20–1
CHAPTER 20
UNDERSTANDING THE ISSUES
1. Several of the important goals of estate
planning are to identify and clearly commu-
nicate the desires and wishes of the dece-
dent, maximize the value of the estate’s net
2. Given a married couple, when the first
spouse dies the decedent’s estate may be
passed to the surviving spouse without
incurring any estate tax at the time of the
3. It is important to separately account for the
income and principal of an estate for sev-
eral reasons. First, the decedent may have
created a will that has special provisions
quires that legacies be satisfied to whatever
extent possible, beginning with the highest
priority level of legacies. If demonstrative
legacy cannot be satisfied, the unsatisfied
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 —
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.
20–3 Ch. 20—Exercises
EXERCISE 20-2
(1) The unified gift and estate tax exclusion amount is ……………… $ 5,340,000
(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
(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
(4) Residual legacy:
Remaining bank balance to sister Ann ($60,000 – $40,000) …………….. $ 20,000
(5) The sum of the residual legacies would be:
Remaining bank balance to sister Ann ($60,000 – $40,000) …………….. $ 20,000
EXERCISE 20-3
(1) Only $1,000 of the gift to the grandson would be considered taxable. Gifts to charities and
(2) Previous taxable gifts to grandchildren
[($25,000 – $14,000) × 4 × 3 years] ………………………………………………….. $ 132,000
Lifetime exclusion …………………………………………………………………………… $5,340,000
(3) Cumulative taxable gifts:
Gift to 3 children [($200,000 – $14,000) × 3] …………………………………… $ 558,000
Gift to brother ($50,000 – $14,000) ……………………………………………….. 36,000
(4) Spouse Spouse
Total of prior gifts ……………………………………………………………. $ 666,000 $ 100,000
EXERCISE 20-4
Principal
Income
Assets received:
Personal residence ………………………………………………. $350,000
Cash ………………………………………………………………….. 230,000
Securities ……………………………………………………………. 210,000
Personal effects …………………………………………………… 12,000
Assets disbursed:
Amount conveyed to Sierra Club ……………………………. $200,000
Mortgage principal ……………………………………………….. 16,000
Mortgage interest …………………………………………………. 2,000 $ 6,000
Funeral and administrative fees ……………………………… 27,000
Balance before distributions/transfers ……………………………. $492,400 $ 6,200
EXERCISE 20-5
(1) Determination of estate tax:
Gross estate ………………………………………………………………….. $7,008,000
Less:
(2) Gross estate ………………………………………………………………….. $7,008,000
Distribution before general legacies:
Debts ………………………………………………………………………… $ 380,000
Transfer to charitable remainder trust ……………………………. 560,000
Charitable contribution to art museum …………………………… 25,000
EXERCISE 20-6
Determination of estate tax liability assuming not trusts are created:
Edith Leppert Gerald Leppert
Initial gross estate equal to net assets ……….. $4,300,000 $2,400,000
Add:
Edith’s unused credit ………………………….. (2,081,800)
Available to Gerald …………………………….. (815,401)
Estimated estate tax due …………………………. $ 0 $ 0
Determination of estate tax liability assuming a credit shelter trust is created:
Edith Leppert Gerald Leppert
Estate tax before credits ………………………….. $1,345,800 $1,657,389
Less unified credit:
Available to Edith ………………………………. (1,345,800)
Edith’s unused credit ………………………….. (736,000)
Available to Gerald …………………………….. (921,389)
Exercise 20-6, Concluded
Note A: This is the amount of the marital deduction.
Note B: Subsequent appreciation is on $2,400,000 traceable to husband plus $4,125,000
EXERCISE 20-7
(a) + (b) = (c) + (d)
Noncash Trust Trust
Cash
Assets Principal Income
Transfer of assets into trust ………………………….. $ 100,000 $ 750,000 $ 850,000
Subsequent discovery of assets ……………………. 40,000 40,000
Sale of real estate partnership ………………………. 220,000 (200,000) 20,000
Receipt of IBM dividend ……………………………….. 20,000 20,000
Receipt of interest income ……………………………. 5,000 $ 5,000
Distribution of assets to children ……………………. (32,000) (27,000) (5,000)
Payment of trustee’s fees …………………………….. (10,000) (5,000) (5,000)
20–9 Ch. 20—Exercises
EXERCISE 20-8
Principal Cash ……………………………………………………………………………. 15,000
Land …………………………………………………………………………………………. 130,000
(1) Funeral and Administrative Expenses …………………………………….. 22,000
(2) Investment in IRA Account ……………………………………………………. 37,000
(3) Principal Cash …………………………………………………………………….. 1,000
Income Cash ………………………………………………………………………. 2,700
(4) Principal Cash …………………………………………………………………….. 140,000
(5) Income Cash ………………………………………………………………………. 400
Principal Cash …………………………………………………………………….. 19,000
(6) Debts of Decedents Paid ………………………………………………………. 28,000
(7) Legacies Distributed …………………………………………………………….. 15,000
(8) Funeral and Administrative Expenses …………………………………….. 3,100
Expenses Chargeable against Income ……………………………………. 100
(1) Estate of Jason Jackson
________________ , Executor
Charge and Discharge Statement
For Period _________ to _________
As to Principal
I charge myself with:
Assets per original inventory ……………………………………………… $272,000
Assets subsequently discovered ………………………………………… 37,000
Gain on sale of principal assets …………………………………………. 10,000
As to Income
I charge myself with:
Estate income …………………………………………………………………. $3,100
(2) Entries to transfer assets to trust:
Principal Assets Transferred to Trust ……………………………………….. 250,900
Cash—Principal ……………………………………………………………… 106,900
20–11 Ch. 20—Problems
PROBLEMS
PROBLEM 20-1
Strategies to minimize estate tax should include:
1. Maximizing the use of the annual gift tax exclusion amount per donor per donee. Both
James and Susan could gift to their children and grandchildren.
