BUSI/FIN 4331 FINAL PROJECT – Fall 2017

 Use the following information to answer the questions posed. Please show or explain your work to the extent possible. If you miss a question but have correct reasoning, I will be able to give you partial credit. If you just list a final answer, you will not receive credit for the answer – even if it is correct!! Demonstration of the thought process is key to achieving full credit!

Because this is a take-home style, group project that you will have several days to complete, I expect your submission to be a finished document that is well-edited and proofread. You have some freedom with regard to how you submit the assignment. You are welcome to submit more than one file if that best demonstrates your work. Some students will submit a word document and a separate excel document containing calculations. Some students will choose to submit one document with all parts of the assignment integrated into that one document. There is no single right way to submit the final project as long as you keep in mind the project requirements. There are 100 points that can be earned on this final project. The value of each question is noted.      

If you elect, you can work with a group for the final project. A maximum of 5 team members are allowed in each group. If you choose to work in a group, please do the following: 1. Designate the team member in charge of submitting your project to the Turnitin dropbox. 2. The designated team member must email me a list of team members for your group that indicates who is responsible for project submission. Make sure each group member is copied on the email.  3. Include all team member names on your project. Again, your designated team member will be responsible for submitting your project for the group. As a result of this process, I will not have electronic signatures for each team member. Identification of participating team members will be key for awarding credit.              

If you elect to work alone, you are free to do so. If you choose to work alone, please email me your intentions.

JIM AND PAM BACKGROUND Jim (age 48) and Pam (age 50) have been married for 25 years and live in Texas, a community property state. Pam is a 15-year breast cancer survivor but has recently been diagnosed with recurrent metastatic breast cancer. Her prognosis is very poor as her cancer had spread to her bones prior to detection. Doctors have informed Jim and Pam that Pam’s survival beyond 12 months is unlikely. Jim is currently in good health. Pam has one daughter, Angela (age 32), from a previous relationship. Angela lives in a duplex on property owned by her mother and stepfather with her husband and two small children, ages 3 and 1. Together, Jim and Pam have the following children and grandchildren:

CHILDREN AGES GRANDCHILDREN Cecilia 25 2 children Phillip 21 1 child Emma 13 0 children     Angela and Cecilia are healthy, gainfully employed, and married. Angela is a middle school principal, and Cecilia recently graduated from medical school and is pursuing an anesthesia residency at Baylor College of Medicine in Houston. Phillip is single, goes to community college, and works at the family business to provide for his child. Emma lives at home with her parents, attends the 7th grade, and has Asperger’s’ Syndrome. Emma will never be able to work consistently and will be dependent upon her parents and government programs for support.

Jim and Pam own a restaurant called “The Grillenium Falcon” specializing in grilled cheese sandwiches and other comfort foods. Jim and Pam have ten restaurants located throughout Texas and Oklahoma and have plans to expand nationwide. Jim and Pam had hoped that Cecilia, their oldest daughter, would take over the business in the future. However, as Cecilia has chosen a different career path, Jim and Pam have faith that Phillip will continue to work in the business and soon become the manager of the restaurant operations. Jim and Pam want to sell “The Grillenium Falcon” to Phillip in the future.  

Jim and Pam have made the following lifetime transfers: • In 2000, Pam loaned $9,500 to Angela for the purchase of a used station wagon. Pam did not charge Angela interest on the loan. • Jim and Pam paid $7,000 in 2002, $14,000 in each of the years 20032005, and $8,000 in 2006 directly to Texas A&M University for Angela to achieve a degree in education. • Jim and Pam paid $320,000 in the years 2009-2012 directly to Cecilia to reimburse her for tuition she paid to Harvard University to achieve a degree in biology (assume $80,000 per year). • Jim and Pam gave $95,000 in 2014 to Phillip to open a comic book business – which failed within 6 months – in lieu of sending him to college.   • Jim and Pam paid $150,000 to Texas Children’s Hospital for an experimental treatment for Emma in 2008.  • In 2007, Jim gave Angela $100,000 of his separate property as a wedding gift. • In 2009, Jim gave his friends Dwight and Andy $50,000 each of separate property to start a paper company. • In 2007, Pam gave her mother $200,000 of her separate property as a birthday gift. • Hurricane Heloise struck the coast of Texas in August 2016. Jim and Pam gave $250,000 to the American Red Cross to assist in Hurricane Sandy relief efforts in September 2016. • In 2016, Jim gave a paid up whole life insurance policy with a death benefit of $100,000 (owned as Jim’s separate property) to the American Cancer Society, a public charity, to support the search for the cure for cancer. Note: Jim and Pam did not agree to split any of the separate property gifts.    

At this time, Jim and Pam do not have a valid will.  

