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Wanda and Howard Background Wanda and Howard have been married for 50 years and are both in good health. Wanda and Howard live in a community property state. They have the following children and grandchildren: Children Grandchildren Rosa Age 45 3 children Amy Age 35 4 children Gina Age 32 No children Sophia Deceased 1 child Rosa, an estate planning attorney, is married, healthy, and happy. Wanda and Howard adore Rosa's husband, Doug, and their three children. Amy, a high net worth investment consultant, was recently divorced and her ex-husband, Brian, has custody of their four children. Wanda and Howard, never quite cared for Brian, as he always seemed to be quite snooty. Since the divorce, the relationship between Wanda and Brian has been very strained. Since her divorce, Amy has had somewhat of a mid-life crisis. She recently rented a penthouse apartment and bought a new Jaguar. Amy has also been dating Adrian, a 21-year-old swimsuit model. While Wanda and Howard are confident that this is only a passing phase, they are concerned about giving any gifts to Amy or her children outright. Gina is an elementary school teacher who has never been married and has no children. Gina. Gina has aspirations of going to graduate school to become a diagnostician but is concerned about taking on debt to pursue additional education. Wanda and Howard are considering helping Gina pay for graduate school tuition. Sophia, Wanda and Howard's youngest child, was a bit of a wild child. Sophia died in a tragic motorcycle accident in her senior year of college while she was on her way home to tell her parents about a big secret she had been keeping. The summer before, Sophia had given birth to a baby girl named Grace. At the time, Sophia gave the baby to the baby's father, an older married man, although no official adoption was ever transacted. Wanda and Howard still do not know about Grace. Wanda and Howard own Curl Up & Dye, a popular chain of beauty salons. Doug, Rosa's husband, has worked at the business since he was a kid. Doug is now the manager and handles most of the day-to-day functions, with very little input from Wanda and Howard. Wanda and Howard would like to reward Doug for all of his hard work by giving Doug and Rosa 1/2 of the business and giving the remaining 1/2 of the business to Amy and Gina equally. They do not want Amy and Gina to have any control over the business, just to have an income interest. Rosa's youngest child, Ethan, was born with a serious physical disability. To provide additional support for Ethan, Howard created an irrevocable trust with Ethan as the sole beneficiary with a $5,000,000 transfer of separate property in 2013. The trust meets the requirements of Section 2503(c). Howard and Wanda made the following additional lifetime transfers: In 2010, Howard gave Rosa, Amy, and their spouses $200,000 each of community property. In 2014, Howard gave Rosa, Amy, and their spouses $200,000 each of his separate property. Howard paid gift tax of $347,760 on these gifts. Howard and Wanda paid $130,000 in the years 1993-1996 directly to Baylor University for Rosa to achieve a degree in Religion (assume $32,500 per year). Howard and Wanda paid $60,000 in the years 2001-2004 directly to Texas State University for Amy to achieve a degree in Finance (assume $12,000 per year). Howard and Wanda paid $32,000 in the years 2004-2007 directly to West Texas A&M University for Gina to achieve a degree in Elementary Education (assume $8,000 per year). Howard and Wanda paid $350,000 to Children's Hospital for a lung transplant for Ethan in 2017. In 2006, Wanda gave Rosa $ 100,000 of her separate property as an anniversary gift. In 2014, Wanda gave each of the grandchildren of which she was aware (assume all grandchildren had been born by 2014) $100,000 News parate property. Wanda and Howard have never elected to split gifts of separate property. Howard and Wanda 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 Wanda does not have a will. Howard has an outdated will leaving most of his probate assets to Wanda. Clauses from Howard's Statutory Last Will and Testament I, Howard, 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 Wanda with whom I am presently living. Out of my marriage to Wanda, four children were born, namely Rosa, Amy, Gina, and Sophia. I have adopted no one nor has anyone adopted me. 2. I leave my Vintage Mustang and House Boat to my daughter, Amy. 3. I leave the life insurance proceeds on my life to my daughter, Rosa. 4. I leave Vacation Home 1 to my daughter, Sophia. 