At Fred’s death, Mary would, in effect, have a general power of appointment over the short-term fixed-income fund to what extent?
Estate Planning Case Questions Part 1
1.1 Which of the following is a consequence of the way in which the Ferris’ home is titled?
A. Either spouse can dispose of his or her interest will by at death.
B. If Mary is the first to die, no portion of the home will be included in her probate estate.
C. At the first death, there is a full step-up in basis for the property.
D. If Fred contributed all of the money to purchase the home, the entire value is included in his gross estate at his death.
1.2. Which of the following statements describes the effect of the titling of the automobile parts supply business interest?
A. Mary must consent to any sale or other disposition of the interest.
B. If Fred is the first to die, no portion of the business interest will pass through probate.
C. At Fred’s death, one-half of the value of the business interest will be included in his gross estate.
D. If Fred dies today, there will be a full step-up in basis for the business interest .
1.3. If Fred dies today, what is the amount of his probate estate?
A. $160,000
B. $251,000
C. $10,000,000
D. $10,216,000
1.4. If Mary dies today, how much is her probate estate?
A. $0
B. $36,000
C. $110,000
D. $250,000
1.5. Which of the following is a correct description of Fred’s will?
A. Joint will
B. Simple will
C. Pour-over wi1l
D. Mutual will
1.6. Under the current arrangements, which of the following is Fred able to change without probate court involvement if Mary becomes incapacitated?
A. Whole life policy
B. Residence
C. Value fund
D. Cash and cash equivalents
1.7. Under the current arrangements, if Mary were to lapse into an irreversible coma, which of the following is the most likely tool Fred would use to deal with medical issues for her?
A. Living will
B. Health care power of attorney
C. Durable power of attorney
D. The courts
1.8 lf Fred gives Ted $8,000 for Ned’s benefit, which of the following is correct?
A. The gift will adversely affect Ned’s eligibility for public benefits.
B. Ted’s wife Maria will be entitled to 50%, due to state property laws.
C. Ned will need to cosign any check given to Ted.
D. The gift will qualify for the annual exclusion.
1.9. Fred and Mary are contemplating a family gifting program of some magnitude. Which of the following is the most legitimate rationale for a gifting pattern?
A. Gifts of annual exclusion amounts to the children are inappropriate because the unlimited marital deduction eliminates the federal estate tax.
B. Gifts directly to Ned are suitable, based on need.
C. Gifts to Ted are appropriate to remove the future appreciation for their estates.
D. Gifts to the daughters would serve to enhance their self-motivation.
1.10. Which of the following would constitute a generation-skipping transfer if it was made today?
A. A direct gift from Fred to Ned’s Uniform Transfers to Minors Act account, using the value fund
B. Creation of a special-needs trust for Ned’s benefit
C. Designating Ted as the holder of a limited power of appointment over property exclusively for
Ned’s benefit
D. Nominating Maria as the holder of a general power of appointment over property for Ned’s benefit
1.11. Which of the following, in addition to current arrangements, would generate a taxable gift?
A. A gift of$14,000 from the growth fund to Harmony
B. A split gift of $28,000 from Fred and Mary to Ted and Maria from the value fund
C. A gift of Fred’s entire interest in the residence to Mary
D. A payment in excess of$14,000 to Felicity’s high school for her tuition
1.12 Seriously contemplating early retirement, Fred wants to know the gift tax payable if he gives Ted 50% of his business interest and sells him the other 50% on a 20-year installment note. Which of the following is correct?
A. Any gift tax is payable ratably over a 20-year period.
B. No gift tax is payable.
C. The gift tax due is $1,750,000.
D. Under this arrangement, Ted would be responsible for the payment of any gift tax.
1.13. In the current situation, which of the following is the most serious weakness in terms of the Ferris family’s planning for incapacity?
A. Inadequate disability insurance for Fred
B. Inadvertent disqualification for Ned’s government assistance
C. Lack of a buy-sell agreement, funded with disability buyout insurance
D. Insufficient protection against long-term nursing care expenses
1.14. If Fred becomes disabled, which of the following plans currently provides protection?
A. The key person disability insurance of the business
B. Disability buyout insurance
C. Business overhead expense disability plan
D. Group long-term disability plan
1.15. If Fred dies, which of the following is not included in his gross estate?
A. The funds set aside for Felicity’s education
B. The group life insurance
C. The individual term insurance
D. The SPDA
1.16. lf Fred dies today, what is the amount included in his gross estate?
A. $10,828,500
B. $10,953,000
C. $12,040,500
D. $12,150,500
1.17. Considering the current estate plan, which of the following best describes Fred’s liquidity position at death?
A. Severely impaired
B. Moderately impaired
C. Modestly impaired
D. Adequate
1.18. If Fred completes business succession documents that transfer his business interest at death to Ted, which technique involves the lowest adverse impact on Fred’s estate liquidity?
