Financial Planning Assignment Chapter 15

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Jun 12, 2024

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Rafay Ahmed Chapter 15 20 – Mar - 23 Answer 1) People planning is deciding who to give which asset. All heirs are not equal and giving the same thing or dollars to each heir is not necessarily treating each “equally.” One kid may really appreciate and enjoy antiques; another could care less about them. People planning is taking into consideration the personality and desires of each heir in deciding which property to give the heir. Also, be aware about the heir’s plans for the asset. If they plan to sell the asset, understand that the basis of property sold is a carryover basis [same basis as donor has] if received by gift. If inherited, the basis will be the fair market value as of date of death of decedent. Substantial difference in tax able gain may occur. Among the possible objectives to consider are: providing financial security for spouse and children (adequate funds to maintain lifestyle, for college education, etc.), arranging for professional management of assets if necessary, naming guardians for minor children, arranging for transfer of business ownership interests, providing for dependent parents or other relatives, arranging to shut down social media accounts and files, and disposing of assets equitably. Answer 2) Both Zoe and William should have wills. One major reason is that they need to name the guardian for their children in the event they die in a common accident. Further, Zoe should also have a will to protect the family when she dies. True, if William predeceases her, the house passes to her through joint tenancy and the insurance proceeds pass to her by contract (assuming that she is the named beneficiary), but then she needs to plan for the disposition of assets at her death. If she and William were to die as a result of the same accident and it was determined that William died first, she would inherit the life insurance proceeds and all other assets. But since she also dies, then the state laws will determine how the property will pass and the courts will appoint guardians for the children and for the property going to the children (minors have a Preserving Your Estate Page 1

Rafay Ahmed Chapter 15 20 – Mar - 23 limited right to receive property outright). With a will, she can express her wishes in these matters as well as specify who should receive any personal property. Both Zoe and William should review their wills on a regular basis to make sure they continue to reflect their wishes. [An additional point you could make: They should also consider more life insurance, particularly on Zoe. They both work outside of the home, and in the absence of one of their incomes, the survivor’s earnings may be insufficient to support their mortgage payments, provide a college education for the children, and possibly pay for some additional child care costs while the children are young.] Answer 4) Ethical wills are personal statements of values, blessings, life’s lessons, and hopes and dreams for the future. They are informal documents that are usually added to formal wills and read at the same time. They offer a way to share your morals, business ethics, life experiences, family stories and history, and more with future generations. They can take various forms, such as handwritten letters or journals, personal essays written on a computer, or even a digitally recorded discourse to be shared on DVD or audiotape. Most people will favor digitally recording their statements. It is their last chance to be on the screen. Of course, you have to have recording equipment such as a camera or your cell phone. Answer 5) An executor, sometimes called the decedent’s personal representative, must collect the decedent’s assets, pay debts or provide for payment of debts that are not currently due, and distribute any remaining assets to the person entitled to them by will or by the intestate succession law of the appropriate state. Because of the importance of the estate administration Preserving Your Estate Page 2

Rafay Ahmed Chapter 15 20 – Mar - 23 process, you should select executors who are not only familiar with testator’s affairs but also can effectively handle the responsibilities of being an executor. Many would argue that the executor should be a bank trust department or a professional such as a lawyer. The amount of detail work to be done can be a problem for a relative with little experience in such matters. But typically, relatives will do the work for less money than lawyers and trust departments. Answer 6) Trusts are very useful to provide professional management of property for the benefit of another. Elijah and Mila have a small estate. Their primary concern will be taking care of their children in case of death of one or both. A testamentary trust could be designed to set aside funds for the kids’ college education. The trust could be funded with the vacation home at the beach with the expectation that the trust would sell the property to provide funds for education expenses. It may be useful to put the house in a trust with the guardian as the trustee to be used to care for the kids. The guardian could sell the house if not needed as a living place for the kids. Also, a separate testamentary trust could be established to hold the antique property until Mila’s child is 18 (the age of majority) and the jewelry for Elijah’s kids until they are both 18. At that time, the property could be turned over to the children with a letter of instruction urging each child to keep the property in the family. The trusts would not be established if the children are through college and the age of majority at the time of the Elijah’s and Mila’s deaths. Preserving Your Estate Page 3

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Rafay Ahmed Chapter 15 20 – Mar - 23 Answer 7) Computing Federal Estate Tax Due Name: Pablo Gonzalez Date: 2023 Line Computation Item Amount Total Amount 1 Gross Estate $7,850,000 2 Subtract sum of a) Funeral expenses $16,800 b) Administrative expenses 75,000 c) Debts 125,000 Total (216,800) 3 Result Adjusted Gross Estate $7,633,200 4 Subtract: a) Marital deduction b) Charitable deduction 180,000 Total (180,000) 5 Result Taxable estate $7,453,200 6 Add Post-1976 taxable gifts 0 7 Result Estate tax base $7,463,200 8 Compute Tax Tentative tax on estate tax base $2,927,080 9 Subtract sum of a) Gift Tax paid on post 1976 gifts $ 0 b) Unified Tax Credit--2018 credit 4,417,800 $4,417,800 10 Result 0 11 Subtract Other credits 0 12 Result: Federal estate tax due $0 Use Exhibit 15.8 to calculate the tentative tax. Use Exhibit 15.7 to determine the appropriate unified tax credit. Note: the amount on line 7, the estate tax base is significant since many states will assess their estate tax as a percentage of the federal estate tax base. Answer 8) Giving gifts reduce the taxable estate in two ways. First, any future appreciation of the gifted property is excluded from the estate because the decedent does not own the property on the date of death. Second, if the gift is so large that taxes are due, the money used to pay the tax is also removed from the estate. (There is an exception for gift taxes paid within 3 years of death.) In this exercise the big issue is the impact on Jack’s income taxes. If Jack sells the gifted property is for a gain, it should be noted that property received by gift has a tax basis equal to its basis in Chloe’s hands (i.e., a carryover basis). In other words, if the beach house is gifted, the Preserving Your Estate Page 4

