Problem:
Your long-time client, Harold (Hal) Holland will meet with your supervising partner next week for an estate planning appointment. Hal has been married to Winona Holland since 1990. Hal is age 68 and retired. Winona, age 60, retired early to spend more time with Hal. They are residents of Topeka, Kansas. Hal is a U.S. citizen, and Winona is a citizen of Australia. Winona has indicated she plans to return to Australia if Hal predeceases her. Your supervising partner has requested that you identify any potential pitfalls in Hal's current estate plan so she can bring them to his attention.
Hal has stated that, in addition to providing some wealth transfers to his wife Winona, he wants to treat his three children by his prior marriage (Gina, Halbert, and Julianna) approximately equally in terms of total wealth received from him while he is alive and as a result of his death.
Hal and Winona prepared and submitted via e-mail the list of assets shown below.
- Principal residence in Topeka titled in the names of Hal and Winona, joint tenants with right of survivorship; purchased with $280,000 of consideration furnished solely by Winona; fair market value of $400,000.
- Household furnishings in the Topeka house; fair market value of $34,000. Winona owned almost all of these furnishings before she married Hal.
- Portfolio of publicly traded stocks in Hal's name; fair market value of $5.12 million.
- Mountain cabin and land in Vail, Colorado. Hal purchased the property in 1988 for $60,000; fair market value is $460,000. Hal never visits the cabin, but Halbert spends every summer and several weeks during the winter at the cabin.
- Stock in Harold's Hammocks, Inc. (a closely held C corporation) transferred to the Oz State Bank Revocable Trust in 1992; fair market value of $226,000, and basis of $15,000. The trust owns 12 of the 100 outstanding common shares. Hal acquired the 12 shares in 1988 in a Sec. 351 transaction. Julianna and Gina each own 44 shares, which Hal gifted to them in 2005.
- Individual retirement account at ToKan State Bank. The account consists of the funds rolled directly into the IRA from the non-contributory qualified retirement plan of
Hal's former employer when Hal retired. Fair market value of the IRA is $540,000.
Hal has not yet received any distributions. He is the IRA beneficiary, and Winona is the contingent beneficiary if Hal predeceases her.
- Cash of $825,000 in checking and savings accounts in Hal's name.
- Mutual fund shares in the names of Hal and Julianna, joint tenants with right of survivorship. Hal provided all the consideration ($9,000); fair market value of $64,000. He intended to use the money to finance Julianna's education, but she received a full scholarship.
- Stock in Dolrah, Inc. (a firm that elected S corporation status in 1990 upon its formation). The stock is in Hal's name, and he is one of six stockholders; fair market value of $79,000.
Hal's current will reads as follows:
To my wife, Winona, I leave outright any household furnishings that I own, $500,000 of stock from my portfolio of publicly traded stocks, and all of my stock in Dolran, Inc.
To my grandchild, Halbert, Jr., I leave $3,750,000 of stock from my portfolio. I leave the rest of my estate outright in equal shares to my children, Gina, Halbert, and Julianna.
Required:
Prepare a memo to your supervising partner to help her prepare for the appointment with Hal. In the memo, advise the partner of any pitfalls (problems) you have identified that she should discuss with Hal. You need not make any calculations of estate tax liabilities.