Finc 355 Retirement And Estate Planning Case 1 Family Estate

Finc 355 Retirement And Estate Planningcase 1 Family Estate Planningy

Finc 355 Retirement And Estate Planningcase 1 Family Estate Planningy

Finc 355 Retirement and Estate Planning Case #1 Family Estate Planning. You have been the Financial Adviser for Ken and Joan Hill for the last 3-years. You have asked them to stop by for an annual review. During the review, you learn that Ken and Joan Hill gave $35,000 to their son for a down payment on a house in 2009.

Questions:

  1. How much gift will be owed by Ken and Joan for giving the gift to their son?
  2. How much income tax will be owed by their son?
  3. List three advantages of making this gift.
  4. If Ken and Joan Hill had asked your advice before making this gift, what would you have recommended?
  5. Joan Hill has now deceased with a net worth of $2,500,000 at the time of her death in 2009. She held a $350,000 whole life policy with $40,000 of cash value, with her niece as the beneficiary. She also had a $50,000 pension plan benefit.
  6. What was the value of Joan’s gross estate?
  7. How much of her estate is taxable?
  8. How much estate tax will need to be paid?
  9. How much of her estate must pass through probate?
  10. What are the four different taxes that may be imposed on an estate?

Paper For Above instruction

Estate planning and gift taxation are critical components of financial planning, especially for individuals with significant assets or familial considerations. The case of Ken and Joan Hill provides a practical context to explore these concepts, focusing on gift tax implications, estate valuation, probate considerations, and estate taxes.

The initial question concerns the gift of $35,000 that Ken and Joan Hill gave their son for a down payment on a house in 2009. Under U.S. federal gift tax law, individuals are allowed an annual gift exclusion, which for 2009 was $13,000 per recipient (Internal Revenue Service [IRS], 2009). Since the Hill's gift exceeded this exclusion, the excess amount is subject to gift tax. Consequently, the taxable gift amount is the total gift minus the applicable exclusion per recipient. Given they gave $35,000, and assuming only one recipient, the excess gift equals $22,000 ($35,000 - $13,000).

The gift tax owed by Ken and Joan would depend on their combined lifetime gift and estate tax exemption, which in 2009 was $3.5 million (IRS, 2009). If the excess gift of $22,000 does not exceed their remaining exemption, they would not owe any gift tax immediately; instead, the gift reduces their exemption amount. The IRS also requires filing IRS Form 709 for gifts exceeding the annual exclusion.

The recipient’s income tax liability from the gift itself is generally minimal. Gifts are not taxable income to the recipient, as per IRS rules (IRS, 2009). However, if the gifted property appreciates, subsequent earnings, such as interest or dividends from assets purchased with the gift, may generate taxable income for the recipient.

Advantageously, gifting allows the donor to reduce their taxable estate, potentially decreasing estate taxes upon death, and can facilitate the transfer of wealth during the donor's lifetime, often at a lower tax rate compared to estate tax rates (Fischer & Ronen, 2019). It can also help diversify the estate, provide financial support to beneficiaries, and establish financial independence.

If advising the Hill family prior to their gift, I would recommend considering whether the gift amount aligns with their overall estate plan and whether utilizing their annual exclusion and lifetime exemption is optimal. I might suggest utilizing the gift to fund a custodial account for their son or establishing a trust to control the timing and conditions of the gift, or possibly making strategic gifts over several years to maximize tax benefits and minimize potential gift taxes (IRS, 2009). Additionally, ensuring the gift complements their estate planning goals and that they are aware of potential future tax implications is crucial.

Moving to Joan Hill’s estate—the context changes considerably now that she has passed away. Joan's net worth at her death in 2009 was $2,500,000, which she designated her niece as the beneficiary of a $350,000 whole life policy, with an additional cash value of $40,000. Her estate also included a pension benefit of $50,000.

The gross estate value encompasses all assets at death—property, life insurance, retirement accounts, and other possessions. Therefore, Joan’s gross estate totals $2,500,000, including the cash value of her life insurance policy and pension benefit. These assets are considered part of the taxable estate (US Department of the Treasury, 2010). Since the assets are transferred at death, they are subject to estate valuation rules, which consider fair market value at the date of death.

The taxable estate equals the gross estate less any allowable deductions, such as debts, funeral expenses, administrative expenses, and certain deductions like the estate tax exemption. For 2009, the estate tax exemption was $3.5 million; Joan’s estate, at $2.5 million, was below this threshold. Thus, her estate was non-taxable, and no estate tax was owed (IRS, 2009; US Department of the Treasury, 2010).

Regarding probate, the estate assets passing through probate are generally those that are solely in the decedent’s name without designated beneficiaries or hold specific titling. Assets with designated beneficiaries, such as life insurance policies and retirement accounts, typically bypass probate, passing directly to beneficiaries. As Joan's life insurance policy was beneficiary-designated, it would not need to pass through probate, and similar applies for her pension.

Finally, the four main taxes that may be imposed on an estate include estate tax, inheritance tax, generation-skipping transfer tax, and income tax on estate income (U.S. Internal Revenue Service, 2021). Estate tax is levied on the estate’s value at death, inheritance tax is paid by beneficiaries depending on their relationship to the deceased, generation-skipping transfer tax applies to transfers to grandchildren or other skips, and income tax may be due on income generated by estate assets after death.

In conclusion, this case underscores the importance of proactive estate planning, including appropriate gifting strategies, understanding estate valuation and taxation, and the significance of beneficiary designations in avoiding probate. Effective planning can minimize taxes, streamline the transfer process, and preserve wealth across generations.

References

  • Fischer, T., & Ronen, A. (2019). Estate and Gift Tax Strategies. Journal of Financial Planning, 32(2), 60-68.
  • Internal Revenue Service. (2009). Topic No. 353 Gift Tax. https://www.irs.gov/taxtopics/tc353
  • Internal Revenue Service. (2021). Estate and Gift Taxes. https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
  • U.S. Department of the Treasury. (2010). Estate Tax Closing Letters. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax-forms-and-publications
  • Internal Revenue Service. (2009). Publication 950: Introduction to Estate and Gift Taxes. https://www.irs.gov/publications/p950
  • Internal Revenue Service. (2021). How Estate and Gift Taxes Work. https://www.irs.gov/businesses/small-businesses-self-employed/how-estate-and-gift-taxes-work
  • Friedman, B. M. (2018). Estate Planning Strategies: Minimizing Taxes and Achieving Goals. Estate Planning Journal, 45(4), 22-29.
  • Roth, G. (2017). Beneficiary Designations and Probate Avoidance. Trusts & Estates, 156(7), 34-39.
  • Kraus, J. (2020). Estate Tax Exemptions and Future Trends. Tax Notes, 164(12), 194-199.
  • Smith, R. (2016). Valuation of Estate Assets. Journal of Taxation, 125(3), 25-30.

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