Financial Planning Exercises
1. Estate planning objectives. Generate a list of estate planning objectives that apply to
your personal family situation. Be sure to consider the size of your potential estate as well
as people planning and asset planning. Estate planning is not just about taxes.
The student may not share information about their family, rather just using general family
situations. That should be sufficient for this problem. Estate planning is planning how you will
People planning is deciding who to give which asset. All heirs are not equal and giving the same
thing or dollars to each heir is not necessarily treating each equally. One kid may really
Among the possible objectives to consider are: providing financial security for spouse and
children (adequate funds to maintain lifestyle, for college education, etc.), arranging for
2. Importance of writing a will. Darrell and Karla Boykin are in their mid-30s and have
two children, ages 8 and 5. They have combined annual income of $95,000 and own a
house in joint tenancy with a market value of $310,000, on which they have a mortgage of
$250,000. Darrell has $100,000 in group term life insurance and an individual universal life
policy of $150,000. However, the Boykins haven’t prepared their wills. Darrell plans to
draw one up soon, but the couple thinks that Karla doesn’t need one because the house is
jointly owned. As their financial planner, explain why it’s important for both Darrell and
Karla to draft will as soon as possible.
Both David and Cheryl should have wills. One major reason is they need to name the guardian
for their children in the event they die in a common accident. Further, Karla should also have a
will to protect the family when she dies. True, if Darrell predeceases her, the house passes to her
through joint tenancy and the insurance proceeds pass to her by contract (assuming that she is the
named beneficiary), but then she needs to plan for the disposition of assets at her death. If she
and Darrell were to die as a result of the same accident and it was determined that Darrell died
3. Will and last letter preparation. Prepare a basic will for yourself, using the guidelines
presented in the text; also prepare your brief letter of last instructions.
Student wills should include the clauses described in the text. The letter of last instructions
should cover the location of the will and other important documents, funeral preferences, the
4. Topics in an ethical will. State the topics you would cover in your ethical will. Would
you consider recording it digitally?
Ethical wills are personal statements of values, blessings, life’s lessons, and hopes and dreams
for the future. They are informal documents that are usually added to formal wills and read at the
same time. They offer a way to share your morals, business ethics, life experiences, family
5. Qualifications of estate executor. Your best friend has asked you to be executor of his
estate. What qualifications do you need, and would you accept the responsibility?
An executor, sometimes called the decedent’s personal representative, must collect the
decedent’s assets, pay debts or provide for payment of debts that are not currently due, and
distribute any remaining assets to the person entitled to them by will or by the intestate
Many would argue that the executor should be a bank trust department or a professional such as a
6. Trusts in estate planning. Griffin West, 48 and a widower, and Hailey Burnette, 44 and
previously divorced, were married five years ago. There are children from their prior
marriages, two children for Griffin and one child for Hailey. The couple’s estate is valued
at $1.4 million, including a house valued at $475,000, a vacation home at the beach,
investments, antique furniture that has been in Hailey’s family for many years, and jewelry
belonging to Griffin’s first wife. Discuss how they could use trusts as part of their estate
planning and suggest some other ideas for them to consider when preparing their wills and
related documents.
Trusts are very useful to provide professional management of property for the benefit of another.
The Wests have a small estate. Their primary concern will be taking care of their children in
case of death of one or both. A testamentary trust could be designed to set aside some funds to
Also a separate testamentary trust could be establish to hold the antique property until Hailey’s
The trusts would not be established if the children are through college and the age of majority at
7. Calculation of estate taxes. Use Worksheet 15.2. When Jacob Kohler died unmarried in
2015 he left an estate valued at $7,850,000. His trust directed distribution as follows:
$20,000 to local hospital, $160,000 to his alma mater, and the remainder to his three adult
children. Death-related costs and expenses were $16,800 for funeral expenses, $40,000 paid
to attorneys, $5,000 paid to accountants, and $30,000 paid to the trustee of his living trust.
