At Freds death, Mary would, in effect, have a general power of appointment over the short-term fixed-income fund to what extent?

Estate Planning Case Questions Part 1

 

1.1 Which of the following is a consequence of the way in which the Ferris home is titled?

 

A. Either spouse can dispose of his or her interest will by at death.

 

B. If Mary is the first to die, no portion of the home will be included in her probate estate.

 

C. At the first death, there is a full step-up in basis for the property.

 

D. If Fred contributed all of the money to purchase the home, the entire value is included in his gross estate at his death.

 

 

 

1.2. Which of the following statements describes the effect of the titling of the automobile parts supply business interest?

 

A. Mary must consent to any sale or other disposition of the interest.

 

B. If Fred is the first to die, no portion of the business interest will pass through probate.

 

C. At Freds death, one-half of the value of the business interest will be included in his gross estate.

 

D. If Fred dies today, there will be a full step-up in basis for the business interest     .

 

 

 

1.3. If Fred dies today, what is the amount of his probate estate?

 

A. $160,000

 

B. $251,000

 

C. $10,000,000

 

D. $10,216,000

 

 

 

1.4. If Mary dies today, how much is her probate estate?

 

A. $0

 

B. $36,000

 

C. $110,000

 

D. $250,000

 

 

 

1.5. Which of the following is a correct description of Freds will?

 

A. Joint will

 

B. Simple will

 

C. Pour-over wi1l

 

D. Mutual will

 

 

 

1.6. Under the current arrangements, which of the following is Fred able to change without probate court involvement if Mary becomes incapacitated?

 

A. Whole life policy

 

B. Residence

 

C. Value fund

 

D. Cash and cash equivalents

 

 

 

1.7. Under the current arrangements, if Mary were to lapse into an irreversible coma, which of the following is the most likely tool Fred would use to deal with medical issues for her?

 

A. Living will

 

B. Health care power of attorney

 

C. Durable power of attorney

 

D. The courts

 

 

 

1.8 lf Fred gives Ted $8,000 for Neds benefit, which of the following is correct?

 

A. The gift will adversely affect Neds eligibility for public benefits.

 

B. Teds wife Maria will be entitled to 50%, due to state property laws.

 

C. Ned will need to cosign any check given to Ted.

 

D. The gift will qualify for the annual exclusion.

 

 

 

1.9. Fred and Mary are contemplating a family gifting program of some magnitude.  Which of the following is the most legitimate rationale for a gifting pattern?

 

A. Gifts of annual exclusion amounts to the children are inappropriate because the unlimited marital deduction eliminates the federal estate tax.

 

B. Gifts directly to Ned are suitable, based on need.

 

C. Gifts to Ted are appropriate to remove the future appreciation for their estates.

 

D. Gifts to the daughters would serve to enhance their self-motivation.

 

 

 

1.10. Which of the following would constitute a generation-skipping transfer if it was made today?

 

A. A direct gift from Fred to Neds Uniform Transfers to Minors Act account, using the value fund

 

B. Creation of a special-needs trust for Neds benefit

 

C. Designating Ted as the holder of a limited power of appointment over property exclusively for

 

Neds benefit

 

D. Nominating Maria as the holder of a general power of appointment over property for Neds benefit

 

 

 

1.11. Which of the following, in addition to current arrangements, would generate a taxable gift?

 

A. A gift of$14,000 from the growth fund to Harmony

 

B. A split gift of $28,000 from Fred and Mary to Ted and Maria from the value fund

 

C. A gift of Freds entire interest in the residence to Mary

 

D. A payment in excess of$14,000 to Felicitys high school for her tuition

 

 

 

1.12 Seriously contemplating early retirement, Fred wants to know the gift tax payable if he gives Ted 50% of his business interest and sells him the other 50% on a 20-year installment note. Which of the following is correct?

 

A. Any gift tax is payable ratably over a 20-year period.

 

B. No gift tax is payable.

 

C. The gift tax due is $1,750,000.

 

D. Under this arrangement, Ted would be responsible for the payment of any gift tax.

 

1.13. In the current situation, which of the following is the most serious weakness in terms of the Ferris familys planning for incapacity?

