The Mel and Oksana Case MEL AND OKSANA BACKGROUND Mel, age 62, and Oksana, age 23, have been dating for about a year and a half. Mel and Oksana met when Mel was on a vacation in the south of France. Oksana was a beautiful French artist selling paintings at the market by Mel's hotel. After a month-long romance, Mel asked Oksana to return to the United States with him. Although not a United States citizen, she has maintained residence in the United States for 15 months. While they have no current plans to marry, they recently found out that Oksana is expecting her first child. Although no paternity tests have been conducted, both Mel and Oksana are confident the child is Mel's. When they found out Oksana was pregnant, Oksana moved into the 4 bedroom home Mel owns so they could prepare for the baby, whom they plan to name Kole. To prove to Oksana that he was serious about them being a family, Mel gave Oksana $10,000,000 in a money market account in January 2019. The money market account is the only asset Oksana owns. Mel also purchased a $5,000,000 life insurance policy on his life and named Oksana as the beneficiary. Mel was previously married and has two children from that marriage, Kati, age 38, and Karli, age 28. Both girls are happily married and have children of their own. Kati has two children, Cody, age 3, and Kali, age 13. Karli was unable to have children of her own; therefore, she adopted a little girl, Riley, age 2, from Russia last year. Mel and his first wife, Robyn, have been divorced for ten years and are not on speaking terms. After their marriage, Mel was required to pay Robyn alimony in the amount of $15,000 per month. When the court order expired at the end of 2015, Mel felt bad so he continues to give Robyn $15,000 per month on the first of each month. Although Mel has high blood pressure, he is otherwise healthy. Oksana has never been married. She is in excellent health, and learned just a few days ago that they are having a baby boy, who is expected to be healthy. Mel is retired and owns Uncle Benny's, a local bar and grill, while Oksana is currently unemployed. Mel and Oksana live in a community property state. Mel's mother, Carrie, also lives with him. Carrie is 82 and in failing health. She was recently diagnosed with Parkinson's disease. While she is unable to feed or bathe herself, she is expected to live for several more years. Carrie has already spent all of her retirement assets and relies exclusively on Social Security. The only substantial asset she owns is a life insurance policy covering her life. The policy has a $100,000 death benefit. The policy does not have a named beneficiary. For estate planning purposes, Mel estimates the following expenses at his death: 1. The last illness and funeral expenses are expected to be $100,000. 2. Estate administration expenses are estimated at $180,000. 3. Funeral expenses are expected to be $120,000. WILL Oksana does not have a will. Mel has written two wills in his lifetime. The first will was a statutory will executed during his marriage to Robyn, and dated September 1, 1990. The second will is a handwritten will he wrote right after his divorce. For the second will, Mel did not want to seek advice from an attorney so he basically copied the first will in his own handwriting and replaced the names. The second will is only signed and dated by him and was not witnessed. Robyn still has an executed copy of the first will and the second will is in the bottom of Mel's sock drawer. No one, other than Mel, knows the second will exists. Mel's Last Will and Testament drafted and executed during his marriage to Robyn. 1, Mel, 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 1. I have been married but once, and only to Robyn with whom I am presently living. Out of my marriage to Robyn, two children were born, namely Kati and Karli. I have adopted no one nor has anyone adopted me. 2. I leave all assets to my wife Robyn. 3. In the event that Robyn predeceases me or fails to survive me for more than six (6) months from the date of my death, disclaims, or otherwise fails to accept any property bequeathed to her, 1 give my estate to my children. 4. In the event that any of my children 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 descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children. 5. I name my wife, Robyn, to serve as the executor of my estate with full seizin and without bond. 6. 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. MEL'S LAST WILL AND TESTAMENT HANDWRITTEN AFTER HIS DIVORCE: 1, Mel, 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. 