Kathi and Darrin own Fresh Veggies, a popular organic health food store in a general partnership with another couple located in Louisiana. Scott, Elizabeth's husband, has worked at the store since he was a kid. Scott is now one of the store managers who continues along with the other partners to direct the company as executives. Kathi and Darrin would like to reward Scott for all of his hard work by giving Scott and Elizabeth 3/4 of their interest in the business and giving the remaining 1/4 of their interest in the business to James. They do not want James to have any control over the business, just to have an income interest. Elizabeth's youngest child, Andrew, was born with a serious physical disability. To provide additional support for Andrew, Darrin created an irrevocable trust with Andrew as the sole beneficiary with an $8,015,000 transfer of separate property 5 years ago. The trust meets the requirements of Section 2503(c). 1 Assume for any calculation of GSTT that the annual exclusion was $15,000 and the available lifetime exemption was $11,180,000. Also assume that the GSTT and gift tax rates were 40% for determination of GSTT even though they were paid 5 years prior. Darrin and Kathi made the following additional lifetime transfers: Four years ago, Darrin gave Elizabeth, James, and their spouses $100,000 each (assume the annual exclusion at the time was $11,000) of community property. Two years ago, Darrin gave Elizabeth, James, and their spouses $200,000 each of his separate property. Darrin paid gift tax of $347,760 on these gifts. Kathi and Darrin have never elected to split gifts of separate property. Darrin and Kathi 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 Kathi does not have a will. Darrin has an outdated will leaving most of his probate assets to Kathi. Clauses from Darrin's Statutory Last Will and Testament 1, Darrin, 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. 1. I have been married but once, and only to Kathi with whom I am presently living. Out of my marriage to Kathi, three children were born, namely Elizabeth, James and Lynn. I have adopted no one nor has anyone adopted me. 2. I leave my Vintage Mustang and House Boat to my son, James. 3. I leave the life insurance proceeds on my life to my daughter, Elizabeth. 4. I leave Vacation Home 1 to my daughter, Lynn. 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Kathi, my wife. 7. In the event that Kathi 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, Elizabeth, James and Lynn, in equal and 1/3 shares. 8. 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 legatee's descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among the surviving named legatees. 9. I name my best friend Keith to serve as the executor of my succession with full seizin and without bond. 10. 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. 11. 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 children's share, regardless of whether my spouse survives me. Statement of Financial Position (Darrin and Kathi Lovette) ASSETS Cash & Cash Equivalents CP Cash Total Cash / Cash Equiv. $150,000 $150,000 LIABILITIES AND NET WORTH Liabilities Current Liabilities CP Credit Card 1 CP Credit Card 2 Total Current Liabilities $ 16,000 $5,000 $21,000 Invested Assets CP Fresh Veggies CP Investment Portfolio H Life Insurance on Darrin CP Rental Property Total Investments $4,000,000 $13,000,000 $1,000,000 $500,000 $18,500,000 Long-Term Liabilities CP Mortgage - Primary Residence CP Rental Property w Auto 2 Total Long-Term Liabilities $750,000 $300,000 $70,000 $1,120,000 Total Liabilities $1,141,000 Personal Use Assets CP Primary Residence H Vacation Home 1 w Vacation Home 2 CP Personal Property H Auto 1 W Auto 2 H Vintage Mustang H Yacht Total Personal Use $1,500,000 $950,000 $500,000 $900,000 $70,000 $60,000 $80,000 $900,000 $4,960,000 Net Worth $22,469,000 Total Assets $23,610,000 Total Liabilities and Net $ 23,610,000 1. Assets are stated at fair market value (rounded to even dollars). 2. Liabilities are stated at principal only (rounded to even dollars). 3. The adjusted basis of the primary residence is $600,000. 4. Kathi received vacation home 2 from her grandmother, Lois. Kathi and Lois were always very close and Lois gave her the home when Elizabeth was first born so Kathi 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. 