what would be the solution to question 5-7?

15.2 Estate Taxes on Saul Schwab's Estate 1, 5, 522, 626 Saul Schwab, of Knoxville, Tennessee, was 65 when he retired in 2010. Camille, his wife of 40 vears passed away the next year. Her will left everything to Saul. Although Camille's estate was valued $2,250,000, there was no estate tax due because of the 100 percent marital deduction. Their only child Eli, is married to Kathleen. They have four children, two in college and two in high school. In 2011 Sau made a gift of Apple stock worth $260,000 jointly to Eli and Kathleen. Because of the two $14,000 annual exclusions and the unified credit, no gift taxes were due, When Saul died in 2015, his home was valued a $850,000, his vacation cabin was valued at $485,000, his investments in stocks and bonds were valued at $1,890,000, and his pension fungs were worth $645,000 (Eli was named beneficiary). Saul also owned a life insurance policy that paid proceeds of $700,000 to Eli. He left $60,000 to his church and $25,00 to his high school to start a scholarship fund in his wife's name. The rest of the estate was left to El Funeral costs were $15,000. Debts were $90.000 and miscellaneous expenses were $25,000. Attorney and accounting fees came to $36,000, Use Worksheet 15.2 to guide your estate tax calculations as you complete these exercises. Critical Thinking Questions 1. Compute the value of Saul's probate estate. 2. Compute the value of Saul's gross estate. 3. Determine the total allowable deductions. 4. Calculate the estate tax base; taking into account the gifts given to Eli and Kathleen (remember that the annual exclusions "adjust" the taxable gifts). 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 2015 from the tentative tax on estate tax base to arrive at the federal estate tax due. 7. Comment on the estate shrinkage experienced by Saul's estate. What might have been done to reduce this shrinkage? Explain. ace Exhibit 15.7 Federal Unified Transfer Tax Rates This ariek rate schedule defines the amoun of federal ift and estate taxes that estates of v ocs es would have to pay, it incorporates the rates paseed in the Foonomic Growth and Tax Relief Reconciation Act of 2001 and dhe 20O Tax Relief Act Estates and oifteunder the evclusion amount pay no federal tax The estate exclusion amount increased annualy from $2.000.000 in 2006 to $5.000.000 in 2012 (see Exhibit 15.8. From 200s to 2012. the top tax rates for estates worth more than s2.000 000 decreased from 45 percent to 35 percenit TAXABLE ESTATE VALUE TENTATIVE TAX More Than But Not More Than Base Amount On Excess Over + Percent 24 10,000 2$ 10,000 20,000 1,800 $ 10,000 20% 20,000 40,000 3,800 22 20,000 40,000 60,000 8,200 24 40,000 6n, 000 80,000 13,000 26 60,000 00,000 100,000 18,200 28 80,000 100.000 150,000 23,800 30 100,000 150.000 250,000 38,800 32 150,000 250,000 500,000 70,800 34 250,000 500,000 750,000 37 155,800 500,000 248,300 39 750,000 750,000 1,000,000 345,800 41 1,000,000 1,250,000 1,000,000 43 1,250,000 448,300 1,500,000 1,250,000 1,500,000 555,800 45 2,000,000 1,500,000 Top rate, 2009 2,000,000 45 780,800 2,000,000 Repealed for estates. The maximum rate for gifts is 35 percent starting at $500,000. The maximum rate is 35 percent starting at $500,000 for both gifts and estates. 2010 2011 and 2012 Returns to pre-2001 tax law levels unless otherwise modified by Congress. Most observers believe that the top rate will be 45 percent for 2013 and beyond. 2013 and beyond e Internal Revenue Code, Section 200 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. The 2010 Tax Relief Act set the top tax rate at 35 percent for the years 2009-2012, with the AEA set at $5,000,000 (adjusted for inflation) for both transfers by gifts and transfer through an estate. For the year 2010, the executor could choose to use the rates for 2010 or to elect to have no estate tax under the provisions of the 2001 Act. Under the 2001 Act, the basis of inherited property is the basis of the property to the decedent, a carryover basis (with some exceptions for the first $3,500,000 of propertyl, rather than a stepped-up basis to FMV at the date of the decedent's death. This table shows the step-up in the exclusion amount from 2006 through repeal in 2012. Also shown are the unified tax credit amounts over the 2006-2013 period. (Reminder: The exclusion and credit amounts for 2013 and beyond are likely to change before the end of 2012. Most observers believe the AEA will be set at $3,500,000 for 2013 and beyond, but no one knows for certain what Congress will do.) Unified Tax Credit-Estates Applicable Exclusion Unified Tax Applicable Exclusion Year Amount-Estates Credit-Gifts Amount-Gifts 2006 S780,800 $2,000,000 $345,800 $1,000,000 2007 $780,800 $2,000,000 $345,800 $1,000,000 2008 $780,800 $2,000,000 $345,800 $1,000,000 2009 $1,455,800 $3,500,000 $345,800 $1,000,000 2010 Estate tax repealed for 2010 $330,800 $1,000,000 2011 $1,730,800 $5,000,000 $1,730,800 $5,000,000 2012 $1,772,800 $5,120,000 $1,000,000 $1,772,800 $5,120,000 $ 345,800 2013 $ 345,800 $1,000,000 ..... O Cen lming 15.2 Estate Taxes on Saul Schwab's Estate 1, 5, 522, 626 Saul Schwab, of Knoxville, Tennessee, was 65 when he retired in 2010. Camille, his wife of 40 vears passed away the next year. Her will left everything to Saul. Although Camille's estate was valued $2,250,000, there was no estate tax due because of the 100 percent marital deduction. Their only child Eli, is married to Kathleen. They have four children, two in college and two in high school. In 2011 Sau made a gift of Apple stock worth $260,000 jointly to Eli and Kathleen. Because of the two $14,000 annual exclusions and the unified credit, no gift taxes were due, When Saul died in 2015, his home was valued a $850,000, his vacation cabin was valued at $485,000, his investments in stocks and bonds were valued at $1,890,000, and his pension fungs were worth $645,000 (Eli was named beneficiary). Saul also owned a life insurance policy that paid proceeds of $700,000 to Eli. He left $60,000 to his church and $25,00 to his high school to start a scholarship fund in his wife's name. The rest of the estate was left to El Funeral costs were $15,000. Debts were $90.000 and miscellaneous expenses were $25,000. Attorney and accounting fees came to $36,000, Use Worksheet 15.2 to guide your estate tax calculations as you complete these exercises. Critical Thinking Questions 1. Compute the value of Saul's probate estate. 2. Compute the value of Saul's gross estate. 3. Determine the total allowable deductions. 4. Calculate the estate tax base; taking into account the gifts given to Eli and Kathleen (remember that the annual exclusions "adjust" the taxable gifts). 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 2015 from the tentative tax on estate tax base to arrive at the federal estate tax due. 7. Comment on the estate shrinkage experienced by Saul's estate. What might have been done to reduce this shrinkage? Explain. ace Exhibit 15.7 Federal Unified Transfer Tax Rates This ariek rate schedule defines the amoun of federal ift and estate taxes that estates of v ocs es would have to pay, it incorporates the rates paseed in the Foonomic Growth and Tax Relief Reconciation Act of 2001 and dhe 20O Tax Relief Act Estates and oifteunder the evclusion amount pay no federal tax The estate exclusion amount increased annualy from $2.000.000 in 2006 to $5.000.000 in 2012 (see Exhibit 15.8. From 200s to 2012. the top tax rates for estates worth more than s2.000 000 decreased from 45 percent to 35 percenit TAXABLE ESTATE VALUE TENTATIVE TAX More Than But Not More Than Base Amount On Excess Over + Percent 24 10,000 2$ 10,000 20,000 1,800 $ 10,000 20% 20,000 40,000 3,800 22 20,000 40,000 60,000 8,200 24 40,000 6n, 000 80,000 13,000 26 60,000 00,000 100,000 18,200 28 80,000 100.000 150,000 23,800 30 100,000 150.000 250,000 38,800 32 150,000 250,000 500,000 70,800 34 250,000 500,000 750,000 37 155,800 500,000 248,300 39 750,000 750,000 1,000,000 345,800 41 1,000,000 1,250,000 1,000,000 43 1,250,000 448,300 1,500,000 1,250,000 1,500,000 555,800 45 2,000,000 1,500,000 Top rate, 2009 2,000,000 45 780,800 2,000,000 Repealed for estates. The maximum rate for gifts is 35 percent starting at $500,000. The maximum rate is 35 percent starting at $500,000 for both gifts and estates. 2010 2011 and 2012 Returns to pre-2001 tax law levels unless otherwise modified by Congress. Most observers believe that the top rate will be 45 percent for 2013 and beyond. 2013 and beyond e Internal Revenue Code, Section 200 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. The 2010 Tax Relief Act set the top tax rate at 35 percent for the years 2009-2012, with the AEA set at $5,000,000 (adjusted for inflation) for both transfers by gifts and transfer through an estate. For the year 2010, the executor could choose to use the rates for 2010 or to elect to have no estate tax under the provisions of the 2001 Act. Under the 2001 Act, the basis of inherited property is the basis of the property to the decedent, a carryover basis (with some exceptions for the first $3,500,000 of propertyl, rather than a stepped-up basis to FMV at the date of the decedent's death. This table shows the step-up in the exclusion amount from 2006 through repeal in 2012. Also shown are the unified tax credit amounts over the 2006-2013 period. (Reminder: The exclusion and credit amounts for 2013 and beyond are likely to change before the end of 2012. Most observers believe the AEA will be set at $3,500,000 for 2013 and beyond, but no one knows for certain what Congress will do.) Unified Tax Credit-Estates Applicable Exclusion Unified Tax Applicable Exclusion Year Amount-Estates Credit-Gifts Amount-Gifts 2006 S780,800 $2,000,000 $345,800 $1,000,000 2007 $780,800 $2,000,000 $345,800 $1,000,000 2008 $780,800 $2,000,000 $345,800 $1,000,000 2009 $1,455,800 $3,500,000 $345,800 $1,000,000 2010 Estate tax repealed for 2010 $330,800 $1,000,000 2011 $1,730,800 $5,000,000 $1,730,800 $5,000,000 2012 $1,772,800 $5,120,000 $1,000,000 $1,772,800 $5,120,000 $ 345,800 2013 $ 345,800 $1,000,000 ..... O Cen lming