CHAPTER 20
UNDERSTANDING THE ISSUES
1. Several of the important goals of estate 3. It is important to separately account for the
planning are to identify and clearly com- income and principal of an estate for sev-
municate the desires and wishes of the de- eral reasons. First, the decedent may have
cedent, maximize the value of the estate’s created a will that has special provisions
net assets, minimize the taxes that may be relating to both principal and income. Sec-
assessed against the assets and income of ond, the income of an estate is subject to
the estate, achieve the necessary liquidity tax. These taxes are either imposed on the
of the estate’s assets so that desired estate or the recipient of the income.
conveyances and distributions may be
The sum of intended legacies may be larger
received, and provide a proper and timely
than the available assets of an estate. In
accounting of the activities of the estate
those instances, a procedure referred to as
and its fiduciary.
abatement is applied. This procedure re-
2. Given a married couple, when the first quires that legacies be satisfied to whatever
spouse dies the decedent's estate may be extent possible, beginning with the highest
passed to the surviving spouse without priority level of legacies. If demonstrative
incurring any estate tax at the time of the legacy cannot be satisfied, the unsatisfied
decedent's death. This marital exclusion amount is considered a general legacy. If
does not necessarily eliminate estate tax there are inadequate resources to satisfy
but rather it defers the tax until the death of general legacies, available resources are
the surviving spouse assuming a taxable allocated proportionately among the identi-
estate continues to exist. When a spouse fied parties.
dies, any unified credit that is not used in
the determination of the decedent's estate
tax may be transferred to the surviving
spouse. The executor of the decedent's
estate must elect to transfer the unused
unified credit. In essence, no unused uni-
fied credit will be lost under the concept of
portability.
20–1
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Ch. 20—Exercises 20–2
EXERCISES
EXERCISE 20-1
Scenario A Scenario B
General legacies as set forth in will:
Amount due The Nature Conservancy ......................... $ 50,000 $ 50,000
Equal amounts due three grandchildren....................... 150,000 150,000
Unsatisfied demonstrative legacies that constitute a
general legacy:
Amount not satisfied by insurance proceeds ................ 20,000 20,000
Total needed to satisfy general legacies ............................. $220,000 $ 220,000
Available cash to satisfy general legacies:
Cash at date of death................................................... $ 40,000 $ 15,000
Sale of Kachina collection ............................................ 45,000 —
Insurance proceeds (policy number 48002) ................. 40,000 40,000
Sale of residence ......................................................... 220,000 —
Total ............................................................................ $345,000 $ 55,000
Amount available for residual legacies ................................ $125,000 $ (165,000)
Amount of cash received by:
Grandchild Riley:
General legacy at amount stated in will
(see Notes A and B) .......................................... $ 50,000 $ 12,500
Son Calvin, Jr.:
Insurance policy number 14378 death benefit ......... $ 50,000 $ 50,000
Residual legacy: One-half of available amount ........ 62,500 —
Total ............................................................................ $112,500 $ 50,000
Note A: Under scenario A, there is enough cash available to satisfy all general legacies.
Therefore, Riley will receive the stated amount of $50,000.
Note B: Under scenario B, there is only $55,000 available to satisfy all general legacies, which
total $220,000. Therefore, only 25% ($55,000/$220,000) of each stated legacy will be
satisfied. Accordingly, Riley will receive $12,500 (25% × $50,000).