1. I have two children, namely Kati and Karli. I have adopted no one nor has anyone adopted me. 2. I leave all assets to my children. 3. In the event that any of my children 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 descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children. 4. i name my daughter Kati, to serve as the executor of my estate with full seizin and without bond. 5. 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. GIFTS TO CHILDREN in 2017 Mel made the following gifts to his children during 2017: Mel gave $250,000 of separate property to Kati. Mel paid $78,000 to Stanford for Karli's undergraduate tuition. Mel gave Karli a Range Rover valued at $104,500 to celebrate her success at Stanford to date. GIFTS TO GRANDCHILDREN in 2018 Mel made the following gifts to his grandchildren during 2018: Seeing how Mel's mom outlived her assets, Mel is afraid his grandchildren may have the same fate. To assist them with their retirement income, Mel decided to establish a trust for the grandchildren. The trust is an irrevocable trust and he funded it in the current year with $750,000. The trust will accumulate income until each grandchild reaches age 50. When a grandchild reaches age 50, he/she will begin receiving an annuity for their life. When all of the grandchildren die, if there is any remaining assets then the trustee may distribute those assets to a charitable organization of his choosing. Mel sent a check in the amount of $18,000 directly to Kali's private school to pay her tuition. Mel also gave each grandchild $10,000 each. Assume Mel paid gift tax of $3,828,000 in 2016 for taxable gifts in the amount of $15,000,000 made in 2015. These were his first taxable gifts. MEL'S STATEMENT OF FINANCIAL POSITION AS OF 12/31/20 (AFTER THE GIFT TO OKSANA) ASSETS LIABILITIES AND NET WORTH Cash & Cash Equivalents Liabilities Cash $959.400 Primary Residence $2,340,000 Total Cash / Cash Equiv. $959,400 AMEX Black $380,250 Total Current Liabilities $2,720,250) Invested Assets Uncle Benny's $29,250,000 Investment Portfolio $9,360,000 Qualified Plan $4.949.100 Total Investments $43,559,100 Net Worth $49.576.410) Personal Use Assets Primary Residence Vacation Property Auto 1 Yacht Total Personal Use $5,265,000 $1,579,500 $85,410 $848, 250 $7,778,160 Total Assets $52,296,660 Total Liabilities and Net $52,296,660 13. 14. 15. 16. 17. 18. 19. Mel is considering transferring his life insurance policy to an ILIT. What benefits could Mel gain by implementing an ILIT? What risks does Mel face using an ILIT? (Value - 10 points) What trust options (besides an ILIT) would you recommend as part of Mel and Oksana's overall estate plan? Why? (At least 3 trust options must be discussed for full credit.) (Value - 12 points) If Mel were to die December 31, 2020, what would his taxable estate be? (Value - 10 points) If Mel were to die December 31, 2020, what would his tentative estate tax be? (Value - 10 points) If Mel were to die December 31, 2020, what would his federal estate tax liability be? (Value - 10 points) If Mel decided to sell the vacation property today for the Fair Market Value, what would his gain or loss be? (Value - 10 points) Assume for this question only that Oksana has a healthy baby boy and they name him Kole. The stress of the new baby deteriorates their relationship and Mel and Oksana break up 6 months later. Mel is ordered by the court to pay $25,000 a month in child support to Oksana which includes $40,000 a year for day care costs. What is Mel's yearly taxable gift to Oksana and how much is deductible for income tax? (Value - 10 points) Assume Mel had charitable inclinations and decided he wanted to bequeath something to charity. Which of his assets would be the most advantageous to leave to the charity considering the tax effects on other non-charitable beneficiaries? (Value - 10 points) Assume Mel and Oksana had Kole today and Mel wanted to create a trust for Kole's future benefit. Mel would like to create a trust that allows him to make use of the annual exclusion. He wants the trust to accumulate income until Kole reaches age 21, at which point the entire trust will be distributed to Kole. Which of trust would be appropriate to accomplish Mel's goals? (Value - 10 points) Mel is considering changing his will today. He wants the new will to leave everything to Oksana. Name and explain at least four clauses that should Mel consider including in his will. (Value - 16 points) 20. 21. 22. 