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com

CHAPTER 20

UNDERSTANDING THE ISSUES

1. Several of the important goals of estate plan- even larger and possibly place those assets in-
ning are to identify and clearly communicate to a higher estate tax bracket.
the desires and wishes of the decedent, max-
3. It is important to separately account for the in-
imize the value of the estates net assets, mi-
come and principal of an estate for several rea-
nimize the taxes that may be assessed against
sons. First, the decedent may have created a
the assets and income of the estate, achieve
will that has special provisions relating to both
the necessary liquidity of the estates assets so
principal and income. Second, the income of an
that desired conveyances and distributions may
estate is subject to tax. These taxes are either
be received, and provide a proper and timely
imposed on the estate or the recipient of the in-
accounting of the activities of the estate and its
come.
fiduciary.
The sum of intended legacies may be larger
2. The marital exclusion is an effective strategy if
than the available assets of an estate. In those
one assumes that the surviving spouse will use
instances, a procedure referred to as abate-
up estate assets during their remaining life ex-
ment is applied. This procedure requires that
pectancy. However, a wealthy couple may have
legacies be satisfied to whatever extent possi-
plenty of assets and should take advantage of
ble, beginning with the highest priority level of
the unified credit. The credit will allow the first
legacies. If demonstrative legacy cannot be sa-
to die to transfer assets out of the estate with
tisfied, the unsatisfied amount is considered a
no resulting estate tax. Furthermore, the surviv-
general legacy. If there are inadequate re-
ing spouse will also be able to claim a unified
sources to satisfy general legacies, available
credit. If all of the deceaseds assets were
resources are allocated proportionately among
transferred to the surviving spouse, the estate
the identified parties.
of the surviving spouse would likely become

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Ch. 20Exercises

EXERCISES

EXERCISE 20-1

Scenario A Scenario B
General legacies as set forth in will:
Amount due The Nature Conservancy ..................... $ 50,000 $ 50,000
Equal amounts due three grandchildren .................. 150,000 150,000

Unsatisfied demonstrative legacies that constitute a

general legacy:
Amount not satisfied by insurance proceeds ........... 20,000 20,000
Total needed to satisfy general legacies.............................. $220,000 $ 220,000

Available cash to satisfy general legacies:

Cash at date of death ............................................... $ 40,000 $ 15,000
Sale of Kachina collection ........................................ 45,000
Insurance proceeds (policy number 48002) ............. 40,000 40,000
Sale of residence ..................................................... 220,000
Total ......................................................................... $345,000 $ 55,000

Amount available for residual legacies ................................ $125,000 $(165,000)

Amount of cash received by:

Grandchild Riley:
General legacy at amount stated in will
(see Notes A and B) ........................................... $ 50,000 $ 12,500

Son Calvin, Jr.:

Insurance policy number 14378 death benefit ......... $ 50,000 $ 50,000
Residual legacy: One-half of available amount ........ 62,500
Total.............................................................................. $112,500 $ 50,000

Note A: Under scenario A, there is enough cash available to satisfy all general legacies. Therefore,
Riley will receive the stated amount of $50,000.

Under scenario B, there is only $55,000 available to satisfy all general legacies, which total
$220,000. Therefore, only 25% ($55,000/$220,000) of each stated legacy will be satisfied.
Accordingly, Riley will receive $12,500 (25% $50,000).

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Ch. 20Exercises

EXERCISE 20-2

(1) Securities that could be disposed of at a loss should, if possible, be sold prior to date of death. The
realized loss would be recognized for income tax purposes and result in a tax savings. If the secu-
rity was not sold, the reduced basis would be included in the determination of taxable estate, but
the loss in value would not receive any recognition for income tax purposes.

(2) The insurance policies could name someone other than the estate, such as a charitable organiza-
tion, as beneficiary. The insurance policies could also be placed in a trust whereby the insured par-
ty gives up its ownership interests in the policies.

(3) The maximum annual gift would be $586,000, consisting of the following: annual gift exclusion of
$12,000 per donee for a total of $36,000 and the balance of the applicable exclusion amount of
$550,000 ($1,000,000 $450,000).

