The Erickson Case

Chuck Erickson, age 64, owns and manages a plumbing parts store in upstate New York. Chuck plans to retire this year and has recently accepted an offer to sell this company for 2.3 million. Chuck and his wife, Elizabeth, age 63, bought a second home in Florida last year, where they intend to spend their winters. The couple has two children, Davis, age 40, and Angie, age 37. Both children are married and currently employed. Davis has one son age 14, and Angie has two daughters under the age of 10.

Chucks will provides that $500,000 of his estate will be placed into a power of appointment trust for Elizabeth, and Elizabeth is the sole trustee. The remainder of his estate is to be placed into a bypass trust with income payable to Elizabeth for her life as needed. Elizabeth will have a right to invade the corpus for health, education, maintenance, and support, and at her death any remaining corpus will be distributed to their children per stirpes.

Elizabeth has separate assets she inherited from her father. The first is a rare stamp collection that was worth $150,000 at her fathers death eight years ago, and is currently valued at $215,000. She also inherited his stock portfolio worth $86,000 which is now valued at $152,000. Elizabeth was the sole beneficiary of her fathers whole life insurance policy for which she received a death benefit of $250,000. She deposited that money in a separate account and used it to buy a duplex with her neighbor near a ski resort. Elizabeth contributed $150,000 toward the $300,000 purchase price, and they titled the property together as tenants in common. Elizabeths will provides for all of her estate to pass to Chuck or, if he predeceases her, to their two children equally.

Chuck created an irrevocable life insurance trust two years ago, and transferred a whole life policy with a face value of $1 million into the trust. Elizabeth will receive the income for life, and their two children will receive the corpus equally at Elizabeths death.

Chuck and Elizabeths estates presently consist of the following property values:

Property itemOwnerValue

Checking and savings accountJoint$23,000

Money market accountJoint$58,000

Mutual fund accountJoint$269,000

Securities inherited by ElizabethElizabeth$152,000

Stamp collection inherited by ElizabethElizabeth$215,000

Plumbing parts storeChuck$2,300,000

Vested profit-sharing plan1Chuck$300,000

Furniture and household goodsJoint$85,000

Jewelry and clothesElizabeth$95,000

BMW automobileChuck$70,000

Life insuranceIrrevocable trust$1 million

Residence in New York2Joint$750,000

Florida home3Joint$450,000

Lexus automobileElizabeth$55,000

Duplex4Elizabeth$200,000

1 Elizabeth is named as the designated beneficiary

2 mortgage liability is $200,000

3 mortgage liability is $180,000

4 capital FMV of duplex is $400,000 (Elizabeth owns 50% or $200,000)

Based on the information above, please answer the following questions.

1. Evaluate the following statements regarding Chuck and Elizabeths estate plans. Indicate whether the statements are correct/incorrect. State the reasons you have made your selections.

A. If Chuck dies first, the Florida home will be subject to ancillary probate upon his death.

B. If Chuck sells the business and places the proceeds in the joint mutual fund account or money market account, it will not be included in his probate estate.

C. If Elizabeth predeceases Chuck, she will not use any of her unified credit.

D. After Chucks death, Elizabeth can spend the money in the power of appointment trust without restrictions.

2. Which statement concerning Chuck and Elizabeths estate plans is not correct? Justify your answer.

A. Elizabeth can name the ultimate beneficiaries of the power of appointment trust in her will.

B. If Chuck decides to sell Elizabeths rare stamp collection after her death, his basis will be Elizabeths inherited basis of $150,000.

Chuck receives a step up in basis when he inherits Elizabeths stamp collection after her death.

C. Elizabeth has been given an ascertainable standard in the bypass trust.

D. Assets passing to the bypass trust for Elizabeth will take advantage of Chucks unified credit.

3. If Chuck dies today, what will the value of his gross estate be for federal estate tax purposes? List the assets you are including along with their value and the total.

4. If Elizabeth dies today, what will the value of her adjusted gross estate be for federal estate tax purposes? List the assets you are including along with their value and the total.

5. Which of the following statements concerning the securities Elizabeth inherited from her father is correct? Why or why not?

A. If Elizabeth leaves the securities equally to her grandchildren in her will, her estate will be subject to the generation-skipping transfer tax.

B. If Elizabeth gives each grandchild $14,000 of her securities over the next three years, she cannot use any generation-skipping transfer tax annual exclusions to offset the GST tax.

C. If Elizabeth transferred her securities into a trust naming all three grandchildren as beneficiaries with the provision that the trust retain all income for the next 15 years, Elizabeth could not use gift tax annual exclusions to offset any taxable gifts.

D. If Elizabeth transfers the securities to a trust that includes her children and grandchildren as beneficiaries, and applies $152,000 of her GST exemption to the trust, the grandchildren must pay a GST tax on any distributions they receive.

6. Which of the following statements correctly describes the consequences of Chucks irrevocable life insurance trust? Justify your answer.

A. The proceeds of the trust will be included in Elizabeths estate, assuming she dies after Chuck.

B. Elizabeth has a life estate in the trust, which is a terminable interest, and the children have a remainder interest in the trust.

C. Premiums for the life insurance policy will be paid with tax-deferred dollars.

D. Gift tax annual exclusions cannot be taken when the policy is transferred into the trust if the trust includes Crummey provisions.

7. Which of the following statements concerning the irrevocable life insurance trust is correct? Justify your response.

A. If the trust has Crummey provisions, Chuck and Elizabeth can use gift splitting to reduce the gift tax on annual premium payments transferred into the trust.

B. Chuck can borrow from the cash values of the policies without adverse tax consequences.

C. If Elizabeth dies after Chuck, a gift tax will incur when trust corpus is transferred equally to the children.

D. The beneficiaries are given Crummey powers and they let their annual right of withdrawal lapse, they are making gifts to the other trust beneficiaries.

8. Assume that Elizabeth bought a whole life insurance policy on Chucks life and she predeceased Chuck. Please evaluate each of the following statements. Determine whether or not each statement is correct. Include your rationale.

A. The value of the policy is included in her probate estate.

B. The replacement cost of the policy is included in her gross estate.

C. If Elizabeth gifted the policy to David one year before she died the policy would not be included in her gross estate.

D. The value of the policy included in Elizabeths gross estate will receive a marital deduction to offset her adjusted gross estate.