Cumulative transfers 7117000 tax on cumulative

Cumulative transfers $ 7,117,000
Tax on cumulative transfers $ 3,083,450
Gift taxes paid - 307,650
Tax on taxable estate $ 2,775,800
Unified credit in 2010 - 1,455,800
Estimated estate tax due $ 1,320,000
65. Montgomery has decided to engage in wealth planning and has listed the value of his
assets below. The life insurance has a cash surrender value of $120,000 and the proceeds
are payable to Montgomery’s estate. The trust is an irrevocable trust created by
Montgomery’s brother 10 years ago and contains assets currently valued at $800,000. The
income from the trust is payable to Montgomery’s faithful butler, Walen, for his life, and
the remainder is payable to Montgomery or his estate. Walen is currently 37 years old and
the §7520 interest rate is currently 5.4 percent. Montgomery is unmarried and plans to
leave all his assets to his surviving relatives.
14-21

Chapter 14 - Transfer Taxes and Wealth Planning
Property Value Adjusted Basis
Auto $ 20,000 $ 55,000
Personal effects 75,000 110,000
Checking and savings accounts 250,000 250,000
Investments 2,500,000 770,000
Residence 1,400,000 980,000
Life insurance proceeds 1,000,000 50,000
Real estate investments 5,125,000 2,800,000
Trust 800,000 80,000
a. Calculate the amount of the estate tax due (if any), assuming Montgomery dies this
year and has never made any taxable gifts.
b. Calculate the amount of the estate tax due (if any), assuming Montgomery dies this
year and made one taxable gift in 2006. The taxable gift was $1 million, and
Montgomery used his unified credit to avoid paying any gift tax.
c. Calculate the amount of the estate tax due (if any), assuming Montgomery dies this
year and made one taxable gift in 2006. The taxable gift was $1 million, and
Montgomery used his unified credit to avoid paying any gift tax. Montgomery plans
to bequeath his investments to charity and leave his remaining assets to his surviving
relatives.
Each part of the solution will need to determine the value of Montgomery’s estate.
Montgomery’s estate includes the fair value (the adjusted basis of the assets is
irrelevant) of all of his assets except the trust because Montgomery only owns a
remainder interest in the trust at his death. Hence, only the value of the remainder
is included in his estate. The remainder is valued by identifying the discount factor
given the §7520 interest rate (5.4%) and the age of the life tenant (37 years). The
value ($123,600) is obtained by multiplying the discount factor (0.1545 from Exhibit
25-4) times the value of the trust assets ($800,000). Hence, the value of
Montgomery’s estate is calculated as follows:
Auto $20,000
Personal effects 75,000
Checking and savings accounts 250,000
Investments 2,500,000
Residence 1,400,000
Life insurance proceeds 1,000,000
Real estate investments 5,125,000
Trust ($800,000x.1545) 123,600
Value of estate at date of death $10,493,600
14-22

Chapter 14 - Transfer Taxes and Wealth Planning
a. Montgomery’s estate would owe $3,147,120 if he dies in 2010 calculated as follows:
Adjusted taxable gifts $ 0
Taxable estate + 10,493,600
Cumulative taxable transfers $ 10,493,600
Tax on cumulative transfers $ 4,602,920
Gift taxes paid - 0
Tax on taxable estate $ 4,602,920
Unified credit in 2010 - 1,455,800
Estimated estate tax due in 2010 $ 3,147,120
b. Montgomery’s estate would owe $3,597,120 if he dies in 2010 calculated as follows:
Adjusted taxable gifts $ 1,000,000
Taxable estate + 10,493,600