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ESTATE PLAN

Answer the following questions. Assume the facts given in the fact pattern and that the 2021 estate and gift tax rates and annual exclusion apply to all transfers in the current and previous years.

1. Which of the following transfer mechanisms would be appropriate for the transfer of Fresh Veggies to James and Elizabeth assuming Madi and Devon did not want to make an outright gift of the company to them?

1. Private Annuity.

2. SCIN.

3. Family Limited Partnership.

4. QPRT.

1 only. 3 only.

1 and 2 1, 2, 3 and 4.

2. If Devon died today, which of the following statements is true regarding the transfers made in his will?

Madi will receive Devon’s interest in the Investment Portfolio.

Elizabeth will receive the proceeds of the life insurance policy.

James will receive the yacht in place of the house boat.

Marie may potentially receive Vacation Home 1 as Lynn’s rightful heir.

3. Assuming Devon died today, calculate his gross estate.

4. Assuming Devon died today, calculate his probate estate.

5. Assuming Devon died today, calculate the marital deduction available for transfers to Madi (remember this is a net amount).

6. Ignoring the data above, Assume that Devon died today and the estate tax due was $702,591 and Keith is appointed executor. Unfortunately, Keith forgot to file an Estate Tax Return (Form 706) and pay the estate tax due until 45 days after the return’s due date. How much is the failure-to-file penalty?

7. Assume Madi and Devon wanted to establish college funds for each of the grandchildren. Which of the following statements would be true?

An irrevocable trust would be a completed gift for gift tax and estate tax purposes.

The transfers would not be subject to GSTT, regardless of to whom the money is paid, because the payments were made for education.

If Devon and Madi found out about Marie and wanted to establish a fund for her as well, then the transfer to Marie would be subject to GSTT.

An appropriate planning technique for both Elizabeth and James’ family would be to place the assets into 2 family trusts, 1 for Elizabeth’s children (with Elizabeth and Scott as joint trustees) and 1 for James’ children (with Catherine as the trustee).

8. Which of the following statements regarding the transfer to Andrew 5 years ago is correct?

Andrew is a skip person because he is more than 37 and ½ years younger than Devon, thus the transfer results in a taxable termination.

The transfer will qualify for the GSTT annual exclusion.

Assuming 2020 rates apply to this transfer, the GSTT will be 40% of $8,000,000.

The only tax consequence for this transfer will be GSTT due.

9. Assuming Madi died today, which of the following statements is true?

Kathi’s assets would avoid probate.

All of Madi’s community property assets would transfer to Devon because of the implied right of survivorship.

State intestacy law would dictate who received Madi’s assets. Madi’s gross estate would include the life insurance policy on Devon.

10. Assuming Devon died today, which of the following statements regarding a valid disclaimer is correct?

Assume Devon left Elizabeth his interest in the Yacht. If Elizabeth disclaims her property, then the transfer will be subject to GSTT.

If James disclaimed his property, the property would transfer to Kathi.

If Madi wanted to disclaim a portion of the property, she must do so by the due date of the estate tax return plus extensions.

In order for the disclaimer to be valid it must be in writing or witnessed by 3 nonrelated individuals if the disclaimer is oral.

11. Assume Madi died today and left Vacation Home 2 to Elizabeth. What would Elizabeth’s adjusted basis be in Vacation Home 2?

12. Assume Madi died today and left her share of the personal residence to Devon. What would Devon’s adjusted basis be in the personal residence?

13. Madi and Devon are considering making a charitable contribution to the Boys and Girls Club of America and want the grandchildren to receive income from the property for an extended period. Which of the following charitable devices may be appropriate to meet their objectives?

1. Charitable Remainder Annuity Trust

2. Charitable Remainder Unitrust Trust

3. Pooled Income Fund

4. Charitable Lead Trust

A 1 only

B. 1, 2, and 3

C. 2, 3, and 4

D. 1, 2, 3, and 4

14. Which of the following types of clauses appear in Devon’s will?

1. Specific Bequests

2. Survivorship Clause

3. No-contest clause

4. Simultaneous Clause

A 1 only

B. 2 and 3

C. 1 and 2

D. 1, 2, 3, and 4

15. Assume Devon died today, and Keith is appointed as executor. Of the following, which is not an available election Keith can make before he files Devon’s estate tax return?

