Mel, age 62, and Oksana, age 23, have been dating for about a year and a half. Mel and Oksana met when Mel was on a vacation in the south of France. Oksana was a beautiful French artist selling paintings at the market by Mel's hotel. After a month-long romance, Mel asked Oksana 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 Oksana is expecting her first child. Although no paternity tests have been conducted, both Mel and Oksana are confident the child is Mel's. When they found out Oksana was pregnant, Oksana moved into the 4 bedroom home Mel owns so they could prepare for the baby, whom they plan to name Kole. To prove to Oksana that he was serious about them being a family, Mel gave Oksana $11,180,000 in a money market account in January 2018. The money market account is the only asset Oksana owns. Mel also purchased a $2,000,000 life insurance policy on his life and named Oksana as the beneficiary.

Mel was previously married 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.

Mel and his first wife, Robyn, have been divorced for ten years and are not on speaking terms. After their marriage, Mel was required to pay Robyn alimony in the amount of $10,000 per month. When the court order expired at the end of 2016, Mel felt bad so he continues to give Robyn $10,000 per month on the first of each month.

Although Mel has high blood pressure, he is otherwise healthy. Oksana 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. Mel is retired and owns The Bungalow, a local bar and grill, while Oksana is currently unemployed. Mel and Oksana live in a community property state.

Mel'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 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. The policy does not have a named beneficiary.

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

1.The last illness and funeral expenses are expected to be $100,000.

2.Estate administration expenses are estimated at $180,000.

WILL

Oksana does not have a will. Mel has written two wills in his lifetime. The first will was astatutory will executed during his marriage to Robyn, and dated September 1, 1990. The second will isa handwritten will he wrote right after his divorce. For the second will, Mel did

not want to seek advice from an attorney so he basically copied the first will in his own handwriting and replaced the names. The second will is only signed and dated by him and was not witnessed. Robyn still has an executed copy of the first will and the second will is in the bottom of Mel's sock drawer. No one, other than Mel, knows the second will exists.

Mel's Last Will and Testament drafted and executed during his marriage to Robyn.

I, Mel, 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 Robyn with whom I am presently living. Out of my marriage to Robyn, two children were born, namely Kati and Karli. I have adopted no one nor has anyone adopted me.

2.I leave all assets to my wife Robyn.

3.In the event that Robyn 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, Robyn, 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.

MEL'S LAST WILL AND TESTAMENT HANDWRITTEN AFTER HIS DIVORCE:

I, Mel, 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 Kati and Karli. 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 Kati, 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

Mel made the following gifts to his grandchildren during 2017:

Seeing how Mel's mom outlived her assets, Mel is afraid his grandchildren may have the same fate. To assist them with their retirement income, Mel 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.

Mel sent a check in the amount of $6,000 directly to Kali's private school to pay her tuition. Mel also gave both Cody and Riley $6,000 each.

Assume Mel paid gift tax of $1,362,518 in 2016 for taxable gifts in the amount of $8,836,295 made in 2015. These were his first taxable gifts.

MEL'S STATEMENT OF FINANCIAL POSITION (AFTER THE GIFT TO OKSANA)

ASSETS

LIABILITIES AND NET WORTH

Cash & Cash Equivalents

Liabilities

Cash

$120,000

Primary Residence

$200,000

Total Cash / Cash Equiv.

$120,000

Auto 1

$10,000

Total Current Liabilities

$210,000

Invested Assets

The Bungalow

$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 1

$20,000

Boat

$60,000

Total Personal Use

$580,000

Total Assets

$3,500,000

Total Liabilities and Net

$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.The Bungalow 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 Robyn listed as the designated beneficiary. The Investment Portfolio is a Transfer on Death (TOD) account with Kati and Karli as the listed beneficiaries.

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

6.Mel 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.

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

8.Mel'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 Oksana, and the gift tax has been paid for the 2015 gifts.

ESTATE PLAN EXERCISE

Answer the following questions. (Numbers are rounded for convenience.)

1.Mel and Oksana decide to make an estate plan.What are the appropriate steps to estate plan?What practitioners should be included in the estate planning discussions and what are the roles of each practitioner?(Value - 6 points)

2.Assuming Mel died February 1, 2018, calculate his gross estate.For full credit, identify each asset and its value.(Value - 5 points)

3.Assuming Mel died February 1, 2018, calculate his probate estate.For full credit, identify each asset and its value.(Value - 5 points)

4.Assuming Mel died February 1, 2018, calculate the Marital Deduction available for estate transfers to Oksana.(Value - 5 points)

5.Assume Mel died February 1, 2018.For this question only, assume that the estate tax liability due is

$266,881, and Kati is appointed executor. Unfortunately, Kati 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.) (Value - 5 points)

6.What is the amount of Mel's total taxable gifts for 2017 (less the annual exclusion and qualified transfers)? (Value - 5 points)

7.Calculate Mel's gift tax due for 2017.Show your work.Even if the tax due is zero, show your calculation to earn full credit.(Value - 5 points)