Tax Estate Planning
Business Situation -
Scott is vice president of marketing of the XYZ Corporation, a large automobile and truck leasing company that is listed on a stock exchange. The XYZ Corporation, a growth-oriented business, has established both a pension and a profit-sharing plan. Scott is a participant in both of these plans. Currently, under XYZ Corporation's qualified noncontributory pension plan, Scott is entitled to a retirement income of $3,000 per month beginning at age 65 and to a preretirement death benefit of $1,450,000. The death benefit is payable in a lump sum to his estate. The current value of Scott's fully vested account in the company's qualified noncontributory profit-sharing plan is $1,246,000. It is payable to Sue, Scott's wife.
Personal Situation -
Scott, aged 62, and his wife, Sue, aged 60, have two children - Ben, their son, aged 28, is a successful financial adviser, and Cate, their daughter, aged 21, is in college. Ben is married and currently has three sons, aged 5, 3, and 1. Both Scott and Sue are in good health. They file a joint federal income tax return. Sue has no experience or interest in business affairs or property management. Both of Sue's parents are deceased. Scott's father is deceased. In his will, Scott's father established a trust that provides for income to be paid to Scott's mother during her lifetime. At her death, the trust property is to be paid to Scott, if living, otherwise to the person or persons designated by Scott's mother during her lifetime or in her will. If Scott does not survive her and if she does not appoint the property, it is to go equally to Scott's children or their descendants, per stirpes. The present value of the trust principal is $650,000. The present value of the life estate held by Scott's mother is one-sixth of the total value of the trust principal ($108,000). Scott's mother has not yet exercised her power of appointment by deed or in her will. Scott contributes $500 per month toward the support of his mother, now aged 85. Scott has recently been named a trustee of TU University, his alma mater, for which he has a great fondness. Scott has made gifts to TU University of $1,000 during each of the last 5 years and would like to aid the university financially in the future. Scott and his friend, Dan, own a parcel of undeveloped land equally as tenants in common. The current value of the entire parcel of land is $4,180,000.
Property -
Scott owns the following property in his own name:
Stock in XYZ Corporation (500 Shares) = $1,340,000
Other listed Common Stock = $440,000
Tax-free municipal bonds = $180,000
Savings accounts = $250,000
Household and other tangible personal property = $130,000
Scott and Sue own the following property as joint tenants with right of survivorship:
Residence purchased 22 years ago (net after mortgage) = $440,000
Vacation home (three-fourths of purchase price contributed by Scott and one-fourth by Sue; purchased 15 years ago; no gift tax return filed = $300,000
Checking account (all deposits contributed by Scott) = 14,000
Scott and Dan own the following property equally as tenants in common:
Undeveloped real estate = $4,180,000
Sue owns the following property in her own name:
Savings account = $24,000
Other personal property = $28,000
Employee Benefits -
In addition to coverage under a group comprehensive major medical policy, Scott is entitled to the following pension and death benefits:
XYZ Corporation Pension Plan - Scott's estate - Lump Sum - Death benefit=$1,450,000
XYZ Corporation Profit Sharing - beneficiary=Sue - Lump Sum - Death benefit=$1,246,000
Life Insurance
Scott owns the following life insurance on his own life:
1) Ordinary Life - Age 33 at purchase - Beneficiary is Sue - Lump Sum - Face Amount=$30,000
2) 20-payment life - Age 44 at purchase - Beneficiary is Cate - Fixed Period Option for 5 years - Face Amount=$70,000
3) Ordinary life - Age 47 at purchase - Beneficiary is Sue - Lump Sum - Face Amount=$200,000
4) Term to 65 - Age 45 at purchase - Beneficiary is Scott's estate - Lump Sum - Face Amount=$300,000
Wills
Scott's will provides for a specific bequest of $10,000 to TU University. The remainder of his property passing under his will is to be divided as follows: an amount equal to $700,000 of his property will pass outright to Sue; the remainder will be divided equally between Ben and Cate, and it will be held in two separate trusts. Each trust provides for income to be paid annually to the trust beneficiary with principal distributed at age 35. All the debts, funeral expenses, and administration expenses are to be paid out of the remainder of the estate passing in trust to Ben and Cate. The will also contains a simultaneous death provision under which it will be presumed that Sue survives Scott in the event Scott and Sue die under circumstances that make it impossible to establish who died first. Sue has no will.
Income
Scott's income last year was $180,000 and came from the following sources:
Commissions from XYZ Corporation = $45,000
Dividends from XYZ Corporation stock = $1,000
Dividends from other listed common stock = $5,000
Interest on tax-free municipal bonds = $3,000
Interest on Savings accounts = $1,000
Scott's salary in his position as vice president is $175,000 a year. Sue's income last year was $1,000 from the interest on savings account that she owns in her own name.
Case Question -
a) Calculate Scott's tentative tax base for federal estate tax purposes, and explain each step in your calculations. For purposes of this question, assume that the liabilities as well as funeral and administration expenses of Scott's estate amount to $40,000 and are to be paid out of the shares of Ben and Cate (children). Assume that Scott's state of domicile imposes a state estate tax equal to 2.5% of Scott's adjusted gross estate. Also assume that Scott's estate plan provides for his estate to utilize Scott's basic credit amount rather than have any unused exemption pass to Sue (wife) due to the DSUE
b) Calculate Scott's federal and state estate tax liability, and explain each step in the calculations. Assume that Scott's state of domicile imposes a state estate tax equal to 2.5% of Scott's adjusted gross estate.
c) Calculate Sue's tentative tax base for federal estate tax purposes, and explain each step in your calculations. Sue dies in 2014, one year after Scott (husband). The funeral and administration expenses at Sue's death amount to $72,000. Sue's state of domicile imposes a 2.5% state estate tax of adjusted gross estate. Assume the proceeds from the $200,000 life insurance have been used. Also, assume that prior to Sue's death, in early 2014 she won the lottery and took the present value in a lump sum of $6 million.
d) Calculate Sue's federal estate tax liability under the facts stated in 3.b. above assuming the 2013 basic credit amount, and explain each step in the calculation. For your federal estate tax calculations use the Gift and Estate Rate Schedule. Rate Schedule: (amount with respect to which the tentative tax is to be computed) Over $1,000,000 : (tentative tax) $345,800, plus 40% of excess of such amount over $1,000,000. For the highest gift and estate tax bracket is assumed for estate value (amount with respect to which the tentative tax is to be computed) over $5,250,000: (tentative tax) $2,045,800, plus 40% of excess of such amount over $5,250,000.