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Wanda, my wife. 7. In the event that Wanda 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, Rosa, Amy, Gina, and Sophia, in equal and 1/4 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 descendents, 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 STATEMENT OF FINANCIAL POSITION (HOWARD & WANDA) ASSETS Cash/Cash Equivalents CP Cash Total Cash/Cash Equivalents $ 1.250,000 $ 1,250,000 LIABILITIES AND NET WORTH Liabilities Current Liabilities CP Credit Card 1 CP Credit Card 2 Total Current Liabilities $ $ 215,250 48,525 263,775 Invested Assets CP Curl Up & Dye Salons H Inherited Stock Portfolio H Life Insurance on Howard CP Rental Property W Inherited Stock Portfolio Total Investments $ 17,520,000 $ 2,750,000 $ 1,000,000 $ 730,000 $ 2,340,000 $24,340,000 Long-Term Liabilities CP Mortgage - Primary W Mortgage - Vacation Home 2 H Yacht Total Long-Term Liabilities $ 1,350,000 $ 275,000 $ 1,000,000 $ 2,625,000 Total Liabilities 2,888,775 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 $ 2,640,000 $ 840,000 $ 950,000 $ 1,250,000 $ 94,000 $ 87,000 $ 215,000 $ 1,500,000 $ 7,576,000 Net Worth $30,277,225 Total Assets $33,166,000 Total Liabilities and Net Worth $33,166,000 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 adjusted basis of the primary residence is $1,600,000. 4. Wanda received vacation home 2 from her grandmother, Lois. Wanda and Lois were always very close and Lois gave her the home when Rosa was first born so Wanda could enjoy motherhood as much as Lois had. Lois purchased the vacation home for $15,000 and the FMV of the home at the date of transfer was $280,000. The FMV when Lois died was $350,000. 5. The life insurance policy has Wanda listed as the designated beneficiary. The inherited stock portfolios are Transfer on Death accounts with Rosa, Amy, and Gina as the listed beneficiaries of both Howard and Wanda's shares. 6. The Yacht was purchased by Howard after his House Boat was destroyed by a Hurricane. 7. Property Ownership: CP - Community Property. H- Husband separate. W-Wife separate. 8. Insurance face value (death benefit) and the cash value of $1,000,000 are the same. Answer the following questions. Assume the facts given in the fact pattern and that the 2019 estate and gift tax rates and annual exclusion apply unless otherwise indicated. (Numbers are rounded for convenience.) 1. Which of the following transfer mechanisms would be appropriate for the transfer of Curl Up & Dye Salons to Amy, Rosa, and Gina assuming Wanda and Howard did not want to make an outright gift of the company to them? For full credit, explain for each transfer option below why it is or is not appropriate. 1. Private Annuity. 2. SCIN. 3. Family Limited Partnership. 4. QPRT. 2. If Howard died today, which of the following statements is true regarding the transfers made in his will? For full credit, explain why each statement is true or false. (a) Wanda will receive Howard's interest in the inherited stock portfolio. (b) Rosa will receive the proceeds of the life insurance policy. (c) Sophia will receive the yacht in place of the house boat. (d) Grace may potentially receive Vacation Home 1 as Sophia's rightful heir. 3. Assuming Howard died today, calculate his gross estate. 4. Assuming Howard died today, calculate his probate estate. 5. Ignoring the above data, assume that Howard died today and the estate tax due was $12,555,666 and Keith is appointed executor. Unfortunately, Keith forgot to file an Estate Tax Return (Form 706) and pay the estate tax due until 186 days after the return's due date. How much is the failure-to-file penalty? 6. Identify and value each taxable gift made by Howard during his life. Where appropriate, explain any exemptions or exclusions that applied. 7. Calculate Howard's gift tax due in each year he made a taxable gift. Show your work. Even if the tax due is zero, show your calculation in each year there is a taxable gift. 8. Identify and value each taxable gift made by Wanda during her life. Where appropriate, explain any exemptions or exclusions that applied. 