Fred & Suzie Scuttle

Transcription

1 Fred & Suzie Scuttle Personal and Family Information Fred & Suzie Fred and Suzie Scuttle have been married for 50 years. Both are in good health, are aged 72, are retired, and are both U.S. Citizens. As a result of their excellent health, they expect to significantly outlive average life expectancy. They reside in, and are residents of, the State of Euphoria, a common-law state. Since they were married, they have always filed their Federal Income Tax Return as a married couple, filing jointly. Fred has one sister, Margaret, who never married. She is 75 years old, and lives in the house next to Fred and Suzie. Fred s elderly uncle Richard died last month without issue (he had no children). His estate was valued at $2,000,000 and he left everything to Fred and Margaret. In the event that Fred or Margaret do not survive Richard, their share is transferred to the Emerald Island Trust. Richard had not made any lifetime gifts or transfers, with the exception of holiday gifts to family members, and some contributions for educational expenses made directly to the colleges his niece, nephew, and grand nieces and nephews attended. Fred owned and operated The Daily Scuttle, LLC (a tabloid newspaper) and Suzie was a school teacher. Fred also owns an interest in an equipment leasing company, Quarry Leasing, LLC, which leases quarrying equipment. Currently, their favorite pastimes are travel and watching their grandchildren grow up. Fred and Suzie have two children, Henry (age 47) and Helen (age 40). Henry married Annie and had two children, Henry Jr., and Ella. Refer to the additional information on Henry s family later in the case. Helen married Mark and had nine children. Helen and Mark s youngest child, Margaret, died in early childhood. Mark recently passed away (last July), leaving Helen to care for their remaining eight children. Refer to the additional information on Helen s family later in the case. Economic Environment The economic environment is currently stable, with a low unemployment rate (4.5%), low interest rates, and low inflation (last year s inflation rate was 2.0%). Income Tax rates have been on a downward trend. Page 1 of 14.

2 Current Interest Rates may be summarized as follows: Passbook Savings Rate 2% 1-year CD rates 3.5% 30 year Mortgage Rate 7.0% 15 year Mortgage Rate 6.25% Home Equity Credit Rates 8.25% Tax Exempt Bond Yields 5.4% IRS Applicable Federal Rates (AFRs) are: Short Term (less than 1 year) 6% Mid Term (1 9 years) 7.3% Long Term (more than 10 years) 7.8% Significant Financial Planning Transactions Five years ago, Fred sold a 20% interest in the Daily Scuttle, LLC to his son, Henry. At the time of the sale, the company was worth $3,000,000. The sale was structured as an installment note, with an initial principal balance of $600,000. The interest rate on the note was 4.7%, and the note term was 20 years. There is one payment per year, and it is due shortly after executive bonuses are granted and paid at The Daily Scuttle, LLC. The fifth year payment has already been made this year, and the outstanding note balance is currently $497, Fred and Suzie are very interested in supporting several local charities. In the past, they have supported two local organizations, Friends of Foley (an animal shelter and placement facility) and St. Helen s (Their local church). Both Fred and Suzie are active in the local Historical Society, and Fred has served as chairperson of the local library s Board of Trustees. In addition, Fred and Suzie are considering gifts to the colleges that they attended, and the colleges that their children attended. Both have a desire to leave a significant bequest to charity at their death, or, if practical, make a current gift during their lifetimes. Specific information about their recent charitable giving activities is summarized below: Earlier this year, Fred and Suzie pledged $250,000 to the St. John s Church Restoration Fund, payable in equal installments over a 10-year period. They have already paid the first installment. Any outstanding balance as of the date of Fred s death will be paid by his estate. Fred and Suzie are also considering a pledge to the St. Helen s Church restoration fund of $250,000 payable over five years. They are concerned, however, about depleting their assets since they would like to preserve a large part of their estate for their family. Page 2 of 14.