Electing the QTIP election on property passing to Kathi.

Utilizing the annual exclusion against testamentary transfers.

Selection of the income tax year end for Devon.

Deducting the expenses of administering Devon’s estate on the estate tax return (Form 706)

16. Assume Devon died in 2020. Which filing status can Madi use on her 2020 income tax return?

Single

Head of Household.

Married Filing Jointly

Qualifying Widow.

17. Assume Devon died in 2020. Which filing status can Madi use on her 2021 income tax return?

Single

Head of Household.

Married Filing Jointly.

Qualifying Widow.

18. Assume Devon died today, Keith is appointed executor, and the estate does not have sufficient cash to pay the required taxes or expenses. Of the following statements, which is not true regarding selling an estate’s assets to generate cash?

The estate may have income tax consequences.

The assets may not be sold at full, realizable fair market value.

Any losses on the sale of the assets are deductible as losses on the estate tax return

Any selling expenses are deductible on the estate tax return.

19. Assume Devon dies today and Keith is appointed executor. Keith is considering electing the alternate valuation date. Which of the following statements does not correctly reflect the rules applicable to the alternate valuation date?

The general rule is the election covers all assets included in the gross estate and cannot be applied to only a portion of the property.

Assets disposed of within 6 months of decedent’s death must be valued on the date of disposition.

The election can be made even though an estate tax return does not have to be filed

The election must decrease the value of the gross estate and decrease the estate tax liability.

20. Assume Devon transfers ownership of the life insurance policy on his life to an Irrevocable Life Insurance Trust (ILIT) and retains the right to borrow against the policy. Assume Devon dies 5 years later. Which of the following is correct regarding the treatment of the proceeds of the life insurance policy?

The proceeds will be included in Devon’s federal gross estate if he has any outstanding loans against the life insurance policy.

The proceeds will be included in Devo’s federal gross estate if he continued paying the policy premiums after the life insurance policy was transferred to the ILIT.

The proceeds will never be included in Devon’s federal gross estate.

The proceeds will always be included in Devon’s federal gross estate.

ESTATE PLAN

Answer the following questions. Assume the facts given in the fact pattern and that the 2021 estate and gift tax rates and annual exclusion apply to all transfers in the current and previous years.

1. Which of the following transfer mechanisms would be appropriate for the transfer of Fresh Veggies to James and Elizabeth assuming Madi and Devon did not want to make an outright gift of the company to them?

1. Private Annuity.

2. SCIN.

3. Family Limited Partnership.

4. QPRT.

1 only. 3 only.

1 and 2 1, 2, 3 and 4.

2. If Devon died today, which of the following statements is true regarding the transfers made in his will?

Madi will receive Devon’s interest in the Investment Portfolio.

Elizabeth will receive the proceeds of the life insurance policy.

James will receive the yacht in place of the houseboat.

Marie may potentially receive Vacation Home 1 as Lynn’s rightful heir.

3. Assuming Devon died today, calculate his gross estate.

4. Assuming Devon died today, calculate his probate estate.

5. Assuming Devon died today, calculate the marital deduction available for transfers to Madi (remember this is a net amount).

6. Ignoring the data above, assume that Devon died today and the estate tax due was $702,591 and Keith is appointed executor. Unfortunately, Keith forgot to file an Estate Tax Return (Form 706) and pay the estate tax due until 45 days after the return’s due date. How much is the failure-to-file penalty?

7. Assume Madi and Devon wanted to establish college funds for each of the grandchildren. Which of the following statements would be true?

An irrevocable trust would be a completed gift for gift tax and estate tax purposes.

The transfers would not be subject to GSTT, regardless of to whom the money is paid, because the payments were made for education.

If Devon and Madi found out about Marie and wanted to establish a fund for her as well, then the transfer to Marie would be subject to GSTT.

An appropriate planning technique for both Elizabeth and James’ family would be to place the assets into 2 family trusts, 1 for Elizabeth’s children (with Elizabeth and Scott as joint trustees) and 1 for James’ children (with Catherine as the trustee).

8. Which of the following statements regarding the transfer to Andrew 5 years ago is correct?

Andrew is a skip person because he is more than 37 and ½ years younger than Devon, thus the transfer results in a taxable termination.

The transfer will qualify for the GSTT annual exclusion.