STATEMENT OF FINANCIAL POSITION OF JIM AND PAM:

Notes to Financial Statements: 1. Assets are stated at fair market value (rounded to even dollars). 2. Liabilities are stated at principal only (rounded to even dollars). 3. The adjusted basis of “The Grillenium Falcon” is $1,800,000. 4. Inherited Stock Portfolios have children designated as beneficiaries. 5. Jim’s whole life insurance policy has a death benefit of $2,000,000 and is solely owned by Jim. The number in the table represents the cash surrender value of the policy. The designated beneficiary is Pam. 6. Property Ownership: a. CP – community property (Jim and Pam have a community property interest) b. TC – tenants in common (Jim and Pam are equal owners in all property owned as tenants in common). c. JTROS – Joint tenancy with right of survivorship (Jim and Pam are joint tenants of all property JTROS). d. H – Jim’s separate property. e. W – Pam’s separate property.   

ASSETS LIABILITIES AND NET WORTH Cash/Cash Equivalents Liabilities JTROS Cash 628,000 $       Current Liabilies Total Cash/Cash Equivalents 628,000 $       W Credit Card 1 47,000 $          CP Credit Card 2 148,000 $        Invested Assets H Credit Card 3 8,200 $            CP Grillenium Falcon 18,000,000 $ CP Credit Card 4 39,200 $          H Inherited Stock Portfolio 785,000 $       Total Current Liabilities 242,400 $        TC Quarterhorses 650,000 $       H Whole Life Insurace Policy 540,000 $       W Inherited Stock Portfolio 2,450,000 $    Long-Term Liabilities Total Investments 22,425,000 $ CP Mortgage – Primary 565,000 $        CP Mortgage – Lake House 168,000 $        Personal Use Assets CP Loan – Boat 51,000 $          CP Primary Residence 1,273,000 $    H Loan – Auto 3 48,500 $          JTROS Lake House 540,000 $       Total Long-Term Liabilities 832,500 $        CP Duplex 240,000 $       CP Boat 85,000 $          CP Auto 1 71,500 $          Total Liabilities 1,074,900 $    W Auto 2 40,800 $          H Auto 3 96,000 $          Total Personal Use 2,346,300 $    Net Worth 24,324,400 $  

Total Assets 25,399,300 $ Total Liabilities and Net Worth 25,399,300 $  

QUESTIONS: Assuming the facts given, answer the following questions. Use the gift and estate rates and exclusions at the time of the transfer. Use 2016 exclusions, credits, and tax rate for the estate tax. A table including the annual exclusion amounts is attached.

 1. Given Pam’s shocking diagnosis, Jim and Pam decide to make an estate plan. What are the appropriate steps to create an estate plan? What practitioners should be included in the estate planning discussions and what are the roles of each practitioner? (Value – 6 points)

 2. What is the first step, in your opinion, that the estate planning team will recommend that Jim and Pam take? (Value – 6 points)

 3. As a member of the estate planning team, what facts would be most important to you in making an appropriate estate plan? Why? (Discuss at least 4 facts – and their implications – that would be important to you for full credit.) (Value – 6 points)

 4. What trust options would you recommend as part of Jim and Pam’s overall estate plan? Why? (At least 3 trust options must be discussed for full credit.) (Value – 6 points)

 5. What additional planning advice would you give Jim and Pam regarding their estate plan that has not already been addressed? Creativity will be rewarded!! (Value – 6 points)

 6. Calculate the taxable gifts made by Jim and Pam for the years 2000 – 2016. Where appropriate, explain any exemptions or exclusions that applied. Calculate gift tax due in the same years. You must calculate the gift tax amount prior to the application of any applicable credit amount. For example, you cannot simply tell me that the gift tax is $0 because Jim and Pam have not used their applicable credit amounts and expect to receive full credit. You must go through all the steps of each gift tax calculation to achieve full credit.  (Value – 10 points)

7. Assume that Jim dies unexpectedly on December 31, 2016 survived by Pam. Calculate the total value of Jim’s gross estate for federal estate tax purposes. For purposes of this question, assume that any gift tax paid was more than 3 years ago. (Value – 3 points) 

 8. Assume that Jim dies unexpectedly on December 31, 2016 survived by Pam. Calculate the total value of the assets that will pass through Jim’s probate estate. For purposes of this question, assume that any gift tax paid was more than 3 years ago. (Value – 3 points)

 9. Assume that Pam dies on December 31, 2016 survived by Jim. Calculate the total value of Pam’s gross estate for federal estate tax purposes. For purposes of this question, assume that any gift tax paid was more than 3 years ago. (Value – 3 points) 

 10. Assume that Pam dies on December 31, 2016 survived by Jim. Calculate the total value of the assets that will pass through Pam’s probate estate. For purposes of this question, assume that any gift tax paid was more than 3 years ago. (Value – 3 points)

 11. Assume that Pam dies December 31, 2016. Calculate the marital deduction amount that will be available to Pam’s estate tax. For purposes of this question, assume the following: a. $0 state death tax credit b. $0 credit for prior transfers c. $0 foreign death tax credit  d. Prior to Pam’s death, she executed a will that bequeaths all her property to Jim.  e. Expenses: i. Last Medical Expenses = $70,000 ii. Administrative costs – $90,000 iii. Funeral expenses = $25,000 iv. Losses during administration = $0

