Lee and Marta Howard are in their early 70s. Recently they have grown concerned about probate and estate taxes. They calculated that this year they will have a combined net worth of

$6,180,000.

In addition, Lee owns a

$430,000

whole life insurance policy on his life. Marta is the beneficiary. They are also considering giving their recently divorced son

$130,000

to start a financial counseling practice. He is their only child, but he has two children of his own. One, age 25, is disabled, lives in a group home, and receives Medicaid. The other is a freshman in college. Although a bit ashamed to admit as much, the Howards do not have a will and have made no plans for their estate. Their overriding fear is that they will outlive their money.

Questions

1. Should Lee and Marta be concerned about probate? Why or why not?

2. What should Lee and Marta include in a letter of last instructions?

3. Help the Howards understand the differences between revocable and irrevocable living trusts by listing the advantages and disadvantages of both.

4. How might the Howards use trusts to benefit their grandchildren? How might these strategies affect their estate taxes?

5. What options does Lee have for gifting his whole life insurance policy, either to an individual or a charity? What are the consequences for his estate tax planning?

6. Would you recommend that Lee and Marta write their own will or should they hire an attorney? Explain your answer.

7. Once they have a completed and signed will, where should they keep it? Where should they definitely not keep the will?

8. Assume that Lee and Marta

(a)

own all assets jointly, except for the life insurance policy that Lee owns, and

(b)

decide not to gift or establish trusts. If Lee were to die in

2017

and leave his assets to Marta through a marital transfer, how much of the estate would be subject to taxes if Marta dies later in

2017

(assuming the estate growth is offset by all expenses incurred in

2017)?

9. If after Lee's death, Marta decided to

(a)

give her son the

$130,000,

(b)

establish two

$1,000,000

irrevocable trusts for the grandchildren, and

(c)

give another

$520,000

to charity, how much of the estate would be subject to taxes if Marta were to die later in

2017

(assuming the estate growth is offset by all expenses incurred in

2017)?

10. Given the ages of the Howards, should they consider naming their son in a durable power of attorney document? What are the advantages and disadvantages of this?

1. Should Lee and Marta be concerned about probate? Why or why not?

Because Lee and Marta do not have a will, probate may an issue. Probate also allows for the orderly distribution of assets of those who die intestate, or without a will. The Howards should be concerned for the following reasons:(Select all the choices that apply.)

A.

The probate process is public.

B.

Probate can cost more than the estate is worth.

C.

Probate can be costly.

D.

Probate can create delays in distributing assets to heirs and charities

2. What should Lee and Marta include in a letter of last instructions?(Select all the choices that apply.)

Although a letter of last instructions is not a legally binding document, the Howards should use such a document to provide information and instructions related to their final wishes. Information in this document includes:

A.

The location of the will and other documents.

B.

Social Security numbers, tax return information, a listing of personal property, and funeral and burial instructions.

C.

Social Security numbers, a listing of personal property, a listing of all investment account logins and passwords, and funeral and burial instructions.

D.

Who should and should not be notified of their death(s).

3. Help the Howards understand the differences between revocable and irrevocable living trusts by listing the advantages and disadvantages of both.(Select from the drop-down menus.)

A(n)

irrevocable

revocable

trust allows the Howards to retain control of the assets in the trust and to obtain income from the trust.

Revocable

Irrevocable

trusts provide no tax advantages; however, they do shelter assets from the probate process. With an

irrevocable

revocable

trust, the Howards will relinquish all title and control of assets placed in the trust. Assets removed from their current estate in a timely manner will be excluded from their estate for federal estate tax purposes; however, gifts to an

revocable

irrevocable

trust may be taxable.

4. How might the Howards use trusts to benefit their grandchildren? How might these strategies affect their estate taxes?

The Howards could use either living or testamentary trusts to benefit their heirs. If they choose to place some of their assets in an irrevocable living trust then:(Select all the choices that apply.)

A.

The deposited assets would avoid the probate process.

B.

The deposited assets would be removed from their taxable estate.

C.

The income from the trust could be directed towards the grandchildren to avoid any income tax liability.

D.

The income from the trust could be directed towards the grandchildren also potentially lowering income tax liability.

Alternatively if the Howards are less concerned about estate taxes then they could use any one of several testamentary trusts.(Select all the choices that apply.)

A.

One option would be a Q-PRT. This trust type would allow either Lee or Marta to provide for the surviving spouse but then have the assets pass without additional taxes or probate fees to their child or grandchildren.

B.

One option would be a Q-TIP. This trust type would allow either Lee or Marta to provide for the surviving spouse but then have the assets pass without additional taxes or probate fees to their child or grandchildren.

C.

Given the income limitations of both grandchildren a sprinkling trust, where the trustee has some discretion about distributions, could be a beneficial solution.

D.

Given the income limitations of both grandchildren a blind trust, where the trustee has some discretion about distributions, could be a beneficial solution.