9. Calculate Wanda's gift tax due in each year she made a taxable gift. Show your work. Even if the tax due is zero, show your calculation in each year there is a taxable gift. Wanda and Howard Background Wanda and Howard have been married for 50 years and are both in good health. Wanda and Howard live in a community property state. They have the following children and grandchildren: Children Grandchildren Rosa Age 45 3 children Amy Age 35 4 children Gina Age 32 No children Sophia Deceased 1 child Rosa, an estate planning attorney, is married, healthy, and happy. Wanda and Howard adore Rosa's husband, Doug, and their three children. Amy, a high net worth investment consultant, was recently divorced and her ex-husband, Brian, has custody of their four children. Wanda and Howard, never quite cared for Brian, as he always seemed to be quite snooty. Since the divorce, the relationship between Wanda and Brian has been very strained. Since her divorce, Amy has had somewhat of a mid-life crisis. She recently rented a penthouse apartment and bought a new Jaguar. Amy has also been dating Adrian, a 21-year-old swimsuit model. While Wanda and Howard are confident that this is only a passing phase, they are concerned about giving any gifts to Amy or her children outright. Gina is an elementary school teacher who has never been married and has no children. Gina. Gina has aspirations of going to graduate school to become a diagnostician but is concerned about taking on debt to pursue additional education. Wanda and Howard are considering helping Gina pay for graduate school tuition. Sophia, Wanda and Howard's youngest child, was a bit of a wild child. Sophia died in a tragic motorcycle accident in her senior year of college while she was on her way home to tell her parents about a big secret she had been keeping. The summer before, Sophia had given birth to a baby girl named Grace. At the time, Sophia gave the baby to the baby's father, an older married man, although no official adoption was ever transacted. Wanda and Howard still do not know about Grace. Wanda and Howard own Curl Up & Dye, a popular chain of beauty salons. Doug, Rosa's husband, has worked at the business since he was a kid. Doug is now the manager and handles most of the day-to-day functions, with very little input from Wanda and Howard. Wanda and Howard would like to reward Doug for all of his hard work by giving Doug and Rosa 1/2 of the business and giving the remaining 1/2 of the business to Amy and Gina equally. They do not want Amy and Gina to have any control over the business, just to have an income interest. Rosa's youngest child, Ethan, was born with a serious physical disability. To provide additional support for Ethan, Howard created an irrevocable trust with Ethan as the sole beneficiary with a $5,000,000 transfer of separate property in 2013. The trust meets the requirements of Section 2503(c). Howard and Wanda made the following additional lifetime transfers: In 2010, Howard gave Rosa, Amy, and their spouses $200,000 each of community property. In 2014, Howard gave Rosa, Amy, and their spouses $200,000 each of his separate property. Howard paid gift tax of $347,760 on these gifts. Howard and Wanda paid $130,000 in the years 1993-1996 directly to Baylor University for Rosa to achieve a degree in Religion (assume $32,500 per year). Howard and Wanda paid $60,000 in the years 2001-2004 directly to Texas State University for Amy to achieve a degree in Finance (assume $12,000 per year). Howard and Wanda paid $32,000 in the years 2004-2007 directly to West Texas A&M University for Gina to achieve a degree in Elementary Education (assume $8,000 per year). Howard and Wanda paid $350,000 to Children's Hospital for a lung transplant for Ethan in 2017. In 2006, Wanda gave Rosa $ 100,000 of her separate property as an anniversary gift. In 2014, Wanda gave each of the grandchildren of which she was aware (assume all grandchildren had been born by 2014) $100,000 News parate property. Wanda and Howard have never elected to split gifts of separate property. Howard and Wanda 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 Wanda does not have a will. Howard has an outdated will leaving most of his probate assets to Wanda. Clauses from Howard's Statutory Last Will and Testament I, Howard, 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 Wanda with whom I am presently living. Out of my marriage to Wanda, four children were born, namely Rosa, Amy, Gina, and Sophia. I have adopted no one nor has anyone adopted me. 2. I leave my Vintage Mustang and House Boat to my daughter, Amy. 3. I leave the life insurance proceeds on my life to my daughter, Rosa. 4. I leave Vacation Home 1 to my daughter, Sophia. 