Assuming 2020 rates apply to this transfer, the GSTT will be 40% of $8,000,000.

The only tax consequence for this transfer will be GSTT due.

9. Assuming Madi died today, which of the following statements is true?

Kathi’s assets would avoid probate.

All of Madi’s community property assets would transfer to Devon because of the implied right of survivorship.

State intestacy law would dictate who received Madi’s assets. Madi’s gross estate would include the life insurance policy on Devon.

10. Assuming Devon died today, which of the following statements regarding a valid disclaimer is correct?

Assume Devon left Elizabeth his interest in the Yacht. If Elizabeth disclaims her property, then the transfer will be subject to GSTT.

If James disclaimed his property, the property would transfer to Kathi.

If Madi wanted to disclaim a portion of the property, she must do so by the due date of the estate tax return plus extensions.

In order for the disclaimer to be valid it must be in writing or witnessed by 3 nonrelated individuals if the disclaimer is oral.

11. Assume Madi died today and left Vacation Home 2 to Elizabeth. What would Elizabeth’s adjusted basis be in Vacation Home 2?

12. Assume Madi died today and left her share of the personal residence to Devon. What would Devon’s adjusted basis be in the personal residence?

13. Madi and Devon are considering making a charitable contribution to the Boys and Girls Club of America and want the grandchildren to receive income from the property for an extended period. Which of the following charitable devices may be appropriate to meet their objectives?

1. Charitable Remainder Annuity Trust

2. Charitable Remainder Unitrust Trust

3. Pooled Income Fund

4. Charitable Lead Trust

A 1 only

B. 1, 2, and 3

C. 2, 3, and 4

D. 1, 2, 3, and 4

14. Which of the following types of clauses appear in Devon’s will?

1. Specific Bequests

2. Survivorship Clause

3. No-contest clause

4. Simultaneous Clause

A 1 only

B. 2 and 3

C. 1 and 2

D. 1, 2, 3, and 4

15. Assume Devon died today, and Keith is appointed as executor. Of the following, which is not an available election Keith can make before he files Devon’s estate tax return?

Electing the QTIP election on property passing to Kathi.

Utilizing the annual exclusion against testamentary transfers.

Selection of the income tax year end for Devon.

Deducting the expenses of administering Devon’s estate on the estate tax return (Form 706)

16. Assume Devon died in 2020. Which filing status can Madi use on her 2020 income tax return?

Single

Head of Household.

Married Filing Jointly

Qualifying Widow.

17. Assume Devon died in 2020. Which filing status can Madi use on her 2021 income tax return?

Single

Head of Household.

Married Filing Jointly.

Qualifying Widow.

18. Assume Devon died today, Keith is appointed executor, and the estate does not have sufficient cash to pay the required taxes or expenses. Of the following statements, which is not true regarding selling an estate’s assets to generate cash?

The estate may have income tax consequences.

The assets may not be sold at full, realizable fair market value.

Any losses on the sale of the assets are deductible as losses on the estate tax return

Any selling expenses are deductible on the estate tax return.

19. Assume Devon dies today, and Keith is appointed executor. Keith is considering electing the alternate valuation date. Which of the following statements does not correctly reflect the rules applicable to the alternate valuation date?

The general rule is the election covers all assets included in the gross estate and cannot be applied to only a portion of the property.

Assets disposed of within 6 months of decedent’s death must be valued on the date of disposition.

The election can be made even though an estate tax return does not have to be filed

The election must decrease the value of the gross estate and decrease the estate tax liability.

20. Assume Devon transfers ownership of the life insurance policy on his life to an Irrevocable Life Insurance Trust (ILIT) and retains the right to borrow against the policy. Assume Devon dies 5 years later. Which of the following is correct regarding the treatment of the proceeds of the life insurance policy?

The proceeds will be included in Devon’s federal gross estate if he has any outstanding loans against the life insurance policy.

The proceeds will be included in Devo’s federal gross estate if he continued paying the policy premiums after the life insurance policy was transferred to the ILIT.

The proceeds will never be included in Devon’s federal gross estate.

The proceeds will always be included in Devon’s federal gross estate.

ATRA 2012 & Current Limits

Made 2010 legislation permanent, including portability.

2020 & 2021 annual exclusion $15,000.

2020 lifetime exemption $11,580,000

2021 lifetime exemption $11,700,000.

