Business Studies

Business Studies

1. (10 points) Bob (45) and Sally (62) have been married for fifteen years. Sally was previously married but divorced her first husband 22 years ago. She has two children and four grandchildren. Sally is the CEO of Big, Inc. Sally’s compensation is $2,500,000 per year and she owns assets worth $20 million. Bob is good-looking, a great cook, and has been working on writing a novel and a couple plays for the last 20 years. He has never published anything. Bob’s assets total about $100,000. He is the unpaid, volunteer director of a local community theater group and uses Sally’s money to help keep the theater afloat. Molly needs to use the marital deduction to avoid estate taxes if she dies before Bob dies and she is willing to let Bob have the income from that money for his life but she wants her wealth to go to her children and grandchildren after Bob’s death. She is concerned about what Bob might do with her money after she dies. What are her choices? How can you solve her problem? Explain your answer in detail.

2. (5 points) Petunia has $1,000,000. She also has four children: Augustus, Brutus, Caesar, and Diogenes. Augustus has two children and Caesar has four children. Petunia’s Will leaves the $1,000,000 to “my issue per stirpes.” Augustus died the day before Petunia died and Caesar died the day after Petunia died. One year after Petunia’s death, the Will is probated and the money is distributed. Who gets how much of Petunia’s money?

3. (5 points) Assume the same facts as the prior question except that Petunia’s Will leaves the $1,000,000 to “my issue per capita.” Who gets how much of Petunia’s money?

4. Arthur owns a life insurance policy on his life with a death benefit of $1,000,000 and he owns a sword, Excalibur, worth $1,000,000. He transfers ownership of both the policy and the sword to Merlin. One year later Arthur dies. How does the rule about gifts within three years of death (IRC Section 2035) apply to these gifts? With respect to these two assets what, if anything, is included in Arthur’s estate? Explain your answer.

5. (5 points) Explain the IRC 2042 rule regarding “incidents of ownership” in a life insurance policy.

6. (5 points) Explain why the extensions of time to pay estate taxes of your text are not as good an idea as owning life insurance to pay the tax.

7. (5 points) Explain how a Survivorship or JLS policy is particularly useful in estate planning. What is the estate planning problem it is designed to solve?

8. (20 points) Create a diagram which shows the use of the A-B-Q-ILIT estate plan.
a. Explain the requirements that must be met for each trust.
b. Show how life insurance is used the fund the plan.
c. Show how much property can be transferred from a husband and wife to the next generation without incurring an estate tax.
d. NOTE: This will require you to draw and write legibly. I know that you can find these diagrams on the internet. I don’t care if you look them up but don’t copy-paste one onto the test. Requiring you to re-draw this diagram means there is a greater chance that you will remember this plan. If you do go find one and use it as your base, you must cite your source.
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