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15-10 What is the right of survivorship? What is community property and how does it
differ from joint tenancy with regard to the right of survivorship?
right of
survivorship
The right of surviving joint owners of property to receive title to the
deceased joint owner’s interest in the property.
community
property
All marital property co-owned equally by both spouses while living is
a community property state.
If the state used community property laws, the property that a person acquires while married is
considered to the half owned by each spouse. The right of survivorship does not apply to the
property and at death, the decedent must transfer their half to their heir, one of whom may be the
spouse.
15-11 Describe the basic trust arrangement, and discuss typical reasons for establishing
trusts. What essential qualities should a trustee possess?
trust
A legal relationship created when one party transfers property to a
second party for the benefit of third parties.
The grantor transfers property to the trust. The provisions of the trust are carried out by the
trustee. The trust specifies who is to benefit from the trust, called the beneficiaries. Each of
these parties may be different individuals or they may all be the same person.
The essential qualities for a trustee are to honest and knowledgeable. The text specifies five
qualities:
1. Possess sound business knowledge and judgment.
2. Have an intimate knowledge of the beneficiary’s needs and financial situation.
3. Be skilled in investment and trust management.
4. Be available to beneficiaries (specifically, this means that the trustee should be young enough
to survive the trust term.)
5. Be able to make decisions impartially.
15-12 What is a living (inter vivos) trust? Distinguish between a revocable living trust and
in irrevocable living trust.
living (inter vivos)
trust
A trust created and funded during the grantor’s lifetime.
Revocable means that the trust may be revoked or discarded at the option of the grantor.
Irrevocable means that the grantor cannot change their mind, the trust cannot be revoked by the
grantor. For federal income tax, a revocable trust is ignored. The grantor is subject to tax on the
income from the property. An irrevocable trust is recognized for federal income tax purpose; the
trust or its beneficiaries are responsible for the tax on the income from the property.
15-13 Explain each of these terms: (a) grantor, (b) trustee, (c) beneficiary, (d) pour-over
will, testamentary trust, and (f) irrevocable life insurance trust.
grantor
A person who creates a trust and whose property is transferred into it.
Also called settlor, trustor creator.
trustee
An organization or individual selected by a grantor to manage and
conserve property placed in trust for the benefit of the beneficiaries.
beneficiaries
Those who receive benefits—property or income—from a trust or
from the estate of a decedent. A grantor can be a beneficiary of his
own trust.
pour-over will,
testamentary trust
A provision in a will that provides for the passing of the estate—after
debts, expenses, taxes, and specific bequests—to an existing living
trust. A revocable living trust becomes irrevocable at the death of the
grantor. A testamentary trust is a trust created by a decedent’s will
and funded through the probate process.
Irrevocable life
insurance trust
An irrevocable trust in which the major asset is life insurance on the
grantor’s life. If establish at least three years before the decedent’s
death, the life insurance is not included in the gross estate as long as
neither the estate nor decedent is the named beneficiary.
15-14 What is a gift, and when is a gift made? Describe the following terms as they relate
to the federal gift taxes: (a) annual exclusion, (b) gift splitting, (c) charitable
deduction, and (d) marital deduction.
Gift splitting: Basically the provision allows a joint return for gifts. At the option of the
15-15 Discuss the reasons estate planners cite for making lifetime gifts. How can gift
giving be used to reduce estate shrinkage?
The estate tax is assessed on the property owned by the decedent at the time of their death. If the
15-16 Explain the general nature of the federal estate tax. How does the unified tax credit
affect the amount of estate tax owed? What is the portability concept?
The unified transfer tax applies to two type of transfers: transfers by gift [referred to as the gift
tax] and transfers through an estate [referred to as the estate tax]. The beginning point for the
15-17 Explain the general procedure used to calculate the federal estate tax due.
15-18 Describe and discuss each of the techniques used in estate planning.
