Kenny and Melissa Background

Kenny, age 62, and Melissa, age 23, have been dating for about a year and a half. Kenny and Melissa met when Kenny was on a vacation in the south of France. Melissa was a beautiful French artist selling paintings at the market by Kenny's hotel. After a month-long romance, Kenny asked Melissa 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.

While they have no current plans to marry, they recently found out that Melissa is expecting her first child. Although no paternity tests have been conducted, both Kenny and Melissa are confident the child is Kenny's. When they found out Melissa was pregnant, Melissa moved into the 4 bedroom home Kenny owns so they could prepare for the baby, whom they plan to name Kole. To prove to Melissa that he was serious about them being a family, Kenny gave Melissa $2,000,000 in cash last month. This is the only asset Melissa owns. Kenny also purchased a $1,000,000 life insurance policy on his life and designated Melissa as the beneficiary.

Kenny was married before and has two children from that marriage, Kati, age 38, and Karli, age 28. Both girls are happily married and have children of their own. Kati has two children, Cody, age 3, and Kali, age 13. Karli was unable to have children of her own; therefore, she adopted a little girl, Riley, age 2, from Russia last year.

Kenny and his first wife, Liz, have been divorced for ten years and are not on speaking terms. After their marriage, Kenny was required to pay Liz alimony in the amount of $1,000 per month for 5 years. When the court order expired, Kenny felt bad so he continues to give Liz $1,000 per month on the first of each month.

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

Kenny's mother, Carrie, also lives with him. Carrie 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. Carrie has already spent all of her retirement assets and relies solely on Social Security. The only substantial asset she still owns is a life insurance policy covering her life. The policy has a $100,000 death benefit and is not considered a MEC. The policy does not have a named beneficiary.

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

• The last illness and funeral expenses are expected to be $100,000.
• Estate administration expenses are estimated at $180,000.

Will

Melissa does not have a will. Kenny has written two wills in his lifetime. The first will was a statutory will executed during his marriage to Liz, and dated September 1, 1990. The second will is a handwritten will he wrote right after his divorce, but it is not dated. For the second will, Kenny 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. Liz still has an executed copy of the first will and the second will is in the bottom of Kenny's sock drawer. No one, other than Kenny, knows the second will exists. Kenny reasonably expects that the family will find the second Will after his death.

Kenny's Last Will and Testament written during his marriage to Liz.

I, Kenny, 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 have been married but once, and only to Liz with whom I am presently living. Out of my marriage to Liz, two children were born, namely Kati and Karli. I have adopted no one nor has anyone adopted me.
• I leave all assets to my wife Liz.
• In the event that Liz 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.
• 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 descendents, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children.
• I name my wife, Liz, to serve as the executor of my estate with full seizin and without bond.
• 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.

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

I, Kenny, 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 have two children, namely Kati and Karli. I have adopted no one nor has anyone adopted me.
• I leave all assets to my children.
• 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 descendents, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children.
• I name my daughter Kati, to serve as the executor of my estate with full seizin and without bond.
• 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

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

• Seeing how Kenny's mom out lived her assets, Kenny is afraid his grandchildren may have the same fate. To assist them with their retirement income, Kenny decided to establish a trust for the grandchildren. 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.
• Kenny sent a check in the amount of $6,000 to Kali's private school to pay her tuition.
• Kenny also gave both Cody and Riley $6,000 each.

Due to prior transfers, Kenny paid GSTT of $165,600 and gift tax of $231,840.

Kenny's Statement of Financial Position

AssetsLiabilities & Net WorthCash/Cash EquivalentsLiabilitiesCash$120,000Primary Residence$200,000Total Cash/Cash Equivalents$120,000Auto$10,000Invested AssetsTotal Liabilities$210,000The Bungalow$6,500,000Net Worth$12,290,000Investment Portfolio$2,800,000Qualified Plan$2,500,000Total Investments$11,800,000Personal Use AssetsPrimary Residence$400,000Vacation Property$100,000Auto$20,000Boat$60,000Total Personal Use$580,000Total Assets$12,500,000Total Liabilities & Net Worth$12,500,000

Notes to Financial Statements:

• Assets are stated at fair market value (rounded to even dollars).
• Liabilities are stated at principal only (rounded to even dollars).
• The Bungalow was valued last week for insurance purposes. The valuation includes $1,000,000 for the land and $5,500,000 for the business.
• The qualified plan has Liz listed as the designated beneficiary. The Investment Portfolio is a Transfer on Death (TOD) account with Kati and Karli as the listed beneficiaries.
• The adjusted basis of the personal residence is $200,000.
• Kenny received the vacation property as a gift from his grandfather, Grover. Grover purchased the vacation property for $10,000 and the FMV of the property at the date of transfer was $30,000. The FMV when Grover died was $60,000. The annual exclusion did not apply to the transfer and the gift tax paid was $14,700.
• The boat is owned joint tenancy with rights of survivorship with Liz. They each contributed 50% of the purchase price. The Statement of Financial Position only reflects Kenny's interest.
• Kenny's state does not have any statutes that invalidate bequests or beneficiary designations to prior spouses.

Assuming Kenny died today, calculate his gross estate.

1. $12,290,000
2. $12,500,000
3. $13,731,840
4. $13,897,440