Deck 15: Preserving Your Estate

Question 1

Kristen and Robert Salmon are in their mid-30s and have two children, ages 8 and 5. They have combined annual income of $95,000 and own a house in joint tenancy with a market value of $310,000, on which they have a mortgage of $250,000. Robert has $100,000 in group term life insurance and an individual universal life policy for $150,000. However, the Salmons haven't prepared their wills. Robert plans to do one soon, but they think that Kristen doesn't need one because the house is jointly owned. As their financial planner, explain why it's important for both Robert and Kristen to draft wills as soon as possible.

Answer 1

A will is a very important document. It allows the testator (will writer) to direct the disposition of his/her assets after the death. The changes on will can be made by the testator at any time, but it is vital to make changes in the will as any important event of life occurs. Thus, Mr. and Mrs. S should draft their will early as possible. The following are importance of having updated will.
a. As all their children are minor having a will would help in securing their future after uncertain death of Mr. and Mrs. S.
b. Through a will the responsibility of the children along with the share of estate to meet the expenses can be assured and transferred to a close friend or relative.
c. Through a will the disposition of the estate can be determined as per the testator will. Because in the absence of a will the owners would not be able to transfer anything to a person not covered as descendants under a statute.
d. The right to select a representative to guide the disposition process is lost.
e. Estate planning to reduce taxes is not possible in the absence of will.

Question 2

Your best friend has asked you to be executor of his estate. What qualifications do you need, and would you accept the responsibility?

Answer 2

The executor is the legal representative of the decedent and takes care of the settlement process of the estate. The process involves realization of the assets, collection from banks and paying off the debt and distributing the balance as per the will. No qualification is required to be an executor, however and executor must be clearly aware of the affairs of the decedent and must be efficiently responsible to perform the job.
The role of executor must be only accepted if the details of the affairs of your friend are known and that you will be in a position to perform the responsibilities of the settlement and give the required time. Based on the above criteria the role may be accepted.

Question 3

Mark Mead, 48 and a widower, and Natalie White, 44 and divorced, were married 5 years ago. They have children from their prior marriages, two children for Mark and one child for Natalie. The couple's estate is valued at $1.4 million, including a house valued at $475,000, a vacation home in the mountains, investments, antique furniture that has been in Natalie's family for many years, and jewelry belonging to Mark's first wife. Discuss how they could use trusts as part of their estate planning, and suggest some other ideas for them to consider when preparing their wills and related documents.

Answer 3

A trust is a legal arrangement created by the grantor (first party) to transfer his/her estate to the trustee (second party) for the benefit of the beneficiary (third party). The main objective of creating a trust is to get income and estate tax savings. As per the given case Mr. MM and Ms. NM may use a trust to get the following advantages.
a. The trust will enable them to significantly reduce the income tax and the estate taxes.
b. The trust also enables them in conserving the property for a long period of time.
c. As the family includes children in case of death of both parents, the expenses of the children can be endured by the trustee through the income from estate.
The couple can also create a revocable trust and provide in their will for the following benefit to their family.
a. Direct the trustee to ensure that all the expenses of the children are met from the estate.
b. The estate to be transferred to the children attaining majority in equal share.

Question 4

Use Worksheet 15.2. When Henry King died in 2011, he left an estate valued at $5,850,000. His trust directed distribution as follows: $20,000 to the local hospital, $160,000 to his alma mater, and the remainder to his three adult children. Death-related costs were $6,800 for funeral expenses, $40,000 paid to attorneys, $5,000 paid to accountants, and $30,000 paid to the trustee of his living trust. In addition, there were debts of $125,000. Use Worksheet 15.2 and Exhibits 15.5 and 15.6 to calculate the federal estate tax due on his estate.

Question 5

Becky has accumulated substantial wealth and plans to gift some of her wealth to her son Bob. She is considering two assets: a beach house, which cost $150,000 20 years ago and now has a fair market value of $500,000; and stock in Big Corporation, which cost her $400,000 5 years ago and now has a fair market value of $500,000. Prepare a memo advising Becky which property to give to Bob. In your memo, consider two scenarios: one where Bob sells the property and one where he does not.

Question 6

Fred died in 2011, leaving an estate of $23,000,000. Fred's wife died in 2009. In 2009, Fred gave his son property that resulted in a taxable gift of $3,000,000 and upon which Fred paid $885,000 in transfer taxes. Fred had made no other taxable gifts during his life. Fred's will provided a charitable bequest of $1,000,000 to his church. Determine the federal transfer tax on Fred's estate.