Primary techniques are:
Gift giving, gift an amount less than the annual exclusion each year to each person you desire to
receive some of your estate and there will be no tax due nor will there be a tax return due.
Criterial Thinking Cases
15.1 A Long-Overdue Will for Carsten
In the late 1980s, Carsten Richter, from Germany, migrated to the United States, where he
is now a citizen. A man of many talents and deep foresight, he has built a large fleet of
oceangoing oil tankers during his stay in the United States. Now a wealthy man in his 60s,
he resides in Aspen, Colorado, with his second wife, Gabriela, age 50. They have two sons,
one in junior high and one a high-school freshman. For some time, Carsten has considered
preparing a will to ensure that his estate will be property distributed when he dies. A
survey of his estate reveals the following:
Ranch in Colorado
$1,000,000
Condominium in Santa Barbara
800,000
House in Aspen
1,500,000
Franchise in ice cream stores
2,000,000
Stock in Google
5,000,000
Stock in Wal-Mart
1,000,000
Stock in Silver Mines International
3,000,000
Other assets
200,000
Total Assets
$14,500,000
The house and the Silver Mines International shares are held in joint tenancy with his wife,
but all other property is in his name alone. He desires that there be a separate fund of $1
million for his sons’ education and that the balance of his estate be divided as follows: 40
percent to his sons; 40 percent to his wife, and 20 percent to given to other relatives, friends
and charitable institutions. He has scheduled an appointment for drafting his will with his
attorney and close friend, Forrest Gauthier. Carsten would like to appoint Forrest, who is
70 years old and Carsten’s cousin Heinrich Richter (a CPA) as co-executors. If one of them
predeceases Carsten, he’d like First National Bank to serve as co-executor.
Critical Thinking Questions
1. Does Carsten really need a will? Explain why or why not? What would happen to his
estate if he were to die without a will?
2. Explain to Carsten the common features that need to be incorporated into a will.
His will should contain eight distinct parts:
(1) Introductory Clause—stating his place of residence and nullifying old and forgotten wills
and codicils (legally binding modifications of an existing will).
3. Might the manner in which titles are held thwart his estate planning desires? What
should be done to avoid problems?
4. Is a living trust an appropriate part of his estate plan? How would a living trust change
the nature of Carsten’s will?
5. How does the age of his children complicate the estate plan? What Special provisions
should he consider?
6. What options are available to Carsten if he decides later to change or revoke the will? Is
it more difficult to change a living trust?
Minor changes in the will may be made by a codicil, a short document that reaffirms all existing
provisions in the will except the one to be changed. The codicil should be executed and
7. What duties will Forrest Gauthier and Heinrich Richter have to perform as co-
executors of Carsten’s estate? If a trust is created, what should Carsten consider in his
selection of a trustee or co-trustees? Might Forest and Heinrich, serving together, be a
good choice?
15.2 Estate Taxes on Saul Schwab’s Estate
Saul Schwab’s, of Knoxville, Tennessee, was 65 when he retired in 2010. Camille, his wife
of 40 years, passed away the next year. Her will left everything to Saul. Although
Camille’s estate was valued at $2,250,000, there was no estate tax due because of the 100
percent marital deduction. Their only child, Eli, is married to Kathleen; they have four
children, two in college and two in high school. In 2011, Saul made a gift of Apple stock
worth $260,000 jointly to Eli and Kathleen. Because of the two $13,000 annual exclusions
and the unified credit, no gift taxes were due. When Saul died in 2015, his home was
valued at $890,000, his vacation cabin on a lake was valued at $485,000, his investments in
stocks and bonds at $1,890,000, and his pension funds at $645,000 (Eli was named
beneficiary). Saul also owned a life insurance policy that paid proceeds of $700,000 to Eli.
He left $60,000 to his church and $25,000 to his high school to start a scholarship fund in
his wife’s name. The rest of the estate was left to Eli. Funeral costs were $15,000. Debts
were $90,000 and miscellaneous expenses were $25,000. Attorney and accounting fees
came to $36,000.