3 In March, the Historical and Genealogical Museum of County Laois, Ireland was opened. Fred and Suzie attended the Grand Opening Celebration in Portlaoise, Ireland. If the Museum was located in the United States, it would qualify as a charity under Section 501(c)(3) of the Code. Fred donated 5 ancient maps of the County to the Museum. The maps had been in his family for several hundred years, and were estimated to be worth in excess of $100,000. In April, Fred and Suzie purchased tickets from their local public television station (a section 501(c)(3) charity) for an Irish Tenors Concert. The purchase price for the two tickets was $2,500 and included front-row seating at the concert, a pre-concert invitation-only buffet and reception, and an after-concert audience with the Irish Tenors. Several years ago, Fred and Suzie made loans to each of their children and grandchildren. In that year, they had already used up their gift tax annual exclusion, and wanted to make additional transfers without gift tax consequences due to a windfall received on an investment. The amount of each loan was $20,000, and the interest rate on the loans is zero percent (0%). Henry and Helen used their loans to pay down the mortgages on their homes. The Loans given to each of the grandchildren were placed in UTMA accounts and invested in identical portfolios of dividend paying stocks. Each of the UTMA accounts holding the loan proceeds earns $500 in taxable income each year. Fred and Suzie do not reflect these loans on their financial statements, since it is their intention to forgive the loans once they finish using their annual exclusions to fund a life insurance trust to provide for estate liquidity. Since Helen is a stay-at-home parent, Mark s death last year put a sudden strain on the family finances. While Mark was well insured, it took some time to receive the death benefits on his life insurance policies and probate his estate. During the interim period (from July last year to April this year), Fred and Suzie decided to help out by paying the mortgage payments on Helen s House. The monthly mortgage payment is $1,750. Since most of the mortgage payment is interest, Fred and Suzie hope to be able to take an interest deduction, and treat the rest as a loan to Helen that will be forgiven when annual exclusions are again available (currently, annual exclusions are being used to fund a life insurance trust on Fred & Suzie s life). Even though Helen has now received the insurance proceeds from Mark s life insurance, Fred and Suzie are concerned that she will not have enough income to support her large family and, in particular, cover the college education expenses of the children. They would like to consider planning tools that can help get Helen the income she needs while at the same time accomplishing their other goals. Five years ago, Fred and Suzie established beneficiary defective trusts (BDTs) for each of their grandchildren. On January 1 st of each year, Fred and Suzie have made gifts of $5,000 to each trust. The beneficiaries of each trust have a crummey demand right over the annual contribution, exercisable for 15 days from the date of contribution. Fred and Page 3 of 14.

4 Suzie allocated a portion of their GST exemption to each trust when the contribution was made. Henry is the trustee of all of the trusts for the benefit of Helen s children, and Helen is the trustee of all the trusts for the benefit of Henry s children. Because the trusts are defective with respect to the beneficiary under I.R.C. Sec. 678, the beneficiary is subject to tax on the trust income. The trusts are all invested in the same securities, and generate approximately $2,500 in dividend income each year for each child. Aside from the initial Crummey right of withdrawal at the time of the gift, which was not exercised by the guardian of each child, the children may not demand distributions, and are not entitled to specific payments from the trust. The Trustee, however, may make discretionary distributions to the beneficiaries in the Trustee s sole and absolute discretion. Over the last few years, Fred and Suzie have been discussing the possibility of purchasing a beach house for the family s use. Now that Mark has died, and Fred and Suzie wish to spend more time with their grandchildren, they feel that this would be a positive move for the family. Henry and Helen have enthusiastically encouraged this, and have indicated that they would keep the house after Fred and Suzie s death for use of the family. Due to their age, and the reduction in their travel, Fred and Suzie are considering selling the home in Ireland and using the proceeds as a down payment for the beach house. Estate Planning Documents Fred and Suzie have simple wills, which leave all of their property to the survivor. Upon the surviving spouse s death, the property is left to their children in equal shares per stirpes. The wills meet the statutory requirements set forth under the Statute of Wills, and were executed with necessary testamentary formality, with three witnesses. They also have a General Power of Attorney naming each other as attorney-in-fact. The General Power of Attorney includes provisions that allows the attorney in fact to make gifts (without limitation), permits the attorney in fact to disclaim property interests, and includes standard tax and retirement powers. In the event that the original attorney in fact named in the document is unable or unwilling to act as attorney in fact, their son, Henry, is listed as successor Attorney in Fact. Both Fred and Suzie have executed living wills, using the statutory form available in their state. They also have Health Care Proxies (General Power of Attorney for health care) naming each other as attorney-in-fact. As noted earlier in the facts, they have created several trusts for the benefit of their children and grandchildren. Family Trust ( The Emerald Isle Trust ) Page 4 of 14.