3. Recognition that tuition payments to an educational organization made on another’s behalf
are not considered taxable gifts if paid directly to the organization.
5. The executor of the decedent’s estate should make the election to insure the portability of
the unified credit.
Consideration of the above strategies and factors set forth in the problem could result in a signif-
icant reduction in estate taxes determined as follows:
James Wagner Susan Wagner
Initial gross estate ………………………………….. $12,700,000 $4,800,000
Add:
Spouse’s remaining estate (see Note A) . $6,805,000
Subsequent appreciation (see Note B) … 450,000 7,255,000
Taxable estate ………………………………………. $5,340,000 $7,750,000
Estate tax before credits …………………………. $2,081,800 $3,045,800
Less unified credit ………………………………….. (2,081,800) (2,081,800)
Estimated estate tax due ………………………… $ 0 $964,200
Remaining estate after payment of estate taxes $6,786,000
Problem 20-1, Concluded
Note C: Gifts to each of the two children and the three grandchildren could be made by both
spouses as follows:
PROBLEM 20-2
Entries to record activities of estate:
Principal Cash …………………………………………………………………….. 50,000
Personal Residence …………………………………………………………….. 450,000
Automobile and Sailboat ……………………………………………………….. 65,000
Investment in Mutual Funds ………………………………………………….. 3,280,000
Collection of Antique Duck Decoys ………………………………………… 85,000
Devises Distributed ………………………………………………………………. 300,000
Mortgage on Personal Residence ………………………………………….. 150,000
Personal Residence ………………………………………………………… 450,000
To record transfer of personal residence to sister.
20–13 Ch. 20—Problems
Problem 20-2, Continued
Principal Cash …………………………………………………………………….. 450,000
Life Insurance Policy Loan ……………………………………………………. 50,000
Death Benefit of Life Insurance ………………………………………… 500,000
To record collection of death benefit and payment of
policy loan.
Credit Cards Payable …………………………………………………………… 5,000
Principal Assets Transferred to Trust ……………………………………… 3,929,000
Income Assets Transferred to Trust ……………………………………….. 10,000
Investment in Mutual Funds ……………………………………………… 3,110,000
Farmland in Ozaukee County …………………………………………… 800,000
Estate Principal ……………………………………………………………………. 5,025,000
Estate Income ……………………………………………………………………… 10,000
Problem 20-2, Concluded
Entries to record activities of trust:
Principal Cash …………………………………………………………………….. 19,000
Income Cash ………………………………………………………………………. 10,000
Investment in Mutual Funds ………………………………………………….. 3,110,000
To record property taxes and operating expenses.
Principal Cash …………………………………………………………………….. 170,000
Income Cash ………………………………………………………………………. 7,000
Investment in Mutual Funds ……………………………………………… 170,000
Trust Income ………………………………………………………………….. 7,000
To record sale of mutual funds.
