The Danson Case: Estate Planning Case

Ed and Bonnie Danson are taking steps to begin evaluating their estate planning situation. Ed is 60 years old and Bonnie is 53. The Dansons have two children, ages 13 and 18. Ed is a successful executive with a Fortune 500 company, and Bonnie has achieved success as an office manager for a real estate developer.

Currently their wills state that if either Ed or Bonnie were to pass away, the surviving spouse would inherit everything. Both Ed and Bonnie value their privacy, but they have not yet established a trust. They have an interest in providing charitable support for their church, but they have not made any sizable contributions. The data below summarizes their asset, liability, and estate expense situation. Use this information to answer the questions that follow.

Asset

Value

Ownership

Checking Account

$26,000

JTWROS

Savings Account

$20,000

JTWROS

Money Market Account

$90,000

JTWROS

Other Monetary Assets

$0

JTWROS

EE Bonds

$100,000

JTWROS

Mutual Funds

$1,720,000

JTWROS

Other Investment Assets

$250,000

JTWROS

Primary Residence

$700,000

JTWROS

Other Housing Assets (Vacation Home)

$240,000

JTWROS

Vehicles

$86,000

JTWROS

Personal Property

$134,000

JTWROS

Retirement Assets

$768,000

Ed

Retirement Assets

$345,000

Bonnie

Other Assets

$48,000

Joint

Life Insurance (Variable Universal Life)

$1,500,000

Ed

Life Insurance (Universal Life)

$250,000

Bonnie

Liabilities

Mortgage

112,000

Joint

Debts

86,000

Joint

Expenses

Funeral and Final Expenses

25,000

Same

1.Identify the statement(s) below that correctly characterize(s) property interests held by Ed that, at death, pass by operation of law.

I.If the property passed according to the operation of law, the property avoids probate.

II.If the property passes according to the operation of law, it will not be included in the decedent's gross estate.

III.Property that passes by operation of law cannot qualify for the marital deduction.

IV.The titling on the instrument determines who shall receive the property.

a.I only

b.I, II, and III only

c.I and IV only

d.I, II, and IV only

e.II and III only

2.As Ed and Bonnie think about the value of their adjusted gross estate, they are unsure what assets and expenses may be deductible. Which of the following is a deduction from the gross estate used to calculate the adjusted gross estate?

a.Costs associated with maintaining estate assets.

b.Nontaxable gifts made within three years.

c.Federal estate tax marital deduction.

d.Property inherited from others.

3.Currently, the Dansons own their personal residence as JTWROS. If, instead, they owned the property as a tenancy by the entirety, how could this form of ownership be terminated?

I.Death, whereby the survivor takes the property.

II.Mutual agreement.

III.Divorce, which converts the estate into a tenancy in common or a joint tenancy.

IV.Severance, whereby one spouse transfers his or her interest to a third party without the consent of the other spouse.

a.IV only

b.I and III only

c.II and IV only

d.I, II, and III only

e.I, II, III, and IV

4.One of Ed's primary financial planning goals includes making lifetime gifts to his children. He would like to do this to help his children and to reduce his potential estate tax liability. If he moves forward with his plan in order to maximize the value of the strategy, he should make gifts of property that

I.are expected to depreciate in the future.

II.are expected to appreciate in the future.

III.have already depreciated significantly.

a.I only

b.II only

c.III only

d.I and III only

e.I, II, and III

5.What is the value of Ed's adjusted gross estate if he were to pass away today and before Bonnie?

a.$2,475,000

b.$3,225,000

c.$3,851,000

d.$3,975,000

6.There are several weaknesses associated with the Dansons' current estate plan. Which of the following are the significant weaknesses within their plan?

I.Failure to utilize the marital deduction.

II.Failure to maximize the unified credit.

III.Failure to utilize charitable gift strategies to reduce the taxable estate.

IV.Failure to avoid probate.

a.I and III only

b.II and IV only

c.I, II, and III only

d.II, III, and IV only

e.I, II, III, and IV

7.In view of the combined estate values for Ed and Bonnie, and knowing that one of their planning objectives is the reduction of estate taxes, which of the following estate planning techniques may be appropriate?

I.Placing the life insurance policies in an irrevocable trust.

II.Establishing a revocable living trust and funding it by using the unlimited marital deduction and the full unified credit.

III.Making use of the gift tax annual exclusion.

IV.Establishing a QTIP trust to pass property to their children.

a.II and III only

b.I and III only

c.II and IV only

d.II, III, and IV only

e.I, II, III, and IV

8.Calculate Bonnie's taxable estate assuming that Ed passes away first.

a.$6,029,000

b.$6,484,000

c.$7,860,000

d.$7,736,000

e.$7,984,000

9.The Dansons are considering making a sizable charitable gift to their local university using assets held in their mutual fund accounts. The primary purpose of their gift strategy is to reduce their taxable estate while providing a benefit for the university. Which of the following strategies will maximize the effectiveness of this estate planning strategy?

a.Give the mutual funds first to their oldest child who can then sell them with a stepped-up basis and use the proceeds as a donation to the university.

b.Donate the mutual funds directly to the university and allow the university to sell the funds.

c.Sell the mutual funds first and then donate the cash proceeds to the university.

d.Transfer the mutual funds to a noncharitable irrevocable trust and then donate the trust income to the university.

10.The local university has approached the Dansons about making a charitable contribution. After discussing the possibility of making a donation, Ed and Bonnie have decided that they would be willing to make the donation if they can receive an immediate tax deduction and income based on a fixed percentage of the amount donated (valued annually). They would also like to have the ability to add to their donation amount in future years. Which of the following charitable giving alternatives best serves the Dansons' desires?

a.Charitable Remainder Unitrust

b.Charitable Remainder Annuity Trust

c.Pooled Income Fund

d.Grantor Retained Annuity Trust