5 Fred s father, upon his death in 1976, created a dynasty trust in Delaware naming all of his descendants as beneficiaries. The trust was funded with 100% of the LLC that holds land with large Brownstone deposits (called Brownstone Fields, LLC), plus a large amount of cash. The land is leased to Brownstone Quarries, an independent (non-family owned company) that operates the property. The cash was invested in a diversified portfolio of investments. The trustee purchased a $7 million life insurance policy on Fred s life, and a $5 million life insurance policy on Margaret s life shortly after their father died over 30 years ago. The policies are owned by the trust, are paid up, and no further premium payments are required. The trust has not made any distributions to Fred or Margaret, since both have significant assets in their own right, but the Trustee does have the right to make discretionary distributions to either Fred or Margaret, and their issue. The trust permits the trustee to purchase assets for the use of the beneficiaries, and expressly allows the trustee to pay college education expenses of the beneficiaries provided that the payments are made directly to educational institutions. Precatory language in the trust document indicates that the Trustee should distribute funds only when the needs of the beneficiaries require it, or when it would be prudent to purchase the desired asset outside of the trust to protect the other assets of the trust. Page 5 of 14.

6 Fred & Suzie s Goals and Objectives 1. Maintain their current standard of living while minimizing exposure to income taxes, estate and gift taxes, and generation skipping transfer taxes. 2. Consider the creation of a Private Foundation ( The Scuttle Foundation ) to support their charitable activities during the rest of their life and after their death. 3. Determine whether to make a pledge to St. Helen s Church Restoration fund, and if a pledge is made, determine the most appropriate planning tool to fund the obligation. 4. Consider methods of providing income for Helen (to help her support her large family) while at the same time accomplishing their other goals. 5. Consider the tax ramifications of accepting the offer from a construction company to purchase Quarry Leasing, LLC s old crane for $450, Consider purchasing a Beach home, with the possibility of using their Ireland home as a funding device. 7. Develop plans to transfer the future appreciation in their estate to their children and grandchildren. 8. Transfer, without tax consequences, as much property to their children and grandchildren as possible during their lifetime. 9. Consider transferring the current vacation home, by gift, to the children in equal shares, per stirpes, provided that Fred and Suzie can use the home for their vacation at least once per year. 10. Pay for the college education of all of their grandchildren and greatgrandchildren. Consider creation of Sec. 529 College Savings plans to effectuate this intent, or other vehicles that may be appropriate. 11. Consider transferring the apartment house to a family limited partnership, followed by transfer of FLP interests to their children and grandchildren. 12. Keep control of the businesses in the family as long as family members are interested in running the businesses. Page 6 of 14.

7 Fred & Suzie Scuttle Statement of Financial Position December 31, last year (includes unrealized appreciation values at Fair Market Value) Assets Joint Husband Wife TOTAL Cash on hand (Checking) 12, Savings Deposits (Passbook) 25, year CD 50, Stock & Mutual Fund Portfolio (see Detail) 1,250, Loans to family members 240, Tax Exempt Bonds (see Detail) 250, Apartment House (Rental property) 1 1,500, Installment Note(Daily Scuttle Pur- Henry) 0 497,131 0 The Daily Scuttle, LLC 2 0 4,000,000 0 Quarry Leasing, LLC ,000 0 Personal Residence 400, Vacation Residence 4 750, Ireland Residence 5 200, Raw Land near St. Helen s Cemetery ,000 Automobiles 20, Household Furnishings General 10, Antiques and Collectibles 6 230, IRA 0 390,000 0 IRA , (k) 0 1,600, (b) ,000 Total 4,937,000 7,237,131 1,700,000 13,874,131 Liabilities Credit Cards 7 7, Mortgage Vacation Residence 350, Margin Account Balance 8 150, Total 507, ,000 Net Worth Net Worth 4,430,000 $7,237,131 $1,700,000 $13,367,131 Page 7 of 14.