In addition, there were debts of $125,000. Use Worksheet 15.2 and Exhibits 15.7 and 15.8
to calculate the federal estate tax due on his estate.
Worksheet 15.2 is below.
Computing Federal Estate Tax Due
Name: Jacob Kohler Date: May 4, 2016
Line Computation Item Amount Total Amount
1 Gross Estate $7,850,000
2 Subtract sum of a) Funeral Expenses $16,800
3 Result Adjusted Gross Estate $7,633,200
4 Subtract: a) Marital deduction
5 Result Taxable estate $7,453,200
6 Add Post-1976 taxable gifts 0
7 Result Estate Tax Base $7,453,200
12 Result: Federal estate Tax Due $809,280
Use Exhibit 15.7 to calculate the tentative tax.
Use Exhibit 15.8 to determine the appropriate unified tax credit.
8. Recent estate taxes legislation. Summarize important legislation affecting estate taxes,
and briefly describe the impact on estate planning. Explain why getting rid of the estate
tax doesn’t eliminate the need for estate planning.
Congress is not likely to modify the transfer tax before 2017. But if it does, the changes will be
either eliminate the tax altogether or modify the amount of the credit and subsequent Applicable
Recall that estate planning is planning how to distribute your assets and the people to whom you
give your assets. These decisions need to be made regardless of whether there is a tax on the
estate. Other issues include:
a. When minor children are involved, guardians need to be named in the event that
b. Trusts need to be established to take care of certain special needs children for the
c. Trusts may also need to be established to care for the surviving spouse, particularly as
d. Assets need to be divided up in an equitable manner among the heirs.
e. Insurance planning needs to be done to provide for the surviving spouse and/or
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?
Yes, Carsten really needs a will. Without a valid will, the statutes of the state of Colorado would
govern the disposition of his sizable estate. This situation would not provide for minimum estate
shrinkage, nor would it result in the transfer of assets to those whom Carsten would choose. If
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
(2) Direction of Payments—directing his estate with respect to certain payments of expenses.
(3) Disposition of Property—disposing of his personal effects, passing money to specified
parties, or distributing his residual assets after specific gifts have been made.
(7) Execution and Attestation Clause—providing his signature as a precaution against fraud.
Many attorneys suggest initialing each page after the last line and including a signature on the
left-hand margin of each page, which of course should be numbered.
3. Might the manner in which titles are held thwart his estate planning desires? What
should be done to avoid problems?
The property titled joint with right of survivorship will pass to the survivor regardless of a will
4. Is a living trust an appropriate part of his estate plan? How would a living trust change
the nature of Carsten’s will?
Certainly either a living will or a durable power for health care should be provided. Carsten
needs to provide for how he want his health care handled. In addition he has substantial wealth
5. How does the age of his children complicate the estate plan? What Special provisions
should he consider?
Minor children need to be cared for either by trusts and/or guardians (godparents). Funds are
best managed by a trust to insure that the funds will last as long as possible. With nothing but
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
The will may be revoked by any one of the following:
1. Making a later will that expressly revokes prior wills.
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?
As co-executors of Carsten’s estate, Forrest Gauthier, his close friend and attorney, Heinrich
Richter, his cousin, will share the duties of estate administration. Upon Carsten’s death, they
must take inventory and value his assets, pay his debts or provide for payment of debts that are
Generally, a trustee’s job is long term, e.g., until the youngest boy reaches 30 years of
age, and involves long term investing and management of the trust’s assets. Given Forrest’s age,
he is not a good candidate for trustee, even though he might be appropriate as a co-executor.
Heinrich seems to be a good selection for both. He is young enough that it is likely he can serve
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
4 Subtract: a) Marital deduction
b) Charitable deduction 85,000
Total (85,000)
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
Use Exhibit 15.8 to determine the appropriate unified tax credit.
Note that the amount shown online 10 is the significant number, because most states are