 

A. Inadequate disability insurance for Fred

 

B. Inadvertent disqualification for Neds government assistance

 

C. Lack of a buy-sell agreement, funded with disability buyout insurance

 

D. Insufficient protection against long-term nursing care expenses

 

 

 

1.14. If Fred becomes disabled, which of the following plans currently provides protection?

 

A. The key person disability insurance of the business

 

B. Disability buyout insurance

 

C. Business overhead expense disability plan

 

D. Group long-term disability plan

 

 

 

1.15. If Fred dies, which of the following is not included in his gross estate?

 

A. The funds set aside for Felicitys education

 

B. The group life insurance

 

C. The individual term insurance

 

D. The SPDA

 

 

 

1.16. lf Fred dies today, what is the amount included in his gross estate?

 

A. $10,828,500

 

B. $10,953,000

 

C. $12,040,500

 

D. $12,150,500

 

 

 

1.17. Considering the current estate plan, which of the following best describes Freds liquidity position at death?

 

A. Severely impaired

 

B. Moderately impaired

 

C. Modestly impaired

 

D. Adequate

 

1.18. If Fred completes business succession documents that transfer his business interest at death to Ted, which technique involves the lowest adverse impact on Freds estate liquidity?

 

A. A funded one-way buyout agreement

 

B. Sec. 303 partial stock redemption

 

C. Partial transfer of Freds individual term policy to Ted

 

D. Transfer of the whole life policy to Ted

 

 

 

1.19. Under the current documents, which of the following powers is Mary presumed to have if Fred dies first?

 

A. Five-and-five power

 

B. Limited power of appointment

 

C. General power of appointment

 

D. A power limited by an ascertainable standard

 

 

 

1.20. At Freds death, Mary would, in effect, have a general power of appointment over the short-term fixed-income fund to what extent?

 

A. Not at all

 

B. 50%

 

C. 100%

 

D. Her contribution

 

 

 

1.21. Which of the following is least likely to be contained in Teds marital trust for the benefit of Maria?

 

A. General power of appointment

 

B. Special power of appointment

 

C. Ability to name her creditors as payees

 

D. Full withdrawal rights

 

1.22. Freds current trust can best be described as:

 

A. A funded revocable living trust

 

B. A simple trust with Crummey provisions

 

C. An irrevocable trust

 

D. A complex trust with a general power of appointment

 

 

 

1.23. If Ted dies, which of the following best describes his trust?

 

A. The trust retains its revocable character because it is a simple trust.

 

B. The trust becomes irrevocable.

 

C. The residuary must becomes irrevocable, but the marital trust is revocable.

 

D. The marital trust becomes irrevocable, but the residuary trust is revocable.

 

 

 

1.24. Considering the current situation for the extended Ferris family, which of the following is the most viable technique to accomplish one or more of the stated objectives?

 

A. Transferring Freds business interest to a GRUT, with Fred receiving 6% annual income, and the remainder passing to Ted after 13 years

 

B. A gift of a present interest from Fred to Ted of the entirety of Freds fractional business holdings, and Fred and Mary electing gift-splitting to avoid gift tax.

 

C. Placing Fred and Marys home into a 20-year QPRT, with Ted and Maria as remainder beneficiaries.

 

D. A buy-sell agreement funded with life insurance (premiums paid by Fred), allowing Ted purchase Freds shares at his death

 

 

 

1.25. Which of the following transfers would involve the smallest taxable gift?

 

A. Transfer of the growth fund to a 10-year GRA T with a 6% payout

 

B. Transfer of the value fund to a 15-year GRA T with a 6% payout

 

C. Transfer of the short-term fixed-income fund to a I5-year GRUT, using an 8% payout

 

D. Transfer of the home to a to-year QPRT

 

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ESTATE PLANNING

 

 

 

 

 

Topics 53-73

 

 

 

 

 

 

 

© 2014 Keir Educational Resources 153 800-795-5347

 

 

 

 

 

 

 

 

 

FRED AND MARY FERRIS

 

 

 

 

 

 

 

PERSONAL IN FORMA TION

 

 

 

Fred and Mary Ferris have engaged your services for the development of a comprehensive financial plan.

 

 

 

Their primary concerns, however, revolve around estate planning objectives.