5. The life insurance policy has Kathi listed as the designated beneficiary. The Investment account is a Transfer on Death account with Elizabeth and James as the listed beneficiaries of both Darrin and Kathi's shares. The was purchased by Darrin after his House Boat was destroyed by a ane. 7. Property Ownership: CP - Community Property H - Husband separate W-Wife separate 8. The insurance face value (death benefit) and the cash value of $1,000,000 are the same. Kathi and Darrin own Fresh Veggies, a popular organic health food store in a general partnership with another couple located in Louisiana. Scott, Elizabeth's husband, has worked at the store since he was a kid. Scott is now one of the store managers who continues along with the other partners to direct the company as executives. Kathi and Darrin would like to reward Scott for all of his hard work by giving Scott and Elizabeth 3/4 of their interest in the business and giving the remaining 1/4 of their interest in the business to James. They do not want James to have any control over the business, just to have an income interest. Elizabeth's youngest child, Andrew, was born with a serious physical disability. To provide additional support for Andrew, Darrin created an irrevocable trust with Andrew as the sole beneficiary with an $8,015,000 transfer of separate property 5 years ago. The trust meets the requirements of Section 2503(c). 1 Assume for any calculation of GSTT that the annual exclusion was $15,000 and the available lifetime exemption was $11,180,000. Also assume that the GSTT and gift tax rates were 40% for determination of GSTT even though they were paid 5 years prior. Darrin and Kathi made the following additional lifetime transfers: Four years ago, Darrin gave Elizabeth, James, and their spouses $100,000 each (assume the annual exclusion at the time was $11,000) of community property. Two years ago, Darrin gave Elizabeth, James, and their spouses $200,000 each of his separate property. Darrin paid gift tax of $347,760 on these gifts. Kathi and Darrin have never elected to split gifts of separate property. Darrin and Kathi 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 Kathi does not have a will. Darrin has an outdated will leaving most of his probate assets to Kathi. Clauses from Darrin's Statutory Last Will and Testament 1, Darrin, 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. 1. I have been married but once, and only to Kathi with whom I am presently living. Out of my marriage to Kathi, three children were born, namely Elizabeth, James and Lynn. I have adopted no one nor has anyone adopted me. 2. I leave my Vintage Mustang and House Boat to my son, James. 3. I leave the life insurance proceeds on my life to my daughter, Elizabeth. 4. I leave Vacation Home 1 to my daughter, Lynn. 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Kathi, my wife. 7. In the event that Kathi 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, Elizabeth, James and Lynn, in equal and 1/3 shares. 8. 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 legatee's descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among the surviving named legatees. 9. I name my best friend Keith to serve as the executor of my succession with full seizin and without bond. 10. 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. 11. 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 children's share, regardless of whether my spouse survives me. Statement of Financial Position (Darrin and Kathi Lovette) ASSETS Cash & Cash Equivalents CP Cash Total Cash / Cash Equiv. $150,000 $150,000 LIABILITIES AND NET WORTH Liabilities Current Liabilities CP Credit Card 1 CP Credit Card 2 Total Current Liabilities $ 16,000 $5,000 $21,000 Invested Assets CP Fresh Veggies CP Investment Portfolio H Life Insurance on Darrin CP Rental Property Total Investments $4,000,000 $13,000,000 $1,000,000 $500,000 $18,500,000 Long-Term Liabilities CP Mortgage - Primary Residence CP Rental Property w Auto 2 Total Long-Term Liabilities $750,000 $300,000 $70,000 $1,120,000 Total Liabilities $1,141,000 Personal Use Assets CP Primary Residence H Vacation Home 1 w Vacation Home 2 CP Personal Property H Auto 1 W Auto 2 H Vintage Mustang H Yacht Total Personal Use $1,500,000 $950,000 $500,000 $900,000 $70,000 $60,000 $80,000 $900,000 $4,960,000 Net Worth $22,469,000 Total Assets $23,610,000 Total Liabilities and Net $ 23,610,000 1. Assets are stated at fair market value (rounded to even dollars). 2. Liabilities are stated at principal only (rounded to even dollars). 3. The adjusted basis of the primary residence is $600,000. 4. Kathi received vacation home 2 from her grandmother, Lois. Kathi and Lois were always very close and Lois gave her the home when Elizabeth was first born so Kathi 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. 5. The life insurance policy has Kathi listed as the designated beneficiary. The Investment account is a Transfer on Death account with Elizabeth and James as the listed beneficiaries of both Darrin and Kathi's shares. The was purchased by Darrin after his House Boat was destroyed by a ane. 7. Property Ownership: CP - Community Property H - Husband separate W-Wife separate 8. The insurance face value (death benefit) and the cash value of $1,000,000 are the same