A. A funded one-way buyout agreement
B. Sec. 303 partial stock redemption
C. Partial transfer of Fred’s individual term policy to Ted
D. Transfer of the whole life policy to Ted
1.19. Under the current documents, which of the following powers is Mary presumed to have if Fred dies first?
A. Five-and-five power
B. Limited power of appointment
C. General power of appointment
D. A power limited by an ascertainable standard
1.20. At Fred’s death, Mary would, in effect, have a general power of appointment over the short-term fixed-income fund to what extent?
A. Not at all
B. 50%
C. 100%
D. Her contribution
1.21. Which of the following is least likely to be contained in Ted’s marital trust for the benefit of Maria?
A. General power of appointment
B. Special power of appointment
C. Ability to name her creditors as payees
D. Full withdrawal rights
1.22. Fred’s current trust can best be described as:
A. A funded revocable living trust
B. A simple trust with Crummey provisions
C. An irrevocable trust
D. A complex trust with a general power of appointment
1.23. If Ted dies, which of the following best describes his trust?
A. The trust retains its revocable character because it is a simple trust.
B. The trust becomes irrevocable.
C. The residuary must becomes irrevocable, but the marital trust is revocable.
D. The marital trust becomes irrevocable, but the residuary trust is revocable.
1.24. Considering the current situation for the extended Ferris family, which of the following is the most viable technique to accomplish one or more of the stated objectives?
A. Transferring Fred’s business interest to a GRUT, with Fred receiving 6% annual income, and the remainder passing to Ted after 13 years
B. A gift of a present interest from Fred to Ted of the entirety of Fred’s fractional business holdings, and Fred and Mary electing gift-splitting to avoid gift tax.
C. Placing Fred and Mary’s home into a 20-year QPRT, with Ted and Maria as remainder beneficiaries.
D. A buy-sell agreement funded with life insurance (premiums paid by Fred), allowing Ted purchase Fred’s shares at his death
1.25. Which of the following transfers would involve the smallest taxable gift?
A. Transfer of the growth fund to a 10-year GRA T with a 6% payout
B. Transfer of the value fund to a 15-year GRA T with a 6% payout
C. Transfer of the short-term fixed-income fund to a I5-year GRUT, using an 8% payout
D. Transfer of the home to a to-year QPRT
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ESTATE PLANNING
Topics 53-73
© 2014 Keir Educational Resources 153 800-795-5347
FRED AND MARY FERRIS
PERSONAL IN FORMA TION
Fred and Mary Ferris have engaged your services for the development of a comprehensive financial plan.
Their primary concerns, however, revolve around estate planning objectives.
Fred, age 52, is a one-third owner of an automobile parts supplier in Michigan. The business has survived the
cyclical nature of the auto industry through a combination of high-quality parts, just-in-time delivery, and
superior cost containment.
Mary, also 52, works part-time at the art institute, mostly to satisfy her aesthetic senses. She expects to
continue working until age 60.
This is a second marriage for Fred, whose first wife died at age 32 in a car accident. Fred has one son from
that marriage, Ted, age 28, who is happily married but has fmancial difficulties due to his one child, Ned, age
3, who has special needs.
Together, Fred and Mary have two daughters, both in private high school. Felicity is an honors student in her
junior year, and Harmony is a sophomore and has musical talent.
Name Relationship Occupation Notes
Fred Husband Business Ovner Successful
Mary Wife Docent at art institute Charitably inclined
Ted Son Retail sales Married; special-needs child
Felicity Daughter HSjunior Scientifically gifted
Harmony Daughter HS sophomore Musically gifted
Mary has been generous with her time in helping Ted with his special-needs son Ned. Her assistance has
solidified her excellent relationship with Ted and his wife Maria, a Canadian citizen. In addition, Mary is quite
interested in leaving substantial amounts to the art institute at her death.
Fred’s business operates as a C corporation; Fred is an equal one-third owner with Harold Dietz and Gerald
Keats. They are seriously contemplating a number of business agreements, including a buy-sell agreement, a
non-qualified deferred-compensation plan, and a stock option plan of some kind. All three seek your advice in
these matters.
A recent business valuation produced a fair market value of $30 million for the business, with an expectation
of 8% annual growth in the next 15 years. As all three owners are in their 50s and want to retire at age 66, they
are concerned with successor management.
Fred recently sent a registered letter to Harold and Gerald, indicating his intent that his son Ted should receive
his share ofthe business at Fred’s death. At this point, Ted is becoming increasingly interested in his father’s
business as a career.
The owners each draw an annual salary of $150,000 and take equal bonuses, depending on profitability.
Bonuses have averaged $50,000 each in the last five years.
