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BUSI/FIN 4331

Project #2 - Fall 2019

Due November 10, 2019 by 11:59 pm Central Time to Turnitin Dropbox

COMPREHENSIVECASE

Wendy and Holden Background

Wendy and Holden have been married for 50 years and are both in good health. Wendy and Holden live in a community property state. They have the following children and grandchildren:

Heather, an estate planning attorney, is married, healthy, and happy. Wendy and Holden adore Heather's husband, Winston, and their three children.

Kimberly, a high net worth investment consultant, was recently divorced and her ex- husband, Brian, has custody of their three children. Wendy and Holden, never quite cared for Brian, as he always seemed to be quite snooty. Since the divorce, the relationship between Wendy and Brian has been very strained. Since her divorce, Kimberly has had somewhat of a mid-life crisis. She recently rented a penthouse apartment and bought a new Jaguar. Kimberly has also been dating Kevin, a 21-year-old swimsuit model. While Wendy and Holden are confident that this is only a passing phase, they are concerned about giving any gifts to Kimberly or her children outright.

Jennifer is an elementary school teaHailey who has never been married and has no children. Jennifer. Jennifer has aspirations of going to graduate school to become a diagnostician but is concerned about taking on debt to pursue additional education. Wendy and Holden are considering helping Jennifer pay for graduate school tuition.

Amy, Wendy and Holden's youngest child, was a bit of a wild child. Amy 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, Amy had given birth to a baby girl named Grace. At the time, Amy gave the baby to the baby's father, an older married man, although no official adoption was ever transacted. Wendy and Holden still do not know about Grace.

Wendy and Holden own Curl Up & Dye, a popular chain of beauty salons. Winston, Heather's husband, has worked at the business since he was a kid. Winston is now the manager and handles most of the day-to-day functions, with very little input from Wendy and Holden. Wendy and Holden would like to reward Winston for all of his hard work by giving Winston and Heather 1/2 of the business and giving the remaining 1/2 of the business to Kimberly and Jennifer equally. They do not want Kimberly and Jennifer to have any control over the business, just to have an income interest.

Heather's youngest child, Andrew, was born with a serious physical disability. To provide additional support for Andrew, Holden created an irrevocable trust with Andrew as the sole beneficiary with a $5,000,000 transfer of separate property in 2013. The trust meets the requirements of Section 2503(c).

Children

Grandchildren

Heather

Age 45

3 children

Kimberly

Age 35

4 children

Jennifer

Age 32

No children

Amy

Deceased

1 child

Holden and Wendy made the following additional lifetime transfers:

• In 2010, Holden gave Heather, Kimberly, and their spouses $200,000 each of

community property.

• In 2014, Holden gave Heather, Kimberly, and their spouses $200,000 each of his

separate property. Holden paid gift tax of $347,760 on these gifts.

• Holden and Wendy paid $130,000 in the years 1993-1996 directly to Baylor University

for Heather to achieve a degree in Religion (assume $32,500 per year).

• Holden and Wendy paid $60,000 in the years 2001-2004 directly to Texas State

University for Kimberly to achieve a degree in Finance (assume $12,000 per year).

• Holden and Wendy paid $32,000 in the years 2004-2007 directly to West Texas A&M University for Jennifer to achieve a degree in Elementary Education (assume $8,000

per year).

• Holden and Wendy paid $350,000 to Children's Hospital for a lung transplant for

Andrew in 2017.

• In 2006, Wendy gave Heather $100,000 of her separate property as an anniversary gift.
• In 2014, Wendy gave each of the grandchildren of which she was aware (assume all

grandchildren had been born by 2014) $100,000 of her separate property.

Wendy and Holden have never elected to split gifts of separate property.

Holden and Wendy 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

Wendy does not have a will. Holden has an outdated will leaving most of his probate assets to Wendy.