Use Worksheet 15.2 to guide your calculations as you complete these exercises.
Worksheet 15.2 is below.
Computing Federal Estate Tax Due
Name: Saul Schwab
Date: May 4, 2016
Line
Computation
Item
Amount
Total Amount
1
Gross Estate
$4,610,000
2
Subtract sum of
a) Funeral Expenses
$15,000
b)Administrative Expenses
61,000
c)Debts
90,000
Total
(166,000)
3
Result
Adjusted Gross Estate
$4,444,000
4
Subtract:
a) Marital deduction
b) Charitable deduction
85,000
Total
(85,000)
5
Result
Taxable estate
$4,359,000
6
Add
Post-1976 taxable gifts (Eli only)
117,000
7
Result
Estate Tax Base
$4,736,000
8
Compute Tax
Tentative tax on estate tax base
$1,736,200
9
Subtract sum of
a) Gift Tax paid on post 1976 gifts
0
b) Unified Tax Credit--2015 credit
2,117,800
2,117,800
10
Result
0
11
Subtract
Other Credits
0
12
Result:
Federal estate Tax Due
$0
Use Exhibit 15.7 to calculate the tentative tax.
Use Exhibit 15.8 to determine the appropriate unified tax credit.
Critical Thinking Questions
1. Compute the value of Saul’s probate estate.
The probate estate consists of the gross estate less non-probate assets. The gross estate amount of
2. Compute the value of Saul’s gross estate.
Gross estate is:
3. Determine the total allowable deductions.
Deduction are:
4. Calculate the estate tax base, taking into account the gifts to Eli and Kathleen
(remember that the annual exclusions “adjust” the taxable gifts).
5. Use Exhibit 15.7 to determine the tentative tax on estate tax base.
6. Subtract the appropriate unified tax credit (Exhibit 15.8) for 2012 from the tentative tax
on estate tax base to arrive at the federal estate tax due.
7. Comment on the estate shrinkage experienced by Robert’s estate. What might have
been done to reduce this shrinkage? Explain.
Terms Found in the Chapter
administrator
The personal representative of the estate appointed by the court if the
decedent dies intestate.
annual exclusion
Under the federal gift tax law, the amount that can be given each year
without being subject to the gift tax—for example, $14,000 in 2015.
This amount is indexed for inflation.
applicable exclusion
amount (AEA)
Credit given to each person that can be applied to the amount of
federal estate tax owed by that person at death. In 2009 the AEA was
$3,500,000. In 2015, the AEA is $5,400,000.
beneficiaries
Those who receive benefits—property or income—from a trust or
from the estate of a decedent. A grantor can be a beneficiary of his
own trust.
codicil
A document that legally modifies a will without revoking it.
community
property
All marital property co-owned equally by both spouses while living is
a community property state.
durable power of
attorney for
financial matters
Legal document that authorizes another person to take over someone’s
financial affairs and act on this or her behalf.
durable power of
attorney for health
care
A written power of attorney authorizing an individual to make health
care decisions on behalf of the principal when the principal is unable
to make such decisions. Also called advanced directive for health
care.
estate planning
The process of developing a plan to administer and distribute your
assets in a manner consistent with your wishes and the needs of your
survivors, while minimizing taxes.
estate tax
A tax levied on the value of property transferred at the owner’s death.
ethical will
A personal statement left for family, friends, and community that
shares your values blessings, life’s lessons, and hopes and dreams for
the future. Also called legacy letter.
executor
The personal representative of an estate designated in the decedent’s
will.
gift splitting
A method of reducing gift taxes, a gift given by one spouse, with the
consent of the other spouse, can be treated as if each had given one-
half of it.
gift tax
A tax levied on the value of certain gifts made during the giver’s
lifetime.
grantor
A person who creates a trust and whose property is transferred into it.
