44. Willie Walker, a widower, died on February 1, 20X8. He had no living relatives. The following selected
events occurred after Walker’s death:
(1)
Mary Paxton, the executrix named in the will, filed an inventory
of the estate assets consisting of:
Cash
$20,000
Owl Corporation 12% bonds, paying interest
semiannually on December 1 and June 1 (market value
excluding interest, at date of death, $91,000)—face value
70,000
Eagle Corporation common stock
38,000
Eagle Corporation cash dividend declared January 2, 20X8,
payable February 15, 20X8, to holders of record as of
January 25, 20X8 (state law stipulates that the date of record
is the governing date)
2,000
A pair of snowmobiles with trailer
5,000
Life insurance policy—face value
60,000
The beneficiary named in the policy is dead.
Since Walker did not designate a new beneficiary, the
proceeds now go to the estate.
(2)
Items charged by Walker (prior to his death) to his Diners Club card totaled $390. These items were paid.
(3)
The executrix prepared the final income tax return of the decedent, paying the income tax due of $12,000.
(4)
The snowmobiles and trailer were sold for $4,200.
(5)
The following payments were made:
Legal fees for assistance in probating the will
3,000
Funeral expenses
4,710
(6)
The dividend on Eagle Corporation common stock was received.
(7)
On June 1, a check for the semiannual interest on Owl Corporation bonds was received.
(8)
A check for $68,000 was received from the life insurance agency. The additional $8,000 represents another
policy not identified at the time of death.
(9)
On December 1, a check for the semiannual interest on Owl Corporation bonds was received.
(10)
The executrix’s fee of $8,000 was approved for payment by the court. Payment was made, with $500
chargeable to income and the balance chargeable to principal.
(11)
Walker’s will stipulated that $40,000 be given to Carey Jackson, his housekeeper. The legacy was distributed
on December 30, 20X8.
Required:
Prepare journal entries to record the above events. Upon completion of the journal entries, prepare a double trial balance for the estate of Willie
Walker as of December 31, 20X8.
45. On February 1, 20X8, Sharon Kane died. Sharon left a valid will. Events in 20X8 related to the estate are as
follows:
(1)
The inventory of the estate on February 1, 20X8 included the following:
Cash in the bank
$100,000
Bayside Co. common stock:
10,000 shares purchased at a cost of $5 per share
Bayside is a publicly traded company and has a market value on
2/1/X8 of $23.50 per share
Coe Corp. bonds, face value $480,000, market value, excluding
accrued interest, $510,000. (Interest accrues at a rate of
$4,000/month. As of 2/1/X8, $4,000 has accrued.)
Dividends on Bayside stock declared January 15, payable March 15
9,000
(2)
The Bayside dividend is received on March 15.
(3)
On April 1, 20X8 you discover that Sharon owns a tract of land on a
lake that originally cost $25,000 and now has a market value of
$110,000.
(4)
From February 1 through June 30, the following items were paid for:
Funeral expenses
$10,000
Legal fees ($500 related to income)
5,500
Final income tax
25,000
Miscellaneous debts incurred prior to death
12,000
(5)
The Bayside stock is sold for $250,000.
(6)
On June 1, the Coe Corp. bonds are sold for 107 plus accrued interest.
(7)
The following assets are distributed on June 30, 20X8:
Cash – principal
$200,000
Cash to income beneficiaries
10,000
Land to beneficiary
?
Required:
a.
As the executor of the estate, record the 20X8 events in general journal form.
b.
Prepare a Charge and Discharge Statement for the period February 1, 20X8 to June 30, 20X8.
46. For estate planning purposes, Albert began distributing gifts in 20X9. Already, in 20X9, Albert has given
his daughter stocks costing $5,000, with a current market value of $10,000.
Required:
What is the maximum additional gift Albert can give in 20X9 to his daughter in cash without incurring any gift
tax liability assuming that:
a.
Albert is single.
b.
Albert is married and his wife is willing to give the maximum amount the couple is allowed.
a.
$1,000,000 + 13,000 – 10,000 = $1,003,000
b.
$2,000,000 + 26,000 – 10,000 = $2,016,000
47. Mr. Riekoff died and left the following stocks to his two sons:
Tom
Ted
Alpha Co.
Beta Co.
Cost
$50,000
$60,000
Value at date of death
$20,000
$98,000
Required:
a.
If both sons sold their stocks ten months after their father’s death for $50,000 and the alternate valuation was not used, what would their
respective capital gains/losses be?
b.
Assuming that the price of the stock remained constant in the year prior to Mr. Riekoff’s death, what might have been a better method of
handling the stocks from a tax planning perspective? Explain why.
Tom’s gain = $50,000 – 20,000 = $30,000
Ted’s loss = $50,000 – 98,000 = $48,000
(Note that the sons’ basis in the stocks is the value at the date of their father’s death.)
