PART 5

PART 5—ANSWERS TO SELECTED STUDY QUESTIONS

3.	a.	The life insurance proceeds will be included in the insured’s gross estate because, although they are owned by his or her spouse, they are payable to the insured’s estate.

	b.	Since the insured owned the policy, the proceeds will be includible in his or her gross estate for federal estate tax purposes. However, since his or her spouse is the named beneficiary, the proceeds may qualify for the federal estate tax marital deduction.

	c.	The proceeds will be includible in the insured’s estate as a transfer made within 3 years of his or her death. Gifts of life insurance made within 3 years of death are includible in the federal gross estate for federal estate tax purposes at the full value of the proceeds.

5.	a.	Since the insured has the unqualified power to reacquire the policy on his or her life from the trust, the IRS would consider the incidents of ownership in the policy to be held by the insured at the time of his or her death and would include the proceeds in his or her gross estate.

	b.	In the ABC partnership cross-purchase agreement, each partner owns policies on the lives of the other partners. Although there are only private rulings addressing this issue, the insured’s right to reacquire his or her policy subject to an independent contingency beyond the insured’s immediate control is not an incident of ownership unless the contingency has occurred prior to the insured’s death. Generally, a partnership agreement such as this would require the consent of all parties to terminate the agreement. Thus, the policies covering a partner’s life should not be included in his or her estate if such partner’s death occurs before the agreement is terminated.

8.		The regulations under Sec. 2031 make it clear that the first method of valuation of a life insurance policy held on the life of another is the cost of a comparable contract. Thus, $95,000 is the estate tax value of the policy on Mr. Jones’s life.

11.		Jerome Albert’s right to borrow against the cash value in the policy as well as his right to change the beneficiary are both incidents of ownership. Because Jerome Albert will possess these incidents of ownership at the time of his death, the policy proceeds must be included in his gross estate.

20.	a.	Forecasting the estates is relatively simple in these circumstances. If more complicated scenarios are presented, such as property growth rates and comparisons of alternative planning techniques, estate planning computer software is quite useful.

Martha’s Estate (Assumed Date of Death This Year)

Gross estate

$3,500,000
All her property and one-half of the joint property

less

Funeral and administration
(105,000)

Adjusted gross estate

3,395,000

less

Marital deduction
3,395,000

Taxable estate

-0-

Net estate tax

-0-

David’s Estate (Assumed Date of Death 3 Years Later)

Gross estate $5,895,000
David’s individual property plus net amount received from Martha

less

Funeral and administration
(176,850)

Adjusted gross estate
5,718,150

less

Marital deduction
-0-

Taxable estate 5,718,150

Tentative taxes 2,785,783
From tax table

less

Unified credit
(192,800)

Net federal estate tax
2,592,983*

Total family taxes
2,592,983

Net available to heirs
$3,125,167

*This tax was determined based on the rate schedule as presented on page 4.13.

The forecasts in part (a) above reveal a wasted unified credit in Martha’s estate since all is left to David to qualify for the marital deduction. If each of the Megabuckses had a will creating a unified credit share, the forecasts change as follows:

Martha’s Estate (Assumed Date of Death This Year)
Gross estate	$3,500,000
less
Funeral and administration	(105,000)
Adjusted gross estate	3,395,000
less
Marital deduction	(2,795,000)
Taxable estate	600,000	Unified credit share
Tentative tax	192,800	From tax table
Unified credit	(192,800)
Net federal estate tax	-0-

David’s Estate (Assumed Date of Death 3 Years Later)

Gross estate	$5,295,000	David’s property plus net property received From Martha
less
Funeral and administration	(158,850)
Adjusted gross estate	5,136,150
less
Marital deduction	-0-
Taxable estate	5,136,150
Tentative tax	2,465,683	From tax table
less
Unified credit	(192,800)
Net federal estate tax	2,272,883
Total family tax	2,272,883
Net available to heirs	$3,358,267	David’s net estate after taxes and expenses plus the unified credit share from Martha’s estate net of her estate expenses

c..

From the forecasts presented above, it is apparent that the federal estate taxes paid by estate of the survivor of the Megabuckses will be substantial. If they hope to pass their estate intact to their heirs, they must consider life insurance. In this instance, a second-to-die policy of approximately $2.5 million will replace all of the family wealth lost to death taxes and expenses.

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