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,20–3 Ch. 20—Exercises
EXERCISE 20-2
(1) The unified gift and estate tax exclusion amount is ................. $ 5,340,000
Less the prior taxable gifts ...................................................... (1,200,000)
Largest taxable estate without incurring any estate tax ........... $ 4,140,000
(2) Taxable estate ........................................................................ $12,000,000
Post 1976 taxable gifts:
Prior taxable gift ................................................................. 856,000
Taxable gifts to children (($50,000 – $14,000) × 4)............. 144,000
Unified tax base ...................................................................... $13,000,000
Tentative tax ........................................................................... $ 5,145,800
Less unified credits:
Traceable to George........................................................... (2,081,800)
Traceable to Helen's remaining credit:
Tax on Helen's taxable gifts ........................................... 545,800
Less Unified credit.......................................................... (2,081,800) (1,536,000)
Total gift and estate tax........................................................... $1,528,000
Tax on taxable gifts of $856,000 plus $144,000 ...................... (345,800)
Net estate tax ......................................................................... $1,182,200
(3) Helen George
Taxable estate ........................................................................ $ 10,000,000
$8,160,000
Less marital deduction ............................................................ (6,160,000)
0
Taxable estate ........................................................................ $ 3,840,000
$8,160,000
Post 1976 taxable gifts:
Prior taxable gift ................................................................. 1,500,000
856,000
Taxable gifts to children (($50,000 – $14,000) × 4)............. — 144,000
Unified tax base ...................................................................... $ 5,340,000
$9,016,000
Tentative tax ........................................................................... $ 2,081,800
$3,552,200
Less unified credits: ................................................................ (2,081,800)
(2,081,800)
Total gift and estate tax........................................................... $ — $1,470,400
Tax on taxable gifts of $856,000 plus $144,000 ...................... (345,800)
Net estate tax ......................................................................... $1,124,600
(4) Residual legacy:
Remaining bank balance to sister Ann ($60,000 – $40,000) ................. $ 20,000
Amount to children (6 × $40,000) ......................................................... 240,000
Total ..................................................................................................... $260,000
Amount to be allocated between residual legatees ................................... $195,000
Portion allocated to sister Ann ($20,000/$260,000) ................................... × 20/260
Amount allocated to sister Ann ................................................................. $ 15,000
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Ch. 20—Exercises 20–4
(5) The sum of the residual legacies would be:
Remaining bank balance to sister Ann ($60,000 – $40,000) ................. $ 20,000
Amount to children (6 × $40,000) ......................................................... 240,000
Amount to University of Oklahoma ....................................................... 100,000
Total needed from sale of land ............................................................. $360,000
EXERCISE 20-3
(1) Only $1,000 of the gift to the grandson would be considered taxable. Gifts to charities and
spouses are not taxable. The $8,000 to the granddaughter is below the annual exclusion
amount.
(2) Previous taxable gifts to grandchildren
[($25,000 – $14,000) × 4 × 3 years] .......................................................... $ 132,000
Lifetime exclusion ..................................................................................... $5,340,000
Used on previously taxed gifts .................................................................. (132,000)
Remaining exclusion ................................................................................. $5,208,000
Number of grandchildren .......................................................................... 4
Remaining exclusion per grandchild ......................................................... $ 1,302,000
Plus annual exclusion amount .................................................................. 14,000
Maximum gift per grandchild ..................................................................... $ 1,316,000
(3) Cumulative taxable gifts:
Gift to 3 children [($200,000 – $14,000) × 3]......................................... $ 558,000
Gift to brother ($50,000 – $14,000)....................................................... 36,000
Gifts to grandchildren (all less than annual exclusion) .......................... —
Gift to 2 nieces [($50,000 – $14,000) × 2] ............................................. 72,000
Total of prior gifts .................................................................................. $ 666,000
Gift to sister ($5,348,000 – $14,000) .................................................... 5,334,000
Total of all gifts ..................................................................................... $6,000,000
Tax on total gifts ................................................................................... $ 2,345,800
Less lifetime exclusion amount ............................................................. (2,081,800)
Net gift tax (none was due prior to current year) ................................... $ 264,000
(4) Spouse Spouse
Total of prior gifts .................................................................... $ 666,000 $ 100,000
Gift to sister ($5,348,000 – ($14,000 × 2)) .............................. 2,660,000
2,660,000
Total of all gifts ....................................................................... $3,326,000 $2,760,000
After consideration of the lifetime exclusion amount, no tax would be due by either spouse.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
UNDERSTANDING THE ISSUES
1. Several of the important goals of estate 3. It is important to separately account for the
planning are to identify and clearly com- income and principal of an estate for sev-
municate the desires and wishes of the de- eral reasons. First, the decedent may have
cedent, maximize the value of the estate’s created a will that has special provisions
net assets, minimize the taxes that may be relating to both principal and income. Sec-
assessed against the assets and income of ond, the income of an estate is subject to
the estate, achieve the necessary liquidity tax. These taxes are either imposed on the
of the estate’s assets so that desired estate or the recipient of the income.