8 Notes to Fred & Suzie Scuttle s Statement of Financial Position 1 20 Unit Apartment House purchased 10 years ago. Cost Basis was $950,000. Accumulated depreciation to date equals $334,257. Annual depreciation for remaining period is $35,185 based on the straight line method. 2 The Daily Scuttle is currently organized as a Limited Liability Company. The company publishes a daily newspaper which has the highest circulation in the State of Euphoria. Fred currently owns 80% of the business, and has an adjusted basis in the business interest of $1,600, Quarry Leasing, LLC owns quarrying equipment and machines that are leased to Brownstone Quarries Operators (Brownstone Quarries is a property in the Dynasty Trust) and other rock removing and construction businesses. Fred s adjusted basis in his interest in Quarry Leasing, LLC is $650, The vacation residence was purchased 8 years ago for $500,000. It is located in a resort area that hosts an annual national event. While the vacation residence is primarily for personal use, Fred and Suzie rent it out to a major corporation for 10 days a year during the annual national event. 5 The Ireland residence is the Scuttle s second vacation home. It was purchased 20 years ago for $50,000 and is used solely for personal purposes. 6 Over their lifetimes, Fred and Suzie have accumulated several antiques and collectibles with substantial value. Their cost basis in this property is $35, Generally, the credit card bills are paid off each month, but occasionally the Scuttle s incur finance charges when they make major purchases. 8 The margin account balance reflects outstanding margin loans on the stock portfolio. Page 8 of 14.

9 CS = Common Stock Fred & Suzie s Stock and Mutual Fund Portfolio Security Num Shares Annual Div/Shr Acquisition Date Adjusted Basis 1 FMV S&P 500 Index Fund 2 4,000 6/20/ , ,000 Mid Cap Index Fund 2 20,000 12/13/ , ,000 Power Co., Inc. (CS) 5, /17/ , ,000 Dunne s Stores, Inc. (CS) 1, /14/ ,000 20,000 United Telecom, Inc. (CS) 5, /16/ ,000 9,000 Oil Recycling, Inc. (CS) 10,000 10/16/2001 7, ,000 Big Bucks Bank, Inc. (CS) 1, /19/ ,000 36,000 TOTAL 578,300 1,250,000 1 The Adjusted Basis in the table is the basis in the investment as of the end of the year. 2 Distributions from Mutual Funds are taken in cash. Fred & Suzie s Tax Exempt Bond Portfolio Bond Number Purchase Price/Bond Interest Rate FMV Middletown High School Dev. Bond ,068 Barow River Bridge Bonds 75 1, ,000 Soccer Stadium Development Bonds 70 1, Note: All tax exempt bonds in Fred and Suzie s Portfolio are issued by Towns in the State of Euphoria. Unless otherwise stated, the par value of the bonds is $1,000. Page 9 of 14.

10 Fred & Suzie Scuttle Cash Flow Statement Last Year Income Net Income from The Daily Scuttle, LLC 200,000 Net Income from Quarry Leasing, LLC 75,000 Interest Inc from Installment Note (with Henry) 16,928 Capital Gain from Installment Note (with Henry) 10,000 Return of Basis from Installment Note (with Henry 20,000 The Daily Scuttle Defined Benefit Plan 120,000 The Daily Scuttle 401(k) Minimum Distribution 75,000 Middletown Teacher s Retirement Plan 60,000 Middletown Teacher s 403(b) Plan Minimum Distribution 26,000 IRA Fred Minimum Distribution 18,200 IRA Suzie Minimum Distribution 30,000 Social Security Fred 15,000 Social Security Suzie 7,500 Dividends on Stock Portfolio 10,490 Interest 14,370 Rental Income from Vacation Home 50,000 Rental Income from Apartment House 16,300 Total Income $766,788 Expenses Federal Income Taxes 240,000 State Income Taxes 28,690 Medical Expenses 12,000 Gifts to Family Members 264,000 Living, Travel & Miscellaneous Expenses 150,000 Page 10 of 14.

