ESTATE PLANNING Prof. Gerry W. Beyer Spring 2005 WEALTH TRANSFER TAXATION EXAM ANSWER SUMMARY OBJECTIVE 1 A 16 B 2 A, D 17 C, D 3 A, C 18 C 4 D 19 B 5 C 20 B, D 6 B 21 A 7 B 22 B, D 8 A, C, D 23 A, C, D 9 C 24 C 10 B, D 25 C 11 C 26 C 12 B 27 C 13 A 28 C 14 D 29 A, B 15 D 30 D
ESSAY # 1 Taxable gifts in 2005: 1. $251,000 gift to Lois minus $11,000 annual exclusion $240,000. 2. $311,000 gift to Frank covered by marital deduction 0. 3. $51,000 car less consideration of $10,000 and annual exclusion of $11,000 30,000. 4. $51,000 to school for tuition covered by educational expense exclusion 0. 5. $41,000 for minus $11,000 annual exclusion (not qualify for educational expense exclusion because not for tuition) 30,000. 6. $400,000 in stock to Lois (no annual exclusion as already used for gift 1, above; the annual exclusion is per donee, not per gift). Value is at date of gift, not current value 400,000. 7. $251,000 to St. Mary s covered by charitable deduction 0. 700,000. Taxable gifts from prior years 500,000. Total taxable gifts 1,200,000. Page 2 of 8
Tax on total adjusted gifts for all years 345,800 +.41(1,200,000 1,000,000) 345,800 +.41(200,000) 345,800 + 82,000 427,800. Tax on total adjusted gifts for prior years $155,800 (direct from table) 155,800. Tentative tax on current year 427,800 155,800 272,000. Unused applicable credit amount 345,800 155,800 190,000. Gift tax payable $82,000. If forget #6 annual exclusion already used: 2005 = 689,000 Total tax = 1,189,000 Tentative tax = 267,490 Federal gift tax = 77,490 Page 3 of 8
ESSAY # 2 Family Tree: Bick s death 2000 Marriage 2002 Bick ================= Missy ================== Hector Chad Ann Buffy Zeb 11 kids Note: A hodcarrier is a laborer employed in carrying supplies to bricklayers, stonemasons, cement finishers, or plasterers on the job. Gross Estate 1. Inter vivos gifts. Not part of gross estate. $0 2. Investments Stocks and bonds. 2033. 490,000. 3. Residence she is sole contributor despite deed being in name of both; however, because it is held between spouses, as joint tenants with survivorship rights, only one-half is in gross estate regardless of original contribution. 2040(b). 300,000. 4. Life Insurance Policy 456456 payable to Chad and Buffy; Missy had all incidents of ownership. 2042. 100,000. 5. Life Insurance Policy 678678 payable to Chad; Chad took out and owned the policy so proceeds not in Missy s gross estate. 2042. 0. Page 4 of 8
6. Life Insurance on Chad s life current value. 2033. 32,000. 7. Life Insurance on Buffy s life current value. 2033. 28,000 8. IRS Refund. 2033 8,626. 9. Retirement Plan value at date of death. 2039. 800,000. 10. Kid s Trust #1 None of the irrevocable trust is included in estate as Missy retained no prohibited power even though she was the trustee at time of death. At death value is $60,000. 2038. 0. 11. Kid s Trust #2 Although irrevocable, Missy retained the right to direct who receives the property upon her death and thus trust corpus is in her estate. 2038. 100,000. 12. Bick s Trust -- QTIP trust created by predeceased husband remaining value included in estate. 2044 300,000. 13. Mom s Trust revocable and thus in gross estate. 2038 and others 80,000. $2,238,626. Deductions 1. Charitable deduction gift to Medical School. 2055 60,000 2. Marital deductions. 2056 Retirement plan (non-probate asset) 800,000. Residence (non-probate asset) 300,000. Gift in will (Fund A QTIP trust) 64,426. Page 5 of 8
Computation of Gift to spouse which is smallest to trigger no estate tax liability. Take gross estate and subtract all existing deductions: Gross estate 2,238,626. Charitable gift to Medical School 60,000. Retirement plan to Hector 800,000. Residence to Hector 300,000. Funeral expenses 15,000. Administration expenses 25,000. Debts 4,200. 1,034,426 Add adjusted taxable gifts 530,000. Tax base 1,564,426. Subtract applicable exclusion amount to determine amount of additional gift to spouse needed to yield no tax 1,500,000. 64,426. 3. Funeral expenses. 2053 15,000. 4. Administration expenses. 2053 25,000. 5. Debts (real property taxes). 2053 Note: could argue only ½ as jointly owned property 4,200. Taxable estate $970,000. Prior taxable gifts $26,000 to Chad minus $11,000 annual exclusion 15,000 $26,000 to Buffy minus $11,000 annual exclusion 15,000 $511,000 to Lupita minus $11,000 annual exclusion 500,000 Funding of Kids trusts in 1965 and 1970 ignored as gifts made before 1/1/77 0. Tax base $1,500,000. Page 6 of 8
Tentative tax Direct from table $555,800 Applicable credit amount $555,800. Federal estate tax payable $0 Generation-Skipping Transfers: 1. Fund A Marital deduction gift ($64,426) no GST tax liability yet until it ends at Hector s death and property paid to grandchildren. It will then be a taxable termination. But, this can be avoided by making a reverse QTIP election 64,426 2. Fund B Bypass gift ($470,000) Direct skip to the 12 grandkids 470,000 Determining size of Fund B: Size of probate estate: Stocks and bonds 490,000. Insurance on Chad 32,000. Insurance on Buffy 28,000. IRS refund 8,626. Mom s trust balance 80,000. Probate estate $638,626. Subtract expenses: Funeral 15,000. Administration 25,000. Debts 4,200. Distributable probate estate $594,426. Subtract other gifts in the will: Medical school 60,000 Fund A 64,426 $470,000. Page 7 of 8
3. Kid s Trust #2 No GST tax yet until it ends after both Chad and Buffy are dead. It will then be a taxable termination. Allocate GST tax exemption to this trust to avoid the problem. This trust is not grandfathered because Missy retained the right to direct who receives the property upon her death. 100,000. Total amount of GST tax lifetime exemption allocated $634,426 Page 8 of 8