conveyances and distributions may be
The sum of intended legacies may be larger
received, and provide a proper and timely
than the available assets of an estate. In
accounting of the activities of the estate
those instances, a procedure referred to as
and its fiduciary.
abatement is applied. This procedure re-
2. Given a married couple, when the first quires that legacies be satisfied to whatever
spouse dies the decedent's estate may be extent possible, beginning with the highest
passed to the surviving spouse without priority level of legacies. If demonstrative
incurring any estate tax at the time of the legacy cannot be satisfied, the unsatisfied
decedent's death. This marital exclusion amount is considered a general legacy. If
does not necessarily eliminate estate tax there are inadequate resources to satisfy
but rather it defers the tax until the death of general legacies, available resources are
the surviving spouse assuming a taxable allocated proportionately among the identi-
estate continues to exist. When a spouse fied parties.
dies, any unified credit that is not used in
the determination of the decedent's estate
tax may be transferred to the surviving
spouse. The executor of the decedent's
estate must elect to transfer the unused
unified credit. In essence, no unused uni-
fied credit will be lost under the concept of
portability.
20–1
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Ch. 20—Exercises 20–2
EXERCISES
EXERCISE 20-1
Scenario A Scenario B
General legacies as set forth in will:
Amount due The Nature Conservancy ......................... $ 50,000 $ 50,000
Equal amounts due three grandchildren....................... 150,000 150,000
Unsatisfied demonstrative legacies that constitute a
general legacy:
Amount not satisfied by insurance proceeds ................ 20,000 20,000
Total needed to satisfy general legacies ............................. $220,000 $ 220,000
Available cash to satisfy general legacies:
Cash at date of death................................................... $ 40,000 $ 15,000
Sale of Kachina collection ............................................ 45,000 —
Insurance proceeds (policy number 48002) ................. 40,000 40,000
Sale of residence ......................................................... 220,000 —
Total ............................................................................ $345,000 $ 55,000
Amount available for residual legacies ................................ $125,000 $ (165,000)
Amount of cash received by:
Grandchild Riley:
General legacy at amount stated in will
(see Notes A and B) .......................................... $ 50,000 $ 12,500
Son Calvin, Jr.:
Insurance policy number 14378 death benefit ......... $ 50,000 $ 50,000
Residual legacy: One-half of available amount ........ 62,500 —
Total ............................................................................ $112,500 $ 50,000
Note A: Under scenario A, there is enough cash available to satisfy all general legacies.
Therefore, Riley will receive the stated amount of $50,000.
Note B: Under scenario B, there is only $55,000 available to satisfy all general legacies, which
total $220,000. Therefore, only 25% ($55,000/$220,000) of each stated legacy will be
satisfied. Accordingly, Riley will receive $12,500 (25% × $50,000).