11 Business Information The Daily Scuttle, LLC The Daily Scuttle, LLC is the most popular tabloid newspaper in the region. It was originally founded by Fred s father, and has been run by the family ever since. The business first started out as a sole proprietorship, then became a corporation, and later transitioned to an LLC. Aside from publishing The Daily Scuttle Newspaper, The Daily Scuttle, LLC conducts no other business operations or assets (other than goodwill). The Daily Scuttle, LLC employs several family members, including Fred & Suzie Scuttle s Grandchildren. As soon as each grandchild is willing and able to help out, they are given a job at The Daily Scuttle, LLC. Tasks range from cleaning the office to assisting in sales calls. After a period of relatively modest growth, the rollout of TheDailyScuttle.com over the next few years is expected to significantly increase the value of the company. Quarry Leasing, LLC Quarry Leasing, LLC originally began as a holding company for the machinery and equipment used in the Brownstone Quarries owned by the Scuttle family. The operating company that leases the quarry from the Emerald Island Trust also leases the quarrying equipment from Quarry Leasing, LLC. After several years of operation, however, Fred Scuttle decided to expand the business by leasing equipment to other quarry and construction businesses. Quarry Leasing also owns equipment used to transport the machinery to their chosen destinations. Approximately 10 years ago, Quarry Leasing, LLC purchased a crane that is used to put the quarrying equipment in place. The cost of the crane was $400,000. To date, accelerated depreciation on the crane has been taken, totaling $375,000. While the crane is still in excellent shape, and has been meticulously maintained, the size and weight of quarrying equipment has increased substantially over the past several years, requiring Quarry Leasing, LLC to acquire a newer, stronger crane. The old crane, if purchased new today, would cost approximately $650,000. Fred has received an offer from a construction Company to purchase the old crane for $450,000. Since Fred has ceded management responsibility for The Daily Scuttle, LLC to Henry, he has spent more time developing the business plan for Quarry Leasing, LLC. In the near future, he plans to expand operations to neighboring states, and expects a growth rate of approximately 17% for the company over the long run. Page 11 of 14.

12 Henry and Annie Scuttle Henry is currently acting as President and CEO of The Daily Scuttle, LLC. Annie is a 4 th Grade Teacher for a local public school district. Henry has substantial assets, mostly from gifts made to him by Fred and Suzie (and the growth on those gifts) over the years. Henry s salary and bonus from The Daily Scuttle, LLC averages $160,000 per year. Annie s salary as a teacher is $50,000 per year. Henry and Annie are in the highest marginal income tax bracket. Henry s benefits from The Daily Scuttle, LLC include medical expense coverage, dental expense coverage, short-term and long-term disability coverage, and a pension plan. All costs associated with the medical, dental, and disability insurance are paid for by The Daily Scuttle, LLC. Henry and Annie s children are Henry Jr. and Ella. Henry Jr. is 16 years old and is currently attending the local public high school. He has proven to be a good student, and is looking forward to College, where he plans to major in civil engineering. Currently, he is captain of the High School Basketball Team, and has been visited by various college scouts for a possible basketball scholarship. Henry has a part-time job at The Daily Scuttle, LLC where he earns about $5,500 per year. He has expressed interest in working for the family business after he completes college. Ella is aged 12 and is currently attending Middle School. She is interested in law, and hopes to become a member of the bar in the future. Ella works a few hours a week at the The Daily Scuttle, LLC office, where she provides assistance in making copies, sending faxes, filing and mailing. She earns approximately $4,000 per year. Summary Information for Henry & Annie s children may be found in the following table. Name Age as of Dec. 31 st Last Year Earned Income Inc attributable to Loan from Grandparents Henry Jr. 16 $5,500 $500 $1,500 Ella 12 $4,000 $500 $1,500 Inc. attributable to Beneficiary Defective Trust Page 12 of 14.