PROBLEM 20-3
(1) Assuming no credit shelter trust is employed:
Decedent Decedent
Spencer Cook Sara Cook
Gross estate ………………………………………….. $8,600,000 $ 13,300,000
(2) Assuming a credit shelter trust is employed:
Decedent Decedent
Spencer Cook Sara Cook
Gross estate ………………………………………….. $ 8,600,000 $11,400,000
PROBLEM 20-4
Calculation of estate tax:
Gross estate:
Rug and pottery collection ……………………………………………………………. $ 120,000
Personal residence …………………………………………………………………….. 550,000
Brokerage account at Wachovia Securities ……………………………………. 2,200,000
Brokerage account at Schmidt Investment Services ………………………… 900,000
Less allowable deductions:
Deductions excluding charitable donations …………………………………….. $ 235,000
Donation to Museum of Northern New Mexico ……………………………….. 120,000
Donation to First Church of Brookfield …………………………………………… 200,000
Total ……………………………………………………………………………………. $ 555,000
Taxable estate ……………………………………………………………………………………… $ 5,800,000
Available cash to satisfy general legacies:
Excess amount realized on Buffalo County hunting land ………………….. $ 50,000
Excess insurance policy proceeds ………………………………………………… 50,000
Liquidated value of other assets …………………………………………………… 1,500,000
Unsatisfied demonstrative legacies that constitute a general legacy:
Not satisfied by Wachovia Securities account for brother Thomas …….. 300,000
Not satisfied by Schmidt Investment Services account for two sisters .. 100,000
Total needed to satisfy general legacies …………………………………………………… $ 2,000,000
General legacies can be satisfied at the rate of 70.8% ($1,416,000/$2,000,000) and are satis-
fied as follows:
Amount due eight grandchildren (allocated equally) ………………………… $ 283,200
PROBLEM 20-5
At Date At Alternative
of Death
Valuation Date
Gross estate:
Google stock …………………………………………………………………… $2,700,000 $2,340,000
Macon County real estate …………………………………………………. 3,250,000 3,050,000
Household effects ……………………………………………………………. Excluded Excluded
Deductions allowed:
Loan against real estate ……………………………………………………. $307,200 $307,200
Funeral and administrative expenses …………………………………. 45,000 45,000
Property taxes …………………………………………………………………. 4,000 4,000
Income taxes …………………………………………………………………… 27,000 27,000
Total ………………………………………………………………………………. $383,200 $383,200
Taxable estate ……………………………………………………………………… $6,678,800 $6,059,800
Post-1976 taxable gifts:
Total …………………………………………………………………………. $6,201,000 $6,201,000
Unified tax base ……………………………………………………………………. $12,879,800 $12,260,800
Estate tax:
Tentative tax on total transfers …………………………………………… $ 4,850,120
Less unified credit ……………………………………………………………. (2,081,800)
Problem 20-5, Concluded
Year Prior to Year of Year of
Tax due by year: Diagnosis Diagnosis Death Total
*The amount of these gifts has been reduced by the $14,000 annual exclusion.
** This is tax of $2,426,200 on a gift of $6,201,000 less the lifetime exclusion amount of
$2,081,800.
***The gift tax for each year is determined as follows:
Year Prior to Year of Year of
Diagnosis Diagnosis Death
Cumulative gift……………. $ 6,000,000 $ 6,146,000 $ 6,201,000
Tentative tax………………….. $ 2,345,800 $ 2,404,200 $ 2,426,200
20–19 Ch. 20—Problems
PROBLEM 20-6
(1) Estate of Eleanor Matsun
James Madison, Personal Representative
Charge and Discharge Statement
For the Period June 1 through December 31 of the Year of Death
As to Principal
I charge myself with:
Assets per original inventory ……………………………………………… $441,300
Assets subsequently discovered:
Gold coin collection …………………………………………………….. 18,000
Dividend on Pal Corp. common stock ……………………………. 2,500
I credit myself with:
Payment of credit cards ……………………………………………………. $ 2,900
Funeral expenses …………………………………………………………….. 16,000
Legal fees 2,500
Cost associated with sale of residence ……………………………….. 28,000
Payment to personal representative …………………………………… 4,000
As to Income
I charge myself with:
Income from partnership …………………………………………………… $ 5,000
PROBLEM 20-7
(1) Cash—Principal [($40,000 × 1.03) + accrued interest] ………………. 41,467
Cash—Income ($40,000 × 0.08 × 1/12) ………………………………….. 267
(2) Investment in 5% Detroit Bonds …………………………………………….. 50,000
Accrued Interest on Detroit Bonds ($50,000 × 0.05 × 5/12) ……….. 1,042
(3) Investment in 7% Newark Bonds ……………………………………………. 10,000
Accrued Interest on Newark Bonds ($10,000 × 0.07 × 3/12) ……… 175
(4) Cash—Principal …………………………………………………………………… 1,042
Cash—Income ($50,000 × 0.05 × 1/12) ………………………………….. 208
Accrued Interest on Detroit Bonds …………………………………….. 1,042
Estate Income ………………………………………………………………… 208
(5) Cash—Principal (amortization + accrued interest) ……………………. 202
Cash—Income …………………………………………………………………….. 148
Premium on Newark Bonds [($200 ÷ 21 months) × 3 months] . 29
(6) Cash—Income ($50,000 × 0.05 × 5/12) ………………………………….. 1,042
Cash—Principal ($50,000 × 1.01) ………………………………………….. 50,500