance policy to an ILIT. Which of the following statements is true?

a.If Edward included a clause that said, "Edward can change the beneficiary of the trust at any time to any person other than himself" then the assets would be included in Edward's gross estate when he died.

b.If the trust allows the trustee to lend money to Edward's estate at Edward's death, then the proceeds of the life insurance policy will be included in Edward's gross estate.

c.Transferring the policy to the ILIT will eliminate the chance that the proceeds will be included in Edward's gross estate at Edward's death.

d.If Edward continues to pay the trustee an amount needed to pay the premiums on the policy, the proceeds will be included in his gross estate when he dies.

17. Faye would like to spend the few years she has left enjoying her life. She would like to use her life insurance policy to fund the remainder of her life. Which of the following statements is correct?

a.If Faye surrenders her policy for accelerated death benefits, she will be subject to income tax on the gain because she is not terminally ill.

b.Faye could exchange the policy in a 1035 exchange for an annuity without being subject to income tax on the transfer.

c.If Faye borrows from the policy, then the loan will be considered a taxable distribution.

d.If Edward purchases the policy from Faye at the fair market value, he will receive the insurance proceeds income tax free at Faye's death.

18. If Edward were to die today (January 1, 2018), what would his taxable estate be?

a.$3,010,000.

b.$3,835,850.

c.$4,010,000.

d.$6,372,518.

19.If Edward decided to sell the vacation property today (January 1, 2018) for the Fair Market Value, what would his gain or loss be?

a.$40,000.

b.$70,000.

c.$75,300.

d.$80,200.

20.Assume for this question only that Tanya has a healthy baby boy and they name him Chase. The stress of the new baby deteriorates their relationship and Edward and Tanya break up 6 months later. Edward is ordered by the court to pay $2,000 a month in child support to Tanya which includes $4,000 a year for day care costs. What is Edward's yearly taxable gift to Tanya and how much is deductible for income tax?

Gift

Deductible

a.

$0

$0

b.

$0

$4,000

c.

$24,000

$0

d.

$24,000

$4,000

21. AssumeEdwardhadcharitableinclinationsanddecidedhewantedtobequeath something to charity. Which of the following assets would be the most advantageous to leave to the charity considering the tax effects on other non-charitable beneficiaries?

a.$60,000 in cash.

b.$60,000 in qualified plan assets.

c.$60,000 in portfolio assets.

d.The boat.

22.Assume for this question only that Edward and Tanya had the baby today (January 1, 2018). When Edward returned home, Edward's neighbor, Mike Flemm, came over. Mike is the local insurance salesman and he immediately convinced Edward he needed to buy a new life insurance policy on the baby's life. The policy has a $10,000 death benefit. Edward is the owner, the policy is on Chase's life, and Tanya is the beneficiary. Assume Edward paid his first premium payment then had a heart attack and died. Which of the following statements

is correct?

a.The interpolated terminal reserve plus any unearned premium will be included in Edward's gross estate.

b.The death benefit will be included in Edward's gross estate.

c.The replacement cost will be included in Edward's gross estate.

d.The policy will not be included in Edward's gross estate because Edward is not the beneficiary.

23. Assume Edward and Tanya had Chase today (January 1, 2018) and Edward wanted to create trust for Chase's future benefit. Edward would like to create trust that allows him to make use of the annual exclusion. He wants the trust to accumulate income until Chase reaches age 21, at which point the entire trust will be distributed to Chase. Which of the following devices would be appropriate to accomplish Edward's goals?

a.An UGMA device.

b.An UTMA device.

c.A Section 2503(b) device.

d.A Section 2503(c) device.

24. Edward is considering running for governor, but is concerned that managing TransMet and his portfolio will cause a conflict of interest. Which of the following trusts would be an appropriate device to mitigate against the conflict of interest?

a.A Totten trust.

b.A political trust.

c.A blind trust.

d.A standby trust.

25. Edward is considering changing his will today (January 1, 2018). He wants the new will to leave everything to Tanya. Which of the following statements is true?

a.A no-contest clause could be added to discourage Chelsea and Christi from contesting the will.

b.A simultaneous death clause could not be used to require Tanya to survive six months.

c.A guardianship clause can be used to identify Edward's preferred legal guardian of Chase.

d.A disclaimer clause allowing Tanya to disclaim the property in favor of Edward's children could be used to prevent over qualification of the estate.