 

 

 

Fred, age 52, is a one-third owner of an automobile parts supplier in Michigan. The business has survived the

 

 

 

cyclical nature of the auto industry through a combination of high-quality parts, just-in-time delivery, and

 

 

 

superior cost containment.

 

 

 

Mary, also 52, works part-time at the art institute, mostly to satisfy her aesthetic senses. She expects to

 

 

 

continue working until age 60.

 

 

 

This is a second marriage for Fred, whose first wife died at age 32 in a car accident. Fred has one son from

 

 

 

 

 

that marriage, Ted, age 28, who is happily married but has fmancial difficulties due to his one child, Ned, age

 

 

 

 

 

 

 

3, who has special needs.

 

 

 

Together, Fred and Mary have two daughters, both in private high school. Felicity is an honors student in her

 

 

 

junior year, and Harmony is a sophomore and has musical talent.

 

 

 

 

 

Name Relationship Occupation Notes

 

 

 

 

 

 

 

Fred Husband Business Ovner Successful

 

 

 

Mary Wife Docent at art institute Charitably inclined

 

 

 

Ted Son Retail sales Married; special-needs child

 

 

 

Felicity Daughter HSjunior Scientifically gifted

 

 

 

Harmony Daughter HS sophomore Musically gifted

 

 

 

Mary has been generous with her time in helping Ted with his special-needs son Ned. Her assistance has

 

 

 

solidified her excellent relationship with Ted and his wife Maria, a Canadian citizen. In addition, Mary is quite

 

 

 

interested in leaving substantial amounts to the art institute at her death.

 

 

 

Freds business operates as a C corporation; Fred is an equal one-third owner with Harold Dietz and Gerald

 

 

 

Keats. They are seriously contemplating a number of business agreements, including a buy-sell agreement, a

 

 

 

non-qualified deferred-compensation plan, and a stock option plan of some kind. All three seek your advice in

 

 

 

these matters.

 

 

 

A recent business valuation produced a fair market value of $30 million for the business, with an expectation

 

 

 

 

 

of 8% annual growth in the next 15 years. As all three owners are in their 50s and want to retire at age 66, they

 

 

 

 

 

 

 

are concerned with successor management.

 

 

 

Fred recently sent a registered letter to Harold and Gerald, indicating his intent that his son Ted should receive

 

 

 

 

 

his share ofthe business at Freds death. At this point, Ted is becoming increasingly interested in his fathers

 

 

 

 

 

 

 

business as a career.

 

 

 

The owners each draw an annual salary of $150,000 and take equal bonuses, depending on profitability.

 

 

 

Bonuses have averaged $50,000 each in the last five years.

 

 

 

© 2014 Keir Educational Resources 154 www.keirsuccess.com

 

 

 

 

 

Estate Planning (Topics 53·73)

 

 

 

 

 

The business has impLemented a 401 (k) plan with a matching contribution of$.50 per dollar on the first 6% of

 

 

 

 

 

employee contributions. A dozen well-paid factory workers all participate.

 

 

 

© 2014 Keir Educational Resources 155 800-795-5347

 

 

 

Estate Planning ITopics 53-73)

 

 

 

 

 

 

 

The employees and their families are all covered by an excellent group health insurance plan, as well as group

 

 

 

term life insurance equal to their base salary. A separate employer-paid group long-term disability plan also

 

 

 

covers all employees for 60% of base pay, with a 90-day elimination period. The group LTD plan is integrated

 

 

 

with Social Security and workers compensation.

 

 

 

ESTATE PLANNING DOCUMENTS

 

 

 

Fred and Mary Ferris each have wills, leaving everything to the survivor. Each will contains a 120-day

 

 

 

survivorship clause. In a simultaneous death, the will and state law presume that the wife survives. Ifthere is

 

 

 

no surviving spouse, the children ofthe testator share equally. They each named their surviving spouse as the

 

 

 

executor.

 

 

 

Fred executed an unfunded irrevocable trust four years ago for the benefit of his children and grandchildren

 

 

 

that he hopes to use in the future. There is no withdrawal right in the trust.

 

 

 

Fred and Mary have made no prior taxable gifts.

