ESTATE TAX RETURN PROBLEM

Clark Griswold is a wealthy engineer and inventor who retired to his residence in Fort Collins (Larimer County), Colorado. Clark is married to Ellen and they have two adult children, Russell and Audrey. Clark passed away on March 22 of this year at the age of 60, and his executor, Frank Shirley, has hired you to calculate the estate tax and prepare a draft of the 2014 estate tax return (pages 1 through 3). Clark's estate is being administered through the Larimer County Probate Court.

Frank has inventoried Clark's assets and has listed the value of his assets below. The auto, residence, and checking account were owned jointly (with the right of survivorship) with his wife. Clark also owned a whole life insurance policy with a cash surrender value of $50,000. Ellen and Clark's estate were listed as beneficiaries on the insurance policy with Ellen receiving $1 million and the estate receiving the remainder of the proceeds. The Ajax common stock, the real estate, and the patent were all owned by Clark rather than joint ownership. Frank also noted that the real estate is subject to an $800,000 mortgage. At his death Clark also owed $1,500 on his credit card.

Property

Value

Adjusted Basis

Auto

$20,000

$55,000

Personal effects

75,000

110,000

Checking account

250,000

250,000

30,000 shares of Ajax common stock

1,200,000

270,000

Residence

6,800,000

480,000

Life insurance

4,000,000

50,000

Real estate

3,500,000

2,100,000

Patent

4,225,000

100,000

Clark's will instructs Frank to distribute Clark's property as follows: Ellen inherits Clark's personal effects, Russell inherits the patent, and Audrey inherits 10,000 shares of the Ajax stock and the real estate. The will also instructs Frank to distribute 20,000 shares of the Ajax stock to State University (an educational institution), and after paying Clark's personal debts, the residual of the estate (if any) is divided equally between Russell and Audrey. The estate paid Clark's personal debts (credit card debt) and $4,300 of funeral expenses associated with Clark's burial. Finally, the estate paid Frank $27,000 in executor's fees associated with the administration of Clark's estate.

Clark's tax records indicate that in 2007 Clark gave $500,000 of Ajax stock to Russell and $500,000 of cash to Audrey. Clark filed a timely gift tax return (Form 709) and paid no gift taxes.