Rafay Ahmed Chapter 15 20 – Mar - 23 basis to Jack will be $300,000; if passed through the estate, its basis to Jack will be $750,000 (the fair market value date of death). As long as the property is not sold or depreciated, the basis really does not matter until the time of conversion. However, if Jack sells the beach house, then there is a difference in income tax of $90,000 [*20 percent [may be 15 percent)] capital gains rate multiplied by the difference in basis ($450,000) between receiving the property by gift versus through the estate. The same holds true with the mutual funds. That is, if Jack sells the mutual funds, he will have a gain of $200,000, selling price of $750,000 less his carryover basis of $550,000. As a result, if Jack sells both the beach house and stock at their fair values, the capital gains taxes would be $130,000 (Fair value $1,500,000 − $850,000 basis = $650,000 difference × 20% capital gains rate). If Chloe does not make any gifts, rather electing to pass the property through the estate, there will be no gain subject to the income tax [basis of inherited property is its FMV at time of death], a saving of $130,000. If Jack intends to keep the property, for example keep the beach house, then the basis issue is of little matter. As noted above, basis only matters if the property is to be sold. The other issue is income. The mutual funds will generate income (dividends and capital gains) that will be available to Jack and taxable to Jack most likely at the capital gains rate (20 or 15 percent). The beach house will not generate income, but will have expenses such as taxes, insurance, and maintenance. Which property to gift? Most kids prefer cash thus, the mutual funds may be the preferred gift. If Jack sells the funds, the gain will be less than the gain from the beach house. If he keeps the funds, there will be some money from the earnings of the mutual funds. Preserving Your Estate Page 5

Rafay Ahmed Chapter 15 20 – Mar - 23 Answer 9) Computing Federal Estate Tax Due Name: Ryan Cook Date: 2023 Line Computation Item Amount Total Amount 1 Gross estate $26,000,000 2 Subtract sum of a) Funeral expenses b) Administrative expenses c) Debts Total 3 Result Adjusted gross estate $26,000,000 4 Subtract: a) Marital deduction b) Charitable deduction 1,000,000 Total (1,000,000) 5 Result Taxable estate $25,000,000 6 Add Post-1976 taxable gifts 3,000,000 3,000,000 7 Result Estate tax base $28,000,000 8 Compute Tax Tentative tax on estate tax base $11,145,800 9 Subtract sum of a) Gift tax paid on post 1976 gifts $885,000 b) Unified tax credit--2018 credit 4,417,800 (5,302,800) 10 Result $5,843,000 11 Subtract Other credits 0 12 Result: Federal estate tax due $5,843,000 8Use Exhibit 15.5 to calculate the tentative tax. Use Exhibit 15.7 to determine the appropriate unified tax credit. Note: the amount on line 7, the estate tax base is significant since many states will assess their estate tax as a percentage of the federal estate tax base. Answer 10) The Congress is always discussing changes to the income and transfer tax. In 2017, the U.S. House of Representatives voted to eliminate the estate tax in 2026 while keeping the gift tax, but the U.S. Senate did not agree. It is uncertain what will happen by the time 2026 comes around. The gift tax is seen as necessary to prevent splitting the income among the family in order to minimize the family’s income tax. Thus, when planning an estate, focus on flexibility so you can Preserving Your Estate Page 6

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Rafay Ahmed Chapter 15 20 – Mar - 23 react when or if the law is changed. The tax impact of your estate plan should be reviewed annually to ensure the outcome is as you intend. Congress is not likely to modify the transfer tax before 2021, if then. But if it does, the changes will be either eliminate the tax altogether (unlikely given the size of the debt) or modify the amount of the credit and subsequent Applicable Exclusion Amount. The 2018 credit is $4,417,800 which offsets the tax on $11,180,000 of taxable estate. The credit is adjusted each year for inflation. Recall that estate planning is planning how to distribute your assets and the people to whom you give your assets. These decisions need to be made regardless of whether there is a tax on the estate. Other issues include: 1) When minor children are involved, guardians need to be named in the event that both parents die. Otherwise, the state will decide the guardian for the children. 2) Trusts need to be established to take care of certain special needs children for the remainder of their lives. 3) Trusts may also need to be established to care for the surviving spouse, particularly as they become elderly and/or incapacitated. 4) Assets need to be divided up in an equitable manner among the heirs. 5) Insurance planning needs to be done to provide for the surviving spouse and/or children and/or to take care of debts, final expenses, and transfer costs. Preserving Your Estate Page 7