Also called settlor, trustor creator.
gross estate
All property that might be subject to federal estate taxes on a person’s
death.
intestacy
The situation that exists when a person dies without a valid will.
irrevocable living
trust
A trust in which the grantor gives up the right to revoke or terminate
the trust.
Irrevocable life
insurance trust
An irrevocable trust in which the major asset is life insurance on the
grantor’s life.
joint tenancy
A type of ownership by two or more parties, with the survivor(s)
continuing to hold all such property on the death of one or more of the
owners.
letter of last
instructions
An informal memorandum that is separate from a will and contains
suggestions or recommendations for carrying out a decedent’s wishes.
living (inter vivos)
trust
A trust created and funded during the grantor’s lifetime.
living will
A document that precisely states the treatments a person wants if he or
she becomes terminally ill.
pour-over will
A provision in a will that provides for the passing of the estate—after
debts, expenses, taxes, and specific bequests—to an existing living
trust.
probate estate
The real and personal property owned by a person that can be
transferred at death.
probate process
The court-supervised disposition of a decedent’s estate.
right of
survivorship
The right of surviving joint owners of property to receive title to the
deceased joint owner’s interest in the property.
revocable living
trust
A trust in which the grantor reserves the right to revoke the trust and
regain trust property. The grantor can serve as the initial trustee.
tenancy by the
entirety
A form of ownership by husband and wife, recognized in certain
states, in which property automatically passes to the surviving spouse.
tenancy in common
A form of co-ownership under which there is no right of survivorship
and each co-owner can leave his or her share to whomever he or she
desires.
testamentary trust
A trust created by a decedent’s will and funded through the probate
process.
testator
The person who makes a will that provides for the disposition of
property at his or her death.
trust
A legal relationship created when one party transfers property to a
second party for the benefit of third parties.
trustee
An organization or individual selected by a grantor to manage and
conserve property placed in trust for the benefit of the beneficiaries.
unified rate
schedule
A graduated table of rates applied to all taxable transfers; used for
both federal gift and estate tax purposes.
unified tax credit
The credit that can be applied against the tentative tax on estate tax
base.
will
A written and legally enforceable document expressing how a
person’s property should be distributed on his or her death.
Preserving Your Estate
Chapter Outline
Learning Goals
I. Principles of Estate Planning
A. Who Needs Estate Planning?
1. People Planning
2. Asset Planning
B. Why Does an Estate Break Up?
C. What Is Your Estate?
D. The Estate Planning Process
II. Thy Will Be Done…
A. Absence of a Valid Will: Intestacy
B. Preparing the Will
C. Common Features of the Will
D. Requirements of a Valid Will
E. Changing or Revoking the Will: Codicils
1. Changing the Will
2. Revoking the Will
F. Safeguarding the Will
G. Letter of Last Instructions
H. Administration of an Estate
I. Other Important Estate Planning Documents
1. Power of Attorney
2. Living Will and Durable Power of Attorney for Health Care
3. Ethical Wills
J. What about Joint Ownership?
1. Tenancy in Common
2. Community Property
III. Trusts
A. Why Use a Trust?
1. Income and Estate Tax Savings
2. Managing and Conserving Property
B. Selecting a Trustee
C. Common Types and Characteristics of Trusts
1. Living Trusts
a. Revocable Living Trust
b. Irrevocable Living Trust
c. Living Trusts and Pour-Over Wills
2. Testamentary Trust
3. Irrevocable Life Insurance Trust
IV. Federal Unified Transfer Taxes
A. Gifts and Taxes
B. Is It Taxable?
C. Reasons for Making Lifetime Gifts
V. Calculating Estate Taxes
A. Computing the Federal Estate Tax
B. Portability
VI. Estate Planning Techniques
A. Gift Giving Program
B. Use of the Unified Tax Credit
C. Charitable Contributions
D. Life Insurance as an Estate Planning Tool
E. Trusts
F. Valuation Issues
VII. Future of Estate Taxes