Clauses from Holden's Statutory Last Will and Testament

I, Holden, 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 Wendy with whom I am presently living. Out of my marriage to Wendy, four children were born, namely Heather, Kimberly, Jennifer, and Amy. I have adopted no one nor has anyone adopted me.
2. I leave my Vintage Mustang and House Boat to my daughter, Kimberly.
3. I leave the life insurance proceeds on my life to my daughter, Heather.
4. I leave Vacation Home 1 to my daughter, Amy.
5. I leave Auto 1 to the Methodist Church, a qualified charity.
6. I give the residual of my estate to Wendy, my wife.
7. In the event that Wendy 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, Heather, Kimberly, Jennifer, and Amy, in equal and 1/4 shares.

1. 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

my estate shall be paid by my executor as soon as practicable after my death and

allocated against the residual estate.

11. Since I have made numerous lifetime gifts to my children, all inheritance,

estate, succession, transfer, and other taxes (including interest and penalties thereon) payable by reason of my death shall be allocated to the children's share, regardless of whether my spouse survives me.

STATEMENT OFFINANCIALPOSITION(HOLDEN& WENDY)

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 personal residence is $600,000.
4. Wendy received vacation home 2 from her grandmother, Lois. Wendy

and Lois were always very close and Lois gave her the home when Heather was first born so Wendy could enjoy motherhood as much as Lois had. Lois purchased the vacation home for $30,000 and the FMV of the home at the date of transfer was $200,000. The FMV when Lois died was $250,000.

1. The life insurance policy has Wendy listed as the designated beneficiary. The inherited stock portfolios are Transfer on Death accounts with Heather, Kimberly, and Jennifer as the listed beneficiaries of both Holden and Wendy's shares.
2. The Yacht was purchased by Holden after his House Boat was destroyed by a Hurricane.
3. Property Ownership:

• CP - Community Property.
• H - Husband separate.
• W - Wife separate.

1. Insurance face value (death benefit) and the cash value of $2,000,000

are the same.

Answer the following questions. Assume the facts given in the fact pattern and that the 2018 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 Kimberly, Heather, and Jennifer assuming Wendy and Holden 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.

1. If Holden 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.
2. (a)Wendy will receive Holden's interest in the inherited stock portfolio.
3. (b)Heather will receive the proceeds of the life insurance policy.
4. (c)Kimberly will receive the yacht in place of the house boat.
5. (d)Grace may potentially receive Vacation Home 1 as Amy's

rightful heir.

1. Assuming Wendy died today, calculate her gross estate.
2. Assuming Wendy died today, calculate her probate estate.
3. Ignoring the above data, assume that Holden died today and the estate tax due was $2,355,888 and Keith is appointed executor. Unfortunately, Keith forgot to file an Estate Tax Return (Form 706) and pay the estate tax due until 96 days after the return's due date. How much is the failure-to-file penalty?
4. Identify and value each taxable gift made by Holden during his life. Where appropriate, explain any exemptions or exclusions that applied.
5. Calculate Holden'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.
6. Identify and value each taxable gift made by Wendy during her life. Where appropriate, explain any exemptions or exclusions that applied.
7. Calculate Wendy'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.

Use the following scenario to answer questions 10 through 13.

Cedric died on January 1, 2018 after a rogue hot air balloon hit his car. The property that he owned at the time of his death included the following:

All property listed above was owned in sole ownership by Cedric. The annuity is a joint and survivor annuity and will continue to pay his wife Mindy for her lifetime. Cedric's will leaves all probate assets to his son and daughter in equal shares. Cedric also owned a life insurance policy on his life. His basis in the policy was $95,000 and the death benefit was $1,000,000. The beneficiary of the insurance policy was Cedric's daughter, Daphne. Cedric's investment account had a transfer on death designation to Daphne. The family sued the balloon operator and received $1,000,000 for wrongful death payable to Mindy and $500,000 for Cedric's pain and suffering payable to Cedric's estate. Cedric made substantial gifts during his life. He paid gift tax of $108,000 in 2006, $97,200 2014, and $185,250 on April 15, 2016. Cedric's funeral cost $15,000. The car was sold 4/1/18 for its fair market value on that date in order to pay for Cedric's $38,000 hand-carved marble headstone. Cedric had $350,000 of medical expenses from the accident, but all expenses were covered by his medical insurance. The note receivable was being paid monthly.