23. Mel is aware that estate taxes may be due upon his death. What strategies could be implemented to deal with the payment of those taxes? (Hint - at least 3 strategies must be addressed for full credit.) (Value - 10 points) The Mel and Oksana Case MEL AND OKSANA BACKGROUND Mel, age 62, and Oksana, age 23, have been dating for about a year and a half. Mel and Oksana met when Mel was on a vacation in the south of France. Oksana was a beautiful French artist selling paintings at the market by Mel's hotel. After a month-long romance, Mel asked Oksana to return to the United States with him. Although not a United States citizen, she has maintained residence in the United States for 15 months. While they have no current plans to marry, they recently found out that Oksana is expecting her first child. Although no paternity tests have been conducted, both Mel and Oksana are confident the child is Mel's. When they found out Oksana was pregnant, Oksana moved into the 4 bedroom home Mel owns so they could prepare for the baby, whom they plan to name Kole. To prove to Oksana that he was serious about them being a family, Mel gave Oksana $10,000,000 in a money market account in January 2019. The money market account is the only asset Oksana owns. Mel also purchased a $5,000,000 life insurance policy on his life and named Oksana as the beneficiary. Mel was previously married and has two children from that marriage, Kati, age 38, and Karli, age 28. Both girls are happily married and have children of their own. Kati has two children, Cody, age 3, and Kali, age 13. Karli was unable to have children of her own; therefore, she adopted a little girl, Riley, age 2, from Russia last year. Mel and his first wife, Robyn, have been divorced for ten years and are not on speaking terms. After their marriage, Mel was required to pay Robyn alimony in the amount of $15,000 per month. When the court order expired at the end of 2015, Mel felt bad so he continues to give Robyn $15,000 per month on the first of each month. Although Mel has high blood pressure, he is otherwise healthy. Oksana has never been married. She is in excellent health, and learned just a few days ago that they are having a baby boy, who is expected to be healthy. Mel is retired and owns Uncle Benny's, a local bar and grill, while Oksana is currently unemployed. Mel and Oksana live in a community property state. Mel's mother, Carrie, also lives with him. Carrie is 82 and in failing health. She was recently diagnosed with Parkinson's disease. While she is unable to feed or bathe herself, she is expected to live for several more years. Carrie has already spent all of her retirement assets and relies exclusively on Social Security. The only substantial asset she owns is a life insurance policy covering her life. The policy has a $100,000 death benefit. The policy does not have a named beneficiary. For estate planning purposes, Mel estimates the following expenses at his death: 1. The last illness and funeral expenses are expected to be $100,000. 2. Estate administration expenses are estimated at $180,000. 3. Funeral expenses are expected to be $120,000. WILL Oksana does not have a will. Mel has written two wills in his lifetime. The first will was a statutory will executed during his marriage to Robyn, and dated September 1, 1990. The second will is a handwritten will he wrote right after his divorce. For the second will, Mel did not want to seek advice from an attorney so he basically copied the first will in his own handwriting and replaced the names. The second will is only signed and dated by him and was not witnessed. Robyn still has an executed copy of the first will and the second will is in the bottom of Mel's sock drawer. No one, other than Mel, knows the second will exists. Mel's Last Will and Testament drafted and executed during his marriage to Robyn. 1, Mel, 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 1. I have been married but once, and only to Robyn with whom I am presently living. Out of my marriage to Robyn, two children were born, namely Kati and Karli. I have adopted no one nor has anyone adopted me. 2. I leave all assets to my wife Robyn. 3. In the event that Robyn predeceases me or fails to survive me for more than six (6) months from the date of my death, disclaims, or otherwise fails to accept any property bequeathed to her, 1 give my estate to my children. 4. In the event that any of my children 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 descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children. 5. I name my wife, Robyn, to serve as the executor of my estate with full seizin and without bond. 6. 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. MEL'S LAST WILL AND TESTAMENT HANDWRITTEN AFTER HIS DIVORCE: 1, Mel, 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. 