© 2014 Keir Educational Resources 154 www.keirsuccess.com
Estate Planning (Topics 53·73)
The business has impLemented a 401 (k) plan with a matching contribution of$.50 per dollar on the first 6% of
employee contributions. A dozen well-paid factory workers all participate.
© 2014 Keir Educational Resources 155 800-795-5347
Estate Planning ITopics 53-73)
The employees and their families are all covered by an excellent group health insurance plan, as well as group
term life insurance equal to their base salary. A separate employer-paid group long-term disability plan also
covers all employees for 60% of base pay, with a 90-day elimination period. The group LTD plan is integrated
with Social Security and workers’ compensation.
ESTATE PLANNING DOCUMENTS
Fred and Mary Ferris each have wills, leaving everything to the survivor. Each will contains a 120-day
survivorship clause. In a simultaneous death, the will and state law presume that the wife survives. Ifthere is
no surviving spouse, the children ofthe testator share equally. They each named their surviving spouse as the
executor.
Fred executed an unfunded irrevocable trust four years ago for the benefit of his children and grandchildren
that he hopes to use in the future. There is no withdrawal right in the trust.
Fred and Mary have made no prior taxable gifts.
At Fred’s suggestion, Ted and Maria have created standard revocable living trusts with marital and residuary
trusts. Large life insurance policies were also purchased on Ted and Maria ($500,000 each), payable to their
respective trusts.
LIFE INSURANCE SUMMARY
Insured Owner TYP”e Face Amount Premium Beneficiary
Fred Fred Group term $150,000 Employer- Primary: Mary
paid Secondary: Ted
Fred Mary Whole life $250,000 $4,200/year Primary: Mary
Secondary: None
Fred Fred IS-year terrn $1,000,000 $1,800/year Primary: Mary
Secondary: None
e 2014 K@il’ Educational Resources 156 www.keirsueeess.com
Cash and cash equivalents: J
Cash value of life ins.: W
Short-tenn fixed-inc. fund: J
Value fund: J
Growth fund: HI
Global fund: H
SPDA: H2
401 (k) plan: H3
529 plans: H4
Business: H
Residence: J
Personal property: J
Cr:H
$ 31,000
36,000
40,000
83,000
110,000
31,000
160,000
225,000
110,000
10,000,000
450,000
75,000
25,000
Total Assets $11,376,000
H=Husband
W=Wife
Balance Sheet
Fred and Mary Ferris
December 31, Last Year
Liabilities
Car loan: H
Mortgage: J
Total Liabilities
Net Worth
Total Liabilities and
$ 17,000
228,000
$ 245,000
$11,131,000
NetWOlth $11,376,000
J = Joint tenancy with right of survivorship
IPayable on death: Mary
2Single-premium deferred annuity, issued 7/1/80; the initial premium was $40,000, and the estate is beneficiary.
3Beneficiary: Mary
4Mary is the successor-owner at Fred’s death; the average annual return has been 0%.
INVESTMENT DETAIL
Asset Fair Market Basis Projected Purchased Value Growth Rate
Short-tenn fixedincome fund $40,000 $41,000 1% 3 years ago
Value fund $83,000 $50,000 7% 2 years ago
Growth fund $110,000 $50,000 8% 8 years ago
Global fund $31,000 $22,000 6% 4 years ago
© 2014 Keir Educational Resources 157 800-795-5347
Estate Planning (Topics 53-73)
Inflows
Salary: Fred
Bonus: Fred
Salary: Mary
Interest/Dividends
Total Inflows
Outflows
Mortgage: principal and interest
Real estate tax
Homeowners insurance (HO-3)
Maintenance/Repairs
Food
Clothing
Utilities
Car loan
TraveWacationiEntertainment
Life insurance
Fred and Mary Ferris
Cash Flow Projection
Current Year
$150,000
50,000
25,000
Reinvested
$225,000
$ 31,200
6,200
820
8,300
7,800
4,000
5,600
7,200
16,000
Educational funding (daughters’ 529 plans)
401(k) plan contribution: Fred
6,000
56,000
16,000
10,000
30,000
Charitable contributions
Federal income tax
State income tax
Federal and state payroll taxes
Total Outflows
Surplus
Goals and Objectives (in order of priority)
8,000
10,674
$223,794
$1,206
1. Provide $120,000 of annual after-tax cash flow to the surviving family members at the death of either spouse.
2. Pay the remaining mortgage balance at the death of either spouse.
3. Provide adequate college funding for their daughters.
4. Provide assistance to Ted for Ned’s care.
5. Eliminate the federal estate tax at the first death.
6. Reduce or eliminate the federal estate tax at the second death.
7. A void probate at death or incapacity.
8. Secure professional financial assistance for the survivors after either spouse’s death.
9. Ensure adequate retirement income from all sources, including the sale of the business interest.