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,20–3 Ch. 20—Exercises
EXERCISE 20-2
(1) The unified gift and estate tax exclusion amount is ................. $ 5,340,000
Less the prior taxable gifts ...................................................... (1,200,000)
Largest taxable estate without incurring any estate tax ........... $ 4,140,000
(2) Taxable estate ........................................................................ $12,000,000
Post 1976 taxable gifts:
Prior taxable gift ................................................................. 856,000
Taxable gifts to children (($50,000 – $14,000) × 4)............. 144,000
Unified tax base ...................................................................... $13,000,000
Tentative tax ........................................................................... $ 5,145,800
Less unified credits:
Traceable to George........................................................... (2,081,800)
Traceable to Helen's remaining credit:
Tax on Helen's taxable gifts ........................................... 545,800
Less Unified credit.......................................................... (2,081,800) (1,536,000)
Total gift and estate tax........................................................... $1,528,000
Tax on taxable gifts of $856,000 plus $144,000 ...................... (345,800)
Net estate tax ......................................................................... $1,182,200
(3) Helen George
Taxable estate ........................................................................ $ 10,000,000
$8,160,000
Less marital deduction ............................................................ (6,160,000)
0
Taxable estate ........................................................................ $ 3,840,000
$8,160,000
Post 1976 taxable gifts:
Prior taxable gift ................................................................. 1,500,000
856,000
Taxable gifts to children (($50,000 – $14,000) × 4)............. — 144,000
Unified tax base ...................................................................... $ 5,340,000
$9,016,000
Tentative tax ........................................................................... $ 2,081,800
$3,552,200
Less unified credits: ................................................................ (2,081,800)
(2,081,800)
Total gift and estate tax........................................................... $ — $1,470,400
Tax on taxable gifts of $856,000 plus $144,000 ...................... (345,800)
Net estate tax ......................................................................... $1,124,600
(4) Residual legacy:
Remaining bank balance to sister Ann ($60,000 – $40,000) ................. $ 20,000
Amount to children (6 × $40,000) ......................................................... 240,000
Total ..................................................................................................... $260,000
Amount to be allocated between residual legatees ................................... $195,000
Portion allocated to sister Ann ($20,000/$260,000) ................................... × 20/260
Amount allocated to sister Ann ................................................................. $ 15,000
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Ch. 20—Exercises 20–4
(5) The sum of the residual legacies would be:
Remaining bank balance to sister Ann ($60,000 – $40,000) ................. $ 20,000
Amount to children (6 × $40,000) ......................................................... 240,000
Amount to University of Oklahoma ....................................................... 100,000
Total needed from sale of land ............................................................. $360,000
EXERCISE 20-3
(1) Only $1,000 of the gift to the grandson would be considered taxable. Gifts to charities and
spouses are not taxable. The $8,000 to the granddaughter is below the annual exclusion
amount.
(2) Previous taxable gifts to grandchildren
[($25,000 – $14,000) × 4 × 3 years] .......................................................... $ 132,000
Lifetime exclusion ..................................................................................... $5,340,000
Used on previously taxed gifts .................................................................. (132,000)
Remaining exclusion ................................................................................. $5,208,000
Number of grandchildren .......................................................................... 4
Remaining exclusion per grandchild ......................................................... $ 1,302,000
Plus annual exclusion amount .................................................................. 14,000
Maximum gift per grandchild ..................................................................... $ 1,316,000
(3) Cumulative taxable gifts:
Gift to 3 children [($200,000 – $14,000) × 3]......................................... $ 558,000
Gift to brother ($50,000 – $14,000)....................................................... 36,000
Gifts to grandchildren (all less than annual exclusion) .......................... —
Gift to 2 nieces [($50,000 – $14,000) × 2] ............................................. 72,000
Total of prior gifts .................................................................................. $ 666,000
Gift to sister ($5,348,000 – $14,000) .................................................... 5,334,000
Total of all gifts ..................................................................................... $6,000,000
Tax on total gifts ................................................................................... $ 2,345,800
Less lifetime exclusion amount ............................................................. (2,081,800)
Net gift tax (none was due prior to current year) ................................... $ 264,000
(4) Spouse Spouse
Total of prior gifts .................................................................... $ 666,000 $ 100,000
Gift to sister ($5,348,000 – ($14,000 × 2)) .............................. 2,660,000
2,660,000
Total of all gifts ....................................................................... $3,326,000 $2,760,000
After consideration of the lifetime exclusion amount, no tax would be due by either spouse.
© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