1. What is the value of Cedric's gross estate assuming the date of death valuation is selected?
2. What is the value of Cedric's gross estate assuming the alternate valuation date is selected?
3. Determine whether each of the following items is included in Cedric's probate estate? Explain.

• Annuity
• Note Receivable
• Gift Tax Paid in 2014
• Gift Tax Paid in 2016
• Investment Account

1. What is the value of Cedric's probate estate?
2. Sherry contributed $2,250,000 to a revocable living trust in 2007. She named herself as the income beneficiary and her only daughter as the remainder beneficiary. The term of the trust was equal to Sherry's life expectancy. Sherry died in 2018, when the fair market value of the trust's assets is $3,750,000. How much is included in Sherry's probate estate related to the revocable living trust? Why?
3. Sarah contributed $750,000 to an irrevocable trust with no retained powers in 2016 and did not retain any powers over the transferred assets. She named her only son as the sole income and remainder beneficiary and paid gift tax at the date of the transfer of $248,300. In 2018, Sarah died of ovarian cancer. The fair market value of the property in the irrevocable trust was $8,000,000 at the date of her death. What is the value of assets that are included in Sarah's gross estate? Why?

16.JJ sold his farm to the American Red Cross, a 501(c)(3) charitable organization. The farm had a fair market value of $1,250,000. JJ inherited the farm from his brother three years prior to the sale when the fair market value of the home was $800,000. JJ's brother had an adjusted basis in the farm home equal to $150,000. The full sales price paid by the American Red Cross to JJ was $75,000. What amount of capital gain/loss would JJ report on his tax return for the year related to this sale?

17.Mack made the following transfers during the year:

• 100 shares of Walmart stock to the American Heart Association. At the

date of the contribution, the stock had a fair market value of $96.50 per share. Mack's adjusted taxable basis in the stock was $20 per share and he held the stock long term.

• $25,000 to the University of North Carolina at Chapel Hill. The $25,000 contribution allows him to purchase football season tickets. Mack also bought the football season tickets at a cost of $10,000.
• $1,000 to St. Jude's Children's Hospital during a local radio broadcast during the annual fund drive. In return for the $1,000 contribution, Mack received a St. Jude's Children's Hospital calendar with the radio station's logo valued at $15.

Ignoring any AGI limitations, what is Mack's maximum charitable income tax deduction for this year?

1. Justin and Hailey have been married for 28 years. Justin had a net worth of $10,000,000 when he died in 2015. Which of the following scenarios would incur the lowest overall (at Justin's death and Hailey's death) estate taxes assuming the property transfers at equal value at the death of both individuals and utilizing 2015 estate tax rates? Assume that portability is not elected. For full credit, show your calculations for each scenario and justify your answer.
2. Justin's will directs the transfer of $3,000,000 to his two children and the remainder of his assets to his wife, Hailey.
3. Justin's will directs that all of his property is transferred to Hailey.
4. At Justin's death, specific bequests totaling $1,000,000 are transferred per the direction of the will to individuals other than Hailey. The remainder of the assets are transferred to a trust with the income payable to Hailey for her life and the remainder interest payable to the children at Hailey's death. Justin's executor elected to treat this as a QTIP trust.
5. In his will, Justin funds a trust with $5,430,000 for the benefit of his two children. Hailey will receive an annual income distribution from the trust. All other assets will transfer to Hailey.
6. Anna has been married to Liam for 8 years. Liam is an Australian citizen. Anna would like to make an inter vivos transfer to Liam. What is the maximum amount that Anna can transfer to Liam without incurring transfer taxes or utilizing any of her applicable credit during 2018?
7. Henrietta died in 2018. She had been married to William for 28 years, and the two had amassed a community property estate of $35,000,000. Henrietta's will directs three specific bequests to her mother, brother, and father of $5,000,000, $50,000, and $2,000,000, respectively and creates a bypass trust to receive property equal to any remaining applicable estate tax credit available after her specific bequests. The bypass trust gives William the right to income for his life and the remainder of the trust to her two sons and leaves the residue of the estate to William. Henrietta's will directs the residue to be used to pay the estate taxes. What is the marital deduction on Henrietta's federal estate tax return?