Above $1,000,000, the estate, gift, and generation skipping tax rate is 40%.

2018 changes: Instead of $5M from 2010 being indexed for inflation, it treats it as $10M indexed for inflation. Congress included a sunset provision, so that the exemption reverts back to 2017 limits, indexed for inflation, in 2026.

1

Estate Planning 2018 2019 2020 2021

Annual Gift Tax Exclusion $15,000 $15,000 $15,000 $15,000 Annual Gift Tax Exclusion to a Noncitizen Spouse

$152,000 $155,000 $157,000 $159,000

Applicable Exclusion Amount:

• Gift Tax $11,180,000 $11,400,000 $11,580,000 $11,700,000 • Estate Tax $11,180,000 $11,400,000 $11,580,000 $11,700,000 Applicable Credit Amount:

• Gift Tax Credit Equivalent $4,417,800 $4,505,800 $4,577,800 $4,625,800 • Estate Tax Credit Equivalent $4,417,800 $4,505,800 $4,577,800 $4,625,800 Maximum Estate and Gift Tax Rate 40% 40% 40% 40% GSTT Exclusion Amount $11,180,000 $11,400,000 $11,580,000 $11,700,000 Estate Installments (Section 6166) $1,520,000 $1,550,000 $1,570,000 $1,590,000 Special Use Valuation (Section 2032A) $1,140,000 $1,160,000 $1,180,000 $1,190,000

2021 Annual Estate Planning Limits

www.money-education.com Call toll free 888.295.6023

If taxable income is: The tax is: Not over $2,650 10% of taxable income Over $2,650 but not over $9,550 $265 plus 24% of the amount over $2,650 Over $9,550 but not over $13,050 $1,921 plus 35% of the amount over $9,550 Over $13,050 $3,146 plus 37% of the amount over $13,050

Income Tax Rate Schedule for Estates and Trusts (2021)http://www.money-education.comhttp://www.money-education.com

  • 2021 Annual Estate Planning Limits
  • Income Tax Rate Schedule for Estates and Trusts (2021)

The Nichols Case MADI AND DEVON NICHOLS BACKGROUND Madi and Devon Nichols, both age 63, have been married for 40 years, are both in good health, and they are citizens and residents of Louisiana. They expect to work until age 66 to 70. Madi and Devon live in a community property state. They have the following children and grandchildren: Elizabeth, an estate planning attorney, is married, healthy, and happy. Madi and Devon adore Elizabeth’s husband, Scott, and their four children. James, a high net worth investment consultant, was recently divorced and his ex-wife, Catherine, has custody of their three children. Madi and Devon, never quite cared for Catherine, as she always seemed to be quite snooty. Since the divorce, the relationship between Madi and Catherine has been very strained. Since his divorce, James has had somewhat of a mid-life crisis. He recently rented a penthouse apartment and bought a new Jaguar. James has also been dating Natalie, a 21-year-old swimsuit model. While Madi and Devon are confident that this is only a passing phase, they are concerned about giving any gifts outright to James or his children. Lynn, Madi and Devon’s third child, was a bit of a wild child. Lynn died in a tragic motorcycle accident in her senior year of college while on her way home to tell her parents about a big secret she had been keeping. The summer before, Lynn had given birth to a baby girl named Marie. At the time, Lynn gave the baby to the baby’s father, an older married man, although no official adoption was ever transacted. Madi and Devon still do not know about Marie. Madi and Devon own Fresh Veggies, a popular organic health food store in a general partnership with another couple located in Louisiana. Scott, Elizabeth’s husband, has worked at the store since he was a kid. Scott is now one of the store managers who continues along with the other partners to direct the company as executives. Madi and Devon would like to reward Scott for all of his hard work by giving Scott and Elizabeth 3/4 of their interest in the business and giving the remaining 1/4 of their interest in the business to James. They do not want James to have any control over the business, just to have an income interest. Elizabeth’s youngest child, Andrew, was born with a serious physical disability. To provide additional support for Andrew, Devon created an irrevocable trust with Andrew as the sole beneficiary with an $8,015,000 transfer of separate property 5 years ago. The trust meets the requirements of Section 2503(c). Assume for any calculation of GSTT that the annual exclusion was $15,000 and the lifetime exemption was $11,580,000. Also assume that the GSTT and gift tax rates were 40% for determination of GSTT even though they were paid 5 years prior.