 

 

 

At Freds suggestion, Ted and Maria have created standard revocable living trusts with marital and residuary

 

 

 

trusts. Large life insurance policies were also purchased on Ted and Maria ($500,000 each), payable to their

 

 

 

respective trusts.

 

 

 

LIFE INSURANCE SUMMARY

 

 

 

 

 

Insured Owner TYP”e Face Amount Premium Beneficiary

 

 

 

 

 

 

 

Fred Fred Group term $150,000 Employer- Primary: Mary

 

 

 

paid Secondary: Ted

 

 

 

Fred Mary Whole life $250,000 $4,200/year Primary: Mary

 

 

 

Secondary: None

 

 

 

Fred Fred IS-year terrn $1,000,000 $1,800/year Primary: Mary

 

 

 

Secondary: None

 

 

 

 

 

e 2014 [email protected] Educational Resources 156 www.keirsueeess.com

 

 

 

Cash and cash equivalents: J

 

 

 

 

 

 

 

Cash value of life ins.: W

 

 

 

 

 

Short-tenn fixed-inc. fund: J

 

 

 

 

 

 

 

Value fund: J

 

 

 

 

 

Growth fund: HI

 

 

 

 

 

 

 

Global fund: H

 

 

 

SPDA: H2

 

 

 

 

 

401 (k) plan: H3

 

 

 

529 plans: H4

 

 

 

 

 

 

 

Business: H

 

 

 

 

 

Residence: J

 

 

 

Personal property: J

 

 

 

 

 

 

 

Cr:H

$ 31,000

36,000

 

40,000

83,000

110,000

31,000

160,000

225,000

110,000

10,000,000

450,000

75,000

25,000

Total Assets $11,376,000

H=Husband

W=Wife

Balance Sheet

Fred and Mary Ferris

December 31, Last Year

Liabilities

Car loan: H

Mortgage: J

Total Liabilities

Net Worth

Total Liabilities and

$ 17,000

228,000

$ 245,000

$11,131,000

NetWOlth $11,376,000

J = Joint tenancy with right of survivorship

IPayable on death: Mary

2Single-premium deferred annuity, issued 7/1/80; the initial premium was $40,000, and the estate is beneficiary.

3Beneficiary: Mary

4Mary is the successor-owner at Freds death; the average annual return has been 0%.

INVESTMENT DETAIL

Asset Fair Market Basis Projected Purchased Value Growth Rate

Short-tenn fixedincome fund $40,000 $41,000 1% 3 years ago

Value fund $83,000 $50,000 7% 2 years ago

Growth fund $110,000 $50,000 8% 8 years ago

Global fund $31,000 $22,000 6% 4 years ago

© 2014 Keir Educational Resources 157 800-795-5347

Estate Planning (Topics 53-73)

Inflows

Salary: Fred

Bonus: Fred

Salary: Mary

Interest/Dividends

Total Inflows

Outflows

Mortgage: principal and interest

Real estate tax

Homeowners insurance (HO-3)

Maintenance/Repairs

Food

Clothing

Utilities

Car loan

TraveWacationiEntertainment

Life insurance

Fred and Mary Ferris

Cash Flow Projection

Current Year

$150,000

50,000

25,000

Reinvested

$225,000

$ 31,200

6,200

820

8,300

7,800

4,000

5,600

7,200

16,000

Educational funding (daughters 529 plans)

401(k) plan contribution: Fred

6,000

56,000

16,000

10,000

30,000

Charitable contributions

Federal income tax

State income tax

Federal and state payroll taxes

Total Outflows

Surplus

Goals and Objectives (in order of priority)

8,000

10,674

$223,794

$1,206

1. Provide $120,000 of annual after-tax cash flow to the surviving family members at the death of either spouse.

2. Pay the remaining mortgage balance at the death of either spouse.

3. Provide adequate college funding for their daughters.

4. Provide assistance to Ted for Neds care.

5. Eliminate the federal estate tax at the first death.

6. Reduce or eliminate the federal estate tax at the second death.

7. A void probate at death or incapacity.

8. Secure professional financial assistance for the survivors after either spouses death.

9. Ensure adequate retirement income from all sources, including the sale of the business interest.

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