However, Ted is able to recognize a large capital loss due to the step-up in value of the Beta stock transferred to him. The $38,000 increase
in value from cost to value at date of death escapes taxation.
Balance as to estate income consisting of:
Cash—income
$ 5,500
48. Angela Burke died in 20X8 leaving a gross estate that consists of the following assets: (values given are
market values on date of death or valuation):
House
$550,000
Investment in Hogan Stock
200,000
Dividends declared, not paid on Hogan Stock
10,000
Automobile
20,000
Jewelry
50,000
Other Personal Property
20,000
Her unpaid bills included the following:
Funeral expenses
$ 10,000
Administrative expenses
6,500
Final income tax
33,500
Mortgage
120,000
Since 1980, Angela has made taxable gifts of $200,000 to her children, to whom she also
leaves her estate.
Required:
Determine, in good form, the tax base for the estate.
Gross estate
$850,000
Deductions allowed
(170,000)
Taxable estate
$680,000
Plus post-1976 taxable gifts
200,000
$880,000
49. Mr. Arnold Schwartz died on January 23, 20X5. He owned the following items on the date of his death:
Cash
$ 50,000
Stocks
400,000
Personal residence
200,000
Rental property
700,000
He also had the following liabilities:
Mortgage on the home
75,000
Medical expenses
25,000
His funeral and administrative expenses were $10,000.
Arnold’s will specified the following:
(1)
Mercy Hospice was to receive $15,000 in cash.
(2)
His son was to receive the rental property and one-fourth of the stocks.
(3)
His wife was to receive the remainder of the assets.
Required:
Gross estate
$1,350,000
Mortgage
$ 75,000
Medical expenses
25,000
Funeral and administrative expense
10,000
Mercy Hospice gift
15,000
Marital deduction
425,000*
550,000
Taxable estate
$ 800,000
Post-1976 gifts
100,000
Tax base
$ 900,000
50. In his will, Andrew Baker provided for the establishment of a trust that will include the bulk of his estate
assets. At the time of his death, his net assets had a market value of $430,000 consisting of $75,000 in cash,
$125,000 of U.S. Treasury bonds including accrued interest, and the remainder in various securities. Income
beneficiaries of the trust will be the same as the income beneficiaries of the estate. Fiduciary Bank will act as
trustee.
Required:
a.
Identify the term that describes
this kind of trust.
b.
Prepare journal entries on the
bank’s books for the following
transactions:
(1)
The assets are accepted by the bank as trustee.
(2)
Bond interest of $35,000 is received, of which $10,000 was accrued to the
date of transfer to the trustee. Dividends of $20,000 are also received.
(3)
The following cash distributions were made by the trustee:
To income beneficiaries
$25,000
To trustee to cover administrative fees (of which 2/3 is
chargeable against principal and 1/3 against income)
12,000
Total distributions
$37,000
a.
b.
(1)
75,000
U.S. Treasury Bonds
125,000
Investment Securities
230,000
Trust Principal
430,000
(2)
10,000
45,000
Trust Income
45,000
U.S. Treasury Bonds
10,000
(3)
Distributions to Income Beneficiaries
25,000
Expenses Chargeable Against Trust
Income
4,000
Cash—Income
29,000
Expenses Chargeable Against Trust
Principal
8,000
Cash—Principal
8,000
51. Adequate estate planning is critical for an individual or family with a sizable net worth. List the goals of
estate planning for large, more complex estates.
52. Define what makes up the corpus or principal of an estate and list several examples. Also, list the potential
claims or deductions from the principal.
53. If the funds in an estate are insufficient to satisfy all valid claims against it, state laws provide a priority for
settlement.
Required:
a.
Reorder the list of claims below in the
most common order of priority:
(1)
Wages due domestic servants for a period of not more than one year prior to
date of death and medical claims for the same period.
(2)
Taxes: income, estate, and inheritance.
(3)
Claims having a special lien against property, but not to exceed the value of the
property.
(4)
Debts due the United States and various states.
(5)
All other claims.
(6)
Funeral and administrative expenses.
(7)
Judgments of any court of competent jurisdiction.
b.
If funds are insufficient to satisfy all of
the claims within a class, explain how
claims are paid.
(1)
Claims having a special lien against property, but not to exceed the value of the property.
(2)
Funeral and administrative expenses.
(3)
Taxes: income, estate, and inheritance.
(4)
Debts due the United States and various states.
(5)
Judgments of any court of competent jurisdiction.
(6)
Wages due domestic servants for a period of not more than one year prior to date of death
(7)
All other claims.
inadequate to accomplish total
payment for that class.
54. What are some of the tax planning strategies which may be employed to reduce the tax on the decedent’s
gross estate?