Children Age Grandchildren

Elizabeth 40 4 children (ages 15, 14, 13 & 12)

James 35 3 children (ages 5, 3 & 1)

Lynn Deceased 1 child

Devon and Madi made the following additional lifetime transfers:

• Four years ago, Devon gave Elizabeth, James, and their spouses $100,000 each (assume the annual exclusion at the time was $11,000) of community property.

• Two years ago, Devon gave Elizabeth, James, and their spouses $200,000 each of his separate property. Devon paid gift tax of $347,760 on these gifts.

Madi and Devon have never elected to split gifts of separate property. Devon and Madi estimate the following at each of their deaths:

• The last illness and funeral expenses are expected to be $100,000 per person.

• Estate administration expenses are estimated at $250,000 per person. WILLS Madi does not have a will. Devon has an outdated will leaving most of his probate assets to Madi. Clauses from Devon’s Statutory Last Will and Testament I, Devon, 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. I revoke all of my prior wills and codicils.

  1. I have been married but once, and only to Madi with whom I am presently living. Out of my marriage to Madi, three children were born, namely Elizabeth, James and Lynn. I have adopted no one nor has anyone adopted me.
  2. I leave my Vintage Mustang and House Boat to my son, James. 3. I leave the life insurance proceeds on my life to my daughter, Elizabeth. 4. I leave Vacation Home 1 to my daughter, Lynn. 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Madi, my wife. 7. In the event that Madi predeceases me or fails to survive me for more than six (6) months from

the date of my death, I leave any interest of my estate determined to be payable to her to my children, Elizabeth, James and Lynn, in equal and 1/3 shares.

  1. In the event that any of the named legatees 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 the surviving named legatees.
  2. I name my best friend Keith to serve as the executor of my succession with full seizin and without bond.
  3. 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.
  4. Since I have made numerous lifetime gifts to my children, all inheritance, estate, succession, transfer, and other taxes (including interest and penalties thereon) payable by reason of my death shall be allocated to the children’s share, regardless of whether my spouse survives me.

Statement of Financial Position (Devon and Madi Nichols)

  1. Assets are stated at fair market value (rounded to even dollars). 2. Liabilities are stated at principal only (rounded to even dollars). 3. The adjusted basis of the primary residence is $600,000. 4. Madi received vacation home 2 from her grandmother, Lois. Madi and Lois were always very

close and Lois gave her the home when Elizabeth was first born so Madi could enjoy motherhood as much as Lois had. Lois purchased the vacation home for $30,000 and the FMV of the home at the date of transfer was $200,000. The FMV when Lois died was $250,000.

  1. The life insurance policy has Madi listed as the designated beneficiary. The Investment account is a Transfer on Death account with Elizabeth and James as the listed beneficiaries of both Devon and Madi’s shares.
  2. The Yacht was purchased by Devon after his House Boat was destroyed by a Hurricane. 7. Property Ownership:

• CP – Community Property

• H – Husband separate

• W – Wife separate 8. The insurance face value (death benefit) and the cash value of $1,000,000 are the same.

ASSETS LIABILITIES AND NET WORTH

Cash & Cash Equivalents Liabilities

CP Cash $150,000 Current Liabilities

Total Cash / Cash Equiv. $150,000 CP Credit Card 1 $16,000

CP Credit Card 2 $5,000

Invested Assets Total Current Liabilities $21,000

CP Fresh Veggies $4,000,000

CP Investment Portfolio $13,000,000 Long-Term Liabilities

H Life Insurance on Devon $1,000,000 CP Mortgage – Primary Residence $750,000

CP Rental Property $500,000 CP Rental Property $300,000

Total Investments $18,500,000 W Auto 2 $70,000

Total Long-Term Liabilities $1,120,000

Personal Use Assets

CP Primary Residence $1,500,000

H Vacation Home 1 $950,000 Total Liabilities $1,141,000

W Vacation Home 2 $500,000

CP Personal Property $900,000

H Auto 1 $70,000 Net Worth $22,469,000

W Auto 2 $60,000

H Vintage Mustang $80,000

H Yacht $900,000

Total Personal Use $4,960,000

Total Assets $23,610,000 Total Liabilities and Net $23,610,000

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