Name Relationship Age Occupation Health Comments

Louie Husband $78$ Retired Terminally Ill

Kathleen Wife $75$ Retired Excellent

Jerry Son $50$ CEO, Borellis Casinos Excellent

Sal Son $47$ Casino Floor Manager Excellent Married, one child

Emily Granddaughter $($Sal$\text{'}$s Child$)22$ Just graduated from college Excellent Getting married this summer

Ava Non$-$marital child $($Louie$\text{'}$s child with another woman$)20$ Cocktail waitress Excellent Relies on Louie for suppoINVESTMENT ACCOUNT INFORMATION

Louie and Kathleen have one large brokerage account in which they accumulated assets during Louie$$s career in the casino business. While Louie was working, he deferred $$500,000$ of his salary into his $401($k$)$ plan. After his retirement, he rolled the assets into an IRA account that has since grown to be worth $$1,100,000.$ Louie and Kathleen allocate the portfolios in both accounts $50\%$ to equities and $50\%$ to bonds.

INSURANCE INFORMATION

Insured Owner Beneficiary Face Amount Type Cash Value Annual Premium Notes

Louie Louie Kathleen $$2,000,000$ Whole life $$750,000$ $$20,000$ Purchased $25$ years ago

ANNUITY INFORMATION

Louie inherited a condo in downtown Las Vegas $10$ years ago, worth $$1,500,000,$ which he subsequently sold to Sal, in exchange for a single$-$life $$55,000$ annual annuity payment made at the beginning of each year. Sal has made $10$ payments to date.

Louie and Kathleen Borelli

Projected Cash Flow for the Current Year

Cash Inflows

Portfolio income $$100,000$

Social Security income $ $32,000$

Private annuity income $ $55,000$

Cash Outflows

Taxes $($income and real estate$)$ $ $25,000$

Lifestyle expenses $$120,000$

Insurance premiums $ $20,000$

Louie and Kathleen save any remaining income into their brokerage account.All assets are considered community property unless otherwise noted.

$1$ The basis in the stock is $$1,230,000.$ This amount represents $20\%$ of all outstanding shares.

$2$ XYZ is a publicly traded company. The basis in the stock is $$56,000.$

$3$ Kathleen is the named primary beneficiary. Jerry and Sal are the named contingent beneficiaries.

$4$ The basis in the brokerage account is $$1,900,000.$

$5$ See the Annuity Information section for details.

$6$ The land is worth $$300,000.$ The basis in the property is $$440,000.$ The mortgage is paid off.

Question

If Louie dies today, how much of the annuity will be included in his gross estate?

$$0$

$$800,000$

$$950,000$

$$1,500,000$