Deck 15: Preserving Your Estate

Question 1

David and Cheryl Allen 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. David has $100,000 in group term life insurance and an individual universal life policy for $150,000. However, the Allens haven't prepared their wills. David plans to do one soon, but they think that Cheryl doesn't need one because the house is jointly owned. As their financial planner, explain why it's important for both David and Cheryl to draft wills as soon as possible.

Answer 1

It is essential for Mr. D and Mrs. C to draft a will as early as possible. The importance of having a will is explained below-
a. As all their children are minor having a will would help in securing their future in the uncertain death of both the parents. Through a will the responsibility of the children along with the share of estate to meet the expenses can be assured.
b. Through a will the disposition of the estate can be determined. 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.
c. The right to select a representative to guide the disposition process is lost.
d. 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

George Reed, 48 and a widower, and Debbie Moore, 44 and divorced, were married five years ago. They have children from their prior marriages, two children for George and one child for Debbie. 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 Debbie's family for many years, and jewelry belonging to George'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 where one party (grantor) transfers the estate to the second party (trustee) for the benefit of the third party (beneficiary). Mr. G and Mrs. R may use a trust for the following advantages-
a. The trust would enable them to significantly reduce the income tax and the estate taxes.
b. The trust enables 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 taken care by the trustee through the income from estate.
Mr. G and Mrs. R should create a revocable trust and provide in their will for the following for the benefit of the family-
a. The trustee to ensure that all the expenses of the children are met from the estate.
b. The estate to be transferred on the children attaining majority in equal share.

Question 4

Althea has accumulated substantial wealth and plans to gift some of her wealth to her son Jamal. 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 Rich Corporation, which cost her $400,000 5 years ago and now has a fair market value of $500,000. Prepare a memo advising Althea which property to give to Jamal. In your memo, consider two scenarios: one where Jamal sells the property and one where he does not.

Question 5

Michael died in 2012, leaving an estate of $23,000,000. Michael's wife died in 2010. In 2009, Michael gave his son property that resulted in a taxable gift of $3,000,000 and upon which Michael paid $885,000 in transfer taxes. Michael had made no other taxable gifts during his life. Michael's will provided a charitable bequest of $1,000,000 to his church. Determine the federal transfer tax on Michael's estate.