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Wanda, my wife. 7. In the event that Wanda 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, Rosa, Amy, Gina, and Sophia, in equal and 1/4 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 descendents, 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 STATEMENT OF FINANCIAL POSITION (HOWARD & WANDA) ASSETS Cash/Cash Equivalents CP Cash Total Cash/Cash Equivalents $ 1.250,000 $ 1,250,000 LIABILITIES AND NET WORTH Liabilities Current Liabilities CP Credit Card 1 CP Credit Card 2 Total Current Liabilities $ $ 215,250 48,525 263,775 Invested Assets CP Curl Up & Dye Salons H Inherited Stock Portfolio H Life Insurance on Howard CP Rental Property W Inherited Stock Portfolio Total Investments $ 17,520,000 $ 2,750,000 $ 1,000,000 $ 730,000 $ 2,340,000 $24,340,000 Long-Term Liabilities CP Mortgage - Primary W Mortgage - Vacation Home 2 H Yacht Total Long-Term Liabilities $ 1,350,000 $ 275,000 $ 1,000,000 $ 2,625,000 Total Liabilities 2,888,775 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 $ 2,640,000 $ 840,000 $ 950,000 $ 1,250,000 $ 94,000 $ 87,000 $ 215,000 $ 1,500,000 $ 7,576,000 Net Worth $30,277,225 Total Assets $33,166,000 Total Liabilities and Net Worth $33,166,000 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 adjusted basis of the primary residence is $1,600,000. 4. Wanda received vacation home 2 from her grandmother, Lois. Wanda and Lois were always very close and Lois gave her the home when Rosa was first born so Wanda could enjoy motherhood as much as Lois had. Lois purchased the vacation home for $15,000 and the FMV of the home at the date of transfer was $280,000. The FMV when Lois died was $350,000. 5. The life insurance policy has Wanda listed as the designated beneficiary. The inherited stock portfolios are Transfer on Death accounts with Rosa, Amy, and Gina as the listed beneficiaries of both Howard and Wanda's shares. 6. The Yacht was purchased by Howard after his House Boat was destroyed by a Hurricane. 7. Property Ownership: CP - Community Property. H- Husband separate. W-Wife separate. 8. Insurance face value (death benefit) and the cash value of $1,000,000 are the same. Answer the following questions. Assume the facts given in the fact pattern and that the 2019 estate and gift tax rates and annual exclusion apply unless otherwise indicated. (Numbers are rounded for convenience.) 1. Which of the following transfer mechanisms would be appropriate for the transfer of Curl Up & Dye Salons to Amy, Rosa, and Gina assuming Wanda and Howard did not want to make an outright gift of the company to them? For full credit, explain for each transfer option below why it is or is not appropriate. 1. Private Annuity. 2. SCIN. 3. Family Limited Partnership. 4. QPRT. 2. If Howard died today, which of the following statements is true regarding the transfers made in his will? For full credit, explain why each statement is true or false. (a) Wanda will receive Howard's interest in the inherited stock portfolio. (b) Rosa will receive the proceeds of the life insurance policy. (c) Sophia will receive the yacht in place of the house boat. (d) Grace may potentially receive Vacation Home 1 as Sophia's rightful heir. 3. Assuming Howard died today, calculate his gross estate. 4. Assuming Howard died today, calculate his probate estate. 5. Ignoring the above data, assume that Howard died today and the estate tax due was $12,555,666 and Keith is appointed executor. Unfortunately, Keith forgot to file an Estate Tax Return (Form 706) and pay the estate tax due until 186 days after the return's due date. How much is the failure-to-file penalty? 6. Identify and value each taxable gift made by Howard during his life. Where appropriate, explain any exemptions or exclusions that applied. 7. Calculate Howard's gift tax due in each year he made a taxable gift. Show your work. Even if the tax due is zero, show your calculation in each year there is a taxable gift. 8. Identify and value each taxable gift made by Wanda during her life. Where appropriate, explain any exemptions or exclusions that applied. 9. Calculate Wanda's gift tax due in each year she made a taxable gift. Show your work. Even if the tax due is zero, show your calculation in each year there is a taxable gift