(Value – 6 points)

 12. Assuming the same facts as #11, what amount of Pam’s exemption can pass to Jim under the principle of “portability”? (Value – 6 points)

13. Assume that Pam dies December 31, 2016. Calculate the estate tax due at Pam’s death. For purposes of this question, assume the following: a. $0 state death tax credit b. $0 credit for prior transfers c. $0 foreign death tax credit  d. Prior to Pam’s death, she executed a will that bequeaths all her property to Jim.  e. Expenses: i. Last Medical Expenses = $70,000 ii. Administrative costs – $90,000 iii. Funeral expenses = $25,000 iv. Losses during administration = $0 f. Gift and Estate tax rate schedule for 2016 is located on page 215 in your textbook. Hint: Use the layout provided in your book on page 226.  

(Value – 6 points)

 14. Assume that Jim dies December 31, 2016. Calculate the marital deduction amount that will be available to Jim’s estate tax. For purposes of this question, assume the following: a. $0 state death tax credit b. $0 credit for prior transfers c. $0 foreign death tax credit  d. Prior to Jim’s death, he executed a will that bequeaths all his property to his children.  e. Expenses: i. Last Medical Expenses = $20,000 ii. Administrative costs – $90,000 iii. Funeral expenses = $25,000 iv. Losses during administration = $0

(Value – 6 points)

15. Assume that Jim dies December 31, 2016. Calculate the estate tax due at Jim’s death. For purposes of this question, assume the following: a. $0 state death tax credit b. $0 credit for prior transfers c. $0 foreign death tax credit  d. Prior to Jim’s death, he executed a will that bequeaths all his property to his children.  e. Expenses: i. Last Medical Expenses = $20,000 ii. Administrative costs – $90,000 iii. Funeral expenses = $25,000 iv. Losses during administration = $0 f. Gift and Estate tax rate schedule for 2016 is located on page 215 in your textbook. Hint: Use the layout provided in your book on page 226.  

(Value – 6 points)

 16. Assume that Pam dies December 31, 2016. Calculate the marital deduction amount that will be available to Pam’s estate tax. For purposes of this question, assume the following: a. $0 state death tax credit b. $0 credit for prior transfers c. $0 foreign death tax credit  d. Prior to Pam’s death, she executed a will that bequeaths onethird of her property to the American Cancer Society, one-third of her property to Jim, and one-third of her property to her children.  e. Expenses (born by the beneficiaries of the estate in proportion to their share of the estate): i. Last Medical Expenses = $70,000 ii. Administrative costs – $90,000 iii. Funeral expenses = $25,000 iv. Losses during administration = $0

(Value – 3 points)

17. Assume that Pam dies December 31, 2016. Calculate the charitable deduction amount that will be available to Pam’s estate tax. For purposes of this question, assume the following: a. $0 state death tax credit b. $0 credit for prior transfers c. $0 foreign death tax credit  d. Prior to Pam’s death, she executed a will that bequeaths onethird of her property to the American Cancer Society, one-third of her property to Jim, and one-third of her property to her children.  e. Expenses (born by the beneficiaries of the estate in proportion to their share of the estate): i. Last Medical Expenses = $70,000 ii. Administrative costs – $90,000 iii. Funeral expenses = $25,000 iv. Losses during administration = $0

(Value – 3 points)

 18. Assume that Pam dies December 31, 2016. Calculate the estate tax due at Pam’s death. For purposes of this question, assume the following: a. $0 state death tax credit b. $0 credit for prior transfers c. $0 foreign death tax credit  d. Prior to Pam’s death, she executed a will that bequeaths onethird of her property to the American Cancer Society, one-third of her property to Pam, and one-third of her property to her children.  e. Expenses (born by the beneficiaries of the estate in proportion to their share of the estate): i. Last Medical Expenses = $70,000 ii. Administrative costs – $90,000 iii. Funeral expenses = $25,000 iv. Losses during administration = $0 f. Gift and Estate tax rate schedule for 2016 is located on page 215 in your textbook. Hint: Use the layout provided in your book on page 226.  

(Value – 6 points)

 19. Jim and Pam are aware that estate taxes may be due upon either of their deaths. What strategies could be implemented to deal with the payment of those taxes? (Hint – at least 3 strategies must be addressed for full credit.)  (Value – 6 points)

Year Annual Exclusion Amount 2000 $10,000 2001 $10,000 2002 $11,000 2003 $11,000 2004 $11,000 2005 $11,000 2006 $12,000 2007 $12,000 2008 $12,000 2009 $13,000 2010 $13,000 2011 $13,000 2012 $13,000 2013 $14,000 2014 $14,000 2015 $14,000 2016 $14,000