finance-Andy Anderson, age 64, owns and manages a hardware store in Connecticut

FIN410 Name: ______________________________________ Date:________
The Anderson
Case
Andy Anderson, age 64, owns and manages a hardware store in Connecticut.
Andy plans to retire this year and has recently accepted an offer to sell this
company for 1.8 million. Andy and his wife, Marian, age 63, bought a second
home in Florida last year, where they intend to spend their winters. The couple
has two children, Dennis, age 40, and Donna, age 37. Both children are married
and currently employed. Dennis has one son age 14, and Donna has two daughters
under the age of 10.
Andy’s will provides that $200,000 of his estate will be
placed into a power of appointment trust for Marian, and Marian is the sole
trustee. The remainder of his estate is to be placed into a bypass trust with
income payable to Marian for her life as needed. Marian will have a right to
invade the corpus for health, education, maintenance, and support, and at her
death any remaining corpus will be distributed to their children per stirpes.
Marian has separate assets she inherited from her father.
The first is a rare coin collection that was worth $180,000 at her father’s
death eight years ago, and is currently valued at $235,000. She also inherited
his stock portfolio worth $86,000 which is now valued at $108,000. Marian was
the sole beneficiary of her father’s whole life insurance policy for which she
received a death benefit of $200,000. She deposited that money in a separate
account and used it to buy a duplex with her neighbor near a ski resort. Marian
contributed $180,000 toward the $300,000 purchase price, and they titled the
property together as tenants in common. Marian’s will provides for all of her estate
to pass to Andy or, if he predeceases her, to their two children equally.
Andy created an irrevocable life insurance trust two years
ago, and transferred a whole life policy with a face value of $1 million into
the trust. Marian will receive the income for life, and their two children will
receive the corpus equally at Marian’s death.
Andy and Marian’s estates presently consist of the following
property values:

Property item

Owner

Value

Checking and savings account

Joint

$23,000

Money market account

Joint

$58,000

Mutual fund account

Joint

$269,000

Securities inherited by Marian

Marian

$108,000

Coin collection inherited by Marian

Marian

$235,000

Print shop

Andy

$1,800,000

Vested profit-sharing plan1

Andy

$300,000

Furniture and household goods

Joint

$85,000

Jewelry and clothes

Marian

$95,000

BMW automobile

Andy

$50,000

Life insurance

Irrevocable trust

$1 million

Residence in Maine2

Joint

$750,000

Florida home3

Joint

$450,000

Lexus automobile

Marian

$55,000

Duplex4

Marian

$240,000

1 Marian is named as the designated beneficiary
2 mortgage liability is $200,000
3 mortgage liability is $180,000
4 capital FMV of duplex is $400,000 (Marian own 60% or
$240,000)

Based on the information above, please answer the following
questions.
1. Evaluate the following statements regarding Andy and Marian’s
estate plans. Indicate whether the
statements are correct/incorrect. State the reasons you have made your
selections.
A. If Andy dies first, the Florida
home will be subject to ancillary probate upon his death.

B. If Andy sells the business and
places the proceeds in the joint mutual fund account or money market account,
it will not be included in his probate estate.

C. If Marian predeceases Andy, she
will not use any of her unified credit.

D. After Andy’s death, Marian can
spend the money in the power of appointment trust without restrictions.

2. Which statement(s) concerning Andy and Marian’s estate
plans is not correct? Justify your answer.
A. Marian can name the ultimate
beneficiaries of the power of appointment trust in her will.

B. If Andy decides to sell Marian’s
rare coin collection after her death, his basis will be Marian’s inherited
basis of $180,000.

C. Marian has been given an
ascertainable standard in the bypass trust.

D. Assets passing to the bypass
trust for Marian will take advantage of Andy’s unified credit.

3. If Andy dies today, what will the value of his gross
estate be for federal estate tax purposes? List the assets you are including along
with their value and the total.

4. Assume that Andy and Marian’s daughter, Donna, died
unexpectedly in an accident and Andy died a year later leaving the same will
described above. What portion of the corpus of the bypass trust would each of Donna’s
children receive upon Marian’s death? Justify your response.
A. 1/6
B. 1/5
C. 1/4
D. 1/2

5. Which of the following statements concerning the
securities Marian inherited from her father is correct? Why or why not?
A. If Marian leaves the securities
equally to her grandchildren in her will, her estate will pay a
generation-skipping transfer tax.

B. If Marian gives each grandchild
$14,000 of her securities over the next three years, she cannot use any
generation-skipping transfer tax annual exclusions to offset the GST tax.

C. If Marian transferred her
securities into a GST trust naming all three grandchildren as beneficiaries
with the provision that the trust retain all income for the next 15 years, Marian
could not use gift tax annual exclusions to offset any taxable gifts.

D. Marian transfers the securities
to a trust that includes her children and grandchildren as beneficiaries, and
applies $108,000 of her GST T exemption to the trust, the grandchildren must
pay a GST tax on any distributions they receive.

6. Which of the following statements correctly describes the
consequences of Andy’s irrevocable life insurance trust? Justify your answer.
A. The proceeds of the trust will
be included in Marian’s estate, assuming she dies after Andy.
B. Marian has a life estate in the
trust, which is a terminable interest, and the children have a remainder
interest in the trust.
C. Premiums for the life insurance
policy will be paid with tax-deferred dollars.
D. Gift tax annual exclusions
cannot be taken when the policy is transferred into the trust if the trust
includes Crummey provisions.

7. If Andy transfers income producing property into the
irrevocable life insurance trust, which (if any) of the following statements is
correct? Justify your response.
A. Trust income is taxed to Andy
under grantor trust rules.
B. Trust income is not taxed to Andy
since the trust is irrevocable and Andy receives no income from the trust.
C. The trust will pay taxes on the
income based on the amount of distributable net income.
D. Trust income is taxed to Marian
and the children since they are the beneficiaries of the trust.

8. Which of the following statements concerning the
irrevocable life insurance trust is correct? Justify your response.
A. If the trust has Crummey
provisions, Andy and Marian can use gift splitting to reduce the gift tax on
annual premium payments transferred into the trust.
B. Andy can borrow from the cash
values of the policies without adverse tax consequences.
C. If Marian dies after Andy, a
gift tax will incur when trust corpus is transferred equally to the children.
D. The beneficiaries are given
Crummey powers and they let their annual right of withdrawal labs, they are
making gifts to the other trust beneficiaries.

9. Assume that Marian found a whole life insurance policy on
Andy’s life, and she predeceased Andy. Please evaluate each of the following
statements. Determine whether or not each statement is correct. Include your
rationale.
A. The value of the policy is
included in her probate estate

B. The replacement cost of the
policy is included in her gross estate.

C. If Marian gifted the policy to
David one year before she died the policy would not be included in her gross
estate.

D. The value of the policy included
in Marian’s gross estate will receive a marital deduction to offset her
adjusted gross estate.

10. If Marian were to die today, what amounts would be
allowable as a marital deduction on her estate tax return? List each item and
its value along with the total.

 

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