Philip Colburn of Arlington Heights, Delaware, was 65 when he retired in 1998. His wife of 35 years passed away shortly thereafter. Her will left everything to Philip. Although her estate was valued at $1,750,000, there was no estate tax due because of the 100 percent marital deduction. Their only child, Mark Colburn, is married to Alice; they have four children, two in college and two in high school. When Philip died in 2007, his home was valued at $650,000, his vacation cabin on a lake was valued at $285,000, his investments in stocks and bonds at $890,000, and his pension funds at $645,000 (Mark was named beneficiary). Philip also owned a life insurance policy that paid proceeds of $500,000 to Mark. He left $60,000 to his church and $25,000 to his high school to start a scholarship fund in his wifes name. The rest of the estate was left to Mark. Funeral costs were $5,000. Debts and expenses totaled $90,000. In 2001, Philip made a gift of XYZ stock worth $170,000 jointly to Mark and Alice. Because of the two $10,000 annual exclusions (allowed in 2001) and the unified credit, no gift taxes were due. Use Worksheet 15.2 to guide your calculations as you complete these exercises.

1. Compute the value of Philips probate estate.

2. Compute the value of Philips gross estate at the time of his death.

3. Determine the total allowable deductions.

4. Calculate the estate tax base, taking into account the gifts given to Mark and Alice (remember the annual exclusions).

5. Use Exhibit 15.7 to determine the tentative tax on estate tax base.

6. Subtract the appropriate unified tax credit (Exhibit 15.8) for 2007 from the tentative tax on estate tax base to arrive at the federal estate tax due. Note that there is no credit for gift tax payable on post-1976 gifts because no gift taxes had to be paid.

7. Comment on the estate shrinkage experienced for Philips estate. What might have been done to reduce this shrinkage? Explain.

EXHIBIT 15.8 Unified Credits and Applicable Exclusion Amounts for Estates and Gifts The Economic Growth and Tax Relief Reconciliation Act of 2001 increased the applicable exclusion amount on a scheduled basis over the period from 2002 to 2009, with a complete repeal of the estate tax in 2010. This table shows the step-up in the exclusion amount from 2006 through repeal in 2010. Also shown are the unified tax credit amounts over the 2006 to 2011 period. Unified Tax Applicable Exclusion Unified Tax Applicable Exclusion Year Credit Estates Credit-Gifts Amount-Gifts Amount Estates $780,800 $2,000,000 $345,800 $1,000,000 2006 $780,800 $2,000,000 $1,000,000 2007 $345,800 $780,800 $2,000,000 $345,800 $1,000,000 2008 $345,800 $1,000,000 2009 $1,455,800 $3,500,000 $330,800 2010 Estate tax repealed for 2010 $1,000,000 $345,800 2011 $345,800 $1,000,000 $1,000,000