13 Helen (Scuttle) Dunn (widow of Mark Dunn) As noted earlier, Mark passed away last year. Mark s will created a Credit Shelter (Bypass) Trust for the benefit of Helen and the children, and a Martial Trust for the benefit of Helen. The Credit Shelter Trust gives the Trustee the discretion to distribute income to Helen for life, and allows the Trustee to make distributions of principal for Helen s health, education, maintenance, and support. Furthermore, Helen has the right to demand, on December 31 st of each year, the greater of $5,000 or 5% of the trust corpus. The Marital Trust is a General Power of Appointment Marital Trust. The Trust states that all income is to be paid to Helen for her lifetime. Helen has the right to demand any amount of the Trust principal at any time. Assets that Mark owned as of the date of his death included: Asset Titling * Mark s Basis FMV at Mark s Death Home JTwROS with Helen $75,000 $400,000 Car FS $35,000 $20,000 Savings FS $15,000 $15,000 Checking FS $5,000 $5,000 Personal FS $30,000 $7,000 Property IRA FS $60,000 $110, (k) FS $80,000 $160,000 JTwROS = Joint Tenancy with Right of Survivorship FS = Fee Simple Mark s checking and savings accounts were titled in his name, with a payable on death provision naming Helen as the beneficiary. Likewise, Helen was named as the primary beneficiary of Mark s IRA and 401(k) plan. Mark and Helen s home was purchased 18 years ago. The original cost of the home was $150,000 and was financed with a $100,000 mortgage. The outstanding mortgage balance as of the date of Mark s death was $50,000. In addition to the property transferred through his will, Mark owned several life insurance policies. All but one of the life insurance policies was owned by a Trust. The trust was the original owner and beneficiary of the life insurance policies. The beneficiaries (Helen and the children) had a crummey right of withdrawal over the trust, and the annual contributions per trust beneficiary never exceeded $5,000. The Trust provides for the use Page 13 of 14.

14 of income and principal for the payment of the educational expenses of the children. Once all of the children have graduated from college, the income may be distributed to Helen or the children at the discretion of the trustee. Upon Helen s death, the trust terminates and distributes all remaining amounts to the children in equal shares. One life insurance policy, a variable-universal policy with a death benefit of $1,500,000 was owned by Mark outright. The beneficiary was Helen, or, if Helen did not survive Mark, Mark s children in equal shares per stirpes. Mark had originally purchased the policy before his marriage to Helen, and he retained ownership of the policy throughout his life. The cash surrender value of the policy immediately before his death was $65,000. Due to the complications associated with settling Mark s estate and collecting the insurance proceeds, Helen did not receive anything until this year. Mark s earnings for last year (up until the date of his death) were $85,000. Helen had no other income (wages, portfolio income or passive income) this year. Due to the income on her investments, however, she expects to be in the highest marginal income tax bracket in the future. Helen has not worked since her first child was born, and has no income other than a small amount of portfolio income. Summary Information on Mark & Helen s children is found below: Name Age as of Dec. 31 st Last Year Earned Income Inc attributable to Loan from Grandparents John 17 $4,500 $500 $2,500 Helen 15 $3,000 $500 $2,500 James 14 $3,000 $500 $2,500 Fred 12 $2,500 $500 $2,500 Michael 10 $2,000 $500 $2,500 Francis 8 $2,000 $500 $2,500 Henry 7 $1,500 $500 $2,500 William 5 $1,000 $500 $2,500 Margaret deceased Inc. attributable to Beneficiary Defective Trust Note: Children under the age of 16 who have earned income received that income from working at the The Daily Scuttle, LLC office or the Quarry Leasing, LLC office. Page 14 of 14.