1. I have two children, namely Kati and Karli. I have adopted no one nor has anyone adopted me. 2. I leave all assets to my children. 3. In the event that any of my children 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 descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among my surviving children. 4. i name my daughter Kati, to serve as the executor of my estate with full seizin and without bond. 5. 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. GIFTS TO CHILDREN in 2017 Mel made the following gifts to his children during 2017: Mel gave $250,000 of separate property to Kati. Mel paid $78,000 to Stanford for Karli's undergraduate tuition. Mel gave Karli a Range Rover valued at $104,500 to celebrate her success at Stanford to date. GIFTS TO GRANDCHILDREN in 2018 Mel made the following gifts to his grandchildren during 2018: Seeing how Mel's mom outlived her assets, Mel is afraid his grandchildren may have the same fate. To assist them with their retirement income, Mel decided to establish a trust for the grandchildren. The trust is an irrevocable trust and he funded it in the current year with $750,000. The trust will accumulate income until each grandchild reaches age 50. When a grandchild reaches age 50, he/she will begin receiving an annuity for their life. When all of the grandchildren die, if there is any remaining assets then the trustee may distribute those assets to a charitable organization of his choosing. Mel sent a check in the amount of $18,000 directly to Kali's private school to pay her tuition. Mel also gave each grandchild $10,000 each. Assume Mel paid gift tax of $3,828,000 in 2016 for taxable gifts in the amount of $15,000,000 made in 2015. These were his first taxable gifts. MEL'S STATEMENT OF FINANCIAL POSITION AS OF 12/31/20 (AFTER THE GIFT TO OKSANA) ASSETS LIABILITIES AND NET WORTH Cash & Cash Equivalents Liabilities Cash $959.400 Primary Residence $2,340,000 Total Cash / Cash Equiv. $959,400 AMEX Black $380,250 Total Current Liabilities $2,720,250) Invested Assets Uncle Benny's $29,250,000 Investment Portfolio $9,360,000 Qualified Plan $4.949.100 Total Investments $43,559,100 Net Worth $49.576.410) Personal Use Assets Primary Residence Vacation Property Auto 1 Yacht Total Personal Use $5,265,000 $1,579,500 $85,410 $848, 250 $7,778,160 Total Assets $52,296,660 Total Liabilities and Net $52,296,660 13. 14. 15. 16. 17. 18. 19. Mel is considering transferring his life insurance policy to an ILIT. What benefits could Mel gain by implementing an ILIT? What risks does Mel face using an ILIT? (Value - 10 points) What trust options (besides an ILIT) would you recommend as part of Mel and Oksana's overall estate plan? Why? (At least 3 trust options must be discussed for full credit.) (Value - 12 points) If Mel were to die December 31, 2020, what would his taxable estate be? (Value - 10 points) If Mel were to die December 31, 2020, what would his tentative estate tax be? (Value - 10 points) If Mel were to die December 31, 2020, what would his federal estate tax liability be? (Value - 10 points) If Mel decided to sell the vacation property today for the Fair Market Value, what would his gain or loss be? (Value - 10 points) Assume for this question only that Oksana has a healthy baby boy and they name him Kole. The stress of the new baby deteriorates their relationship and Mel and Oksana break up 6 months later. Mel is ordered by the court to pay $25,000 a month in child support to Oksana which includes $40,000 a year for day care costs. What is Mel's yearly taxable gift to Oksana and how much is deductible for income tax? (Value - 10 points) Assume Mel had charitable inclinations and decided he wanted to bequeath something to charity. Which of his assets would be the most advantageous to leave to the charity considering the tax effects on other non-charitable beneficiaries? (Value - 10 points) Assume Mel and Oksana had Kole today and Mel wanted to create a trust for Kole's future benefit. Mel would like to create a trust that allows him to make use of the annual exclusion. He wants the trust to accumulate income until Kole reaches age 21, at which point the entire trust will be distributed to Kole. Which of trust would be appropriate to accomplish Mel's goals? (Value - 10 points) Mel is considering changing his will today. He wants the new will to leave everything to Oksana. Name and explain at least four clauses that should Mel consider including in his will. (Value - 16 points) 20. 21. 22. 23. Mel is aware that estate taxes may be due upon his death. What strategies could be implemented to deal with the payment of those taxes? (Hint - at least 3 strategies must be addressed for full credit.) (Value - 10 points)