Must explain all work and calculations.

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:

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.

CHILDREN AGES GRANDCHILDREN

Cecilia 25 2 children

Phillip 21 1 child

Emma 13 0 children

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 2003-
• 2005, 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:

ASSETS LIABILITIES AND NET WORTH

Cash/Cash Equivalents Liabilities

JTROS Cash $ 628,000 Current Liabilities

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 Quarter horses $ 650,000

H Whole Life Insurance 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

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. PropertyOwnership:

a. CP-community property(Jim and Pam have a community property interest)

1. TC – tenants in common (Jim and Pam are equal owners in all property owned as tenants in common).
2. JTROS-Joint tenancy with right of survivorship(Jim and Pam are joint tenants of all property JTROS).
3. H – Jim’s separate property.
4. W-Pam’s separate property.

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.

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

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

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.

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

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.

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 one-

third 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(bornbythebeneficiariesoftheestateinproportion 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

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 one-

third 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(bornbythebeneficiariesoftheestateinproportion 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

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 one-

third 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.

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.)