5. What options does Lee have for gifting his whole life insurance policy, either to an individual or a charity? What are the consequences for his estate tax planning?(Select all the choices that apply.)

A.

Lee could gift his whole life policy to an individual or charity. If the policy is given away within 3 years of his death, the policy will be included in the estate for tax purposes. However, beyond this point, the implications for his estate tax planning are different.

B.If Lee gives the policy to an individual, the amount of the cash value over

$15,000,

the tax-free gift threshold, will be considered toward his lifetime non-tax-exempt gift amount. This will be offset by part of the unified tax credit, as long as the total non-tax-exempt gifts don't exceed

$5.34

million. The recipient would incur no taxes. No limits on gifts apply to charities.

C.

Lee could gift his whole life policy to an individual or charity. If the policy is given away within 2 years of his death, the policy will be included in the estate for tax purposes. However, beyond this point, the implications for his estate tax planning are different.

D.If Lee gives the policy to an individual, the amount of the cash value over

$14,000,

the tax-free gift threshold, will be considered toward his lifetime non-tax-exempt gift amount. This will be offset by part of the unified tax credit, as long as the total non-tax-exempt gifts don't exceed

$5.34

million. The recipient would incur no taxes. No limits on gifts apply to charities.

6. Would you recommend that Lee and Marta write their own will or should they hire an attorney? Explain your answer.(Select the best choice below.)

A.

Drafting one's own will is illegal in the state of California, therefore, Lee and Marta should hire a competent estate attorney to draft their will.

B.

Although drafting one's own will is not illegal or necessarily inappropriate, Lee and Marta should hire a competent estate attorney to draft their will. This necessity stems from the fact that the Howards have a relatively large estate and potential health problems.

C.

Although drafting one's own will is not illegal or necessarily inappropriate, Lee and Marta should hire a competent tax attorney to draft their will. This necessity stems from the fact that the Howards have a relatively large estate and potential health problems.

D.

Drafting one's own will is illegal in the state of California, therefore, Lee and Marta should hire a competent tax attorney to draft their will.

7. Once they have a completed and signed will, where should they keep it? Where should they definitely not keep the will?(Select all the choices that apply.)

A.

The original and final copy of the will should be held in a safe deposit box.

B.

The original and final copy of the will should not be held in a safe deposit box.

C.

An alternative is a safe at home. If held at home, their executor or personal representative should be notified of the exact location.

D.

Lee and Marta should consider keeping the final copy of their will with their attorney.

8. Assume that Lee and Marta

(a)

own all assets jointly, except for the life insurance policy that Lee owns, and

(b)

decide not to gift or establish trusts. If Lee were to die in

2017

and leave his assets to Marta through a marital transfer, how much of the estate would be subject to taxes if Marta dies later in

2017

(assuming the estate growth is offset by all expenses incurred in

2017)?

(Select all the choices that apply.)

A.

At Lee's death no estate tax will be due.

B.Marta's estate would be valued at

$3,475,000

($3,045,000+$430,000),

which falls below that

$5,340,000

estate exemption.

C.Upon Marta's death, the estate tax will be

$868,750

($3,475,00025%).

D.

Upon Marta's death, no estate tax will be due.

9. If after Lee's death, Marta decided to

(a)

give her son the

$130,000,

(b)

establish two

$1,000,000

irrevocable trusts for the grandchildren, and

(c)

give another

$520,000

to charity, how much of the estate would be subject to taxes if Marta were to die later in

2017

(assuming the estate growth is offset by all expenses incurred in

2017)?

(Select all the choices that apply.)

A.No estate or gift tax is due on Marta's estate. Marta's gross estate, after Lee's death, is valued at

$6,610,000.

The gift to charity reduces the gross estate to

$6,090,000.

Because the total value of the other gifts and transfers is less than

$5,340,000

($1,000,000+$1,000,000+$130,000),

no gift tax is imposed.

B.The taxable estate, after gifts and transfers, is

$3,460,000,

which is less than the

2017

estate exemption of

$5.34

million.

C.The taxable estate, after gifts and transfers, is

$3,960,000,

which is less than the

2017

estate exemption of

$5.34

million.

D.No estate or gift tax is due on Marta's estate. Marta's gross estate, after Lee's death, is valued at

$6,610,000.

The gift to charity reduces the gross estate to

$6,090,000.

Because the total value of the other gifts and transfers is less than

$5,340,000

($1,000,000+$1,000,000),

no gift tax is imposed.

10. Given the ages of the Howards, should they consider naming their son in a durable power of attorney document? What are the advantages and disadvantages of this?

Giving their son a power of attorney, as long as the power is limited, is an excellent idea, especially should something happen to both Lee and Marta at the same time. The advantage of this arrangement is that their son could take care of financial matters for them without the need to have the state get involved. The disadvantage could be that if the son was unscrupulous, he could access the parents' money for his benefit without their permission or knowledge.

Is the above statement true or false?

False

True

. (Select from the drop-down menu.)

Click to select your answer(s).