(4) If the premium on the bonds were amortized, then the measure of interest income would be lo-
wered. This would suggest that a portion of the cash interest received represents a recovery of the
original premium paid on the bond and, therefore, should accrue to the benefit of those entitled to
corpus of the trust, not those entitled to trust income. For example, assume a bond with a maturity
value of $10,000 has an unamortized premium of $500, indicating that the initial corpus amount is
$10,500. Assume that the bond has a stated interest rate of 8% and is held five years to maturity.
Therefore, over the 5-year period, total cash interest of $4,000 (8% $10,000 5 years) has been
received, and the bond would have a value of $10,000 at maturity. If the income beneficiary rece-
ives all the cash interest, then the principal beneficiary would receive only $10,000 rather than the
$10,500 represented by the original corpus amount. By amortizing the premium, the interest in-
come is reduced to $3,500, and the $500 balance of the cash interest received would be conveyed
to the principal beneficiary (in the exercise, that would be the Sierra Club).

(5) Yes, it is more beneficial to the husband for the effect of depletion to be included in the income de-
termination. The value of timberland is most often correlated to the timber on the land. Therefore, if
income is not reduced by a charge for depletion, the asset will be wasted/depleted to the detriment
of the principal beneficiary (in this case, the husband).

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Ch. 20Exercises

EXERCISE 20-3

Disbursement of estate assets in order of priority:

Claims having a special lien against property:
Mortgage balance ........................................................................................ $142,580
Automobile repair expenses ........................................................................ 750
Real estate taxes ......................................................................................... 4,200
Brokerage commissions ............................................................................... 16,000
Funeral and administrative expenses:
Funeral expenses ........................................................................................ 6,300
Administrative expenses .............................................................................. 2,100
TaxesIncome, estate, inheritance:
Income and estate taxes .............................................................................. 12,400
Medical expenses .............................................................................................. 27,000
Remaining claims other than legacies:
Personal loan from brother .......................................................................... 14,700
Personal expenses ...................................................................................... 3,950
Specific legaciesCollection of Edward S. Curtis photographs ........................ 22,000
Demonstrative legacy ($180,000 $142,580 $16,000 $4,200) ................... 17,220
Subtotal ........................................................................................................ $269,200
General legacies (see Schedule A):
Nephew for unsatisfied demonstrative legacy
($30,000 less $17,220 already received) of $12,780 ............................. 9,585
Sister No. 1 .................................................................................................. 15,000
Sister No. 2 .................................................................................................. 15,000
Total of all distributions ...................................................................................... $308,785

Schedule A
Proportionate Allocation of General Legacies

Amount Percent Total Amount

Legatee of Legacy of Total Available Allocated
Nephew ......................................... $12,780 24.21% $39,585 $ 9,585
Sister No.1 .................................... 20,000 37.89 39,585 15,000
Sister No. 2 ................................... 20,000 37.89 39,585 15,000
$52,780 100.00% $39,585

Note: Amounts contain slight rounding errors.

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Ch. 20Exercises

EXERCISE 20-4

Principal Income
Assets received:
Personal residence .................................................. $ 350,000
Cash ......................................................................... 230,000
Securities ................................................................. 210,000
Personal effects ....................................................... 12,000
Sailboat .................................................................... 8,000
Loss on realization of securities ............................... (14,000)
Bond interest ............................................................ $ 4,000
Dividends ................................................................. 7,000 20,000
Total ................................................................... $ 803,000 $24,000

Assets disbursed:
Amount conveyed to Sierra Club ............................. $(200,000)
Mortgage principal.................................................... (16,000)
Mortgage interest ..................................................... (2,000) $ 6,000
Funeral and administrative fees ............................... (27,000)
Medical expenses .................................................... (21,000)
Income taxes ............................................................ (13,000)
Real estate taxes, interest, and penalties ................ (14,000)
Residence utilities and repairs ................................. (1,200) (6,000)
Repair of roof and lawn care .................................... (15,000) (3,000)
Yacht club dues and charges ................................... (1,400) (2,800)
Total ................................................................... $(310,600) $
(17,800)

Balance before distributions/transfers .......................... $ 492,400 $ 6,200

Amount (80%) paid out to Margaret ......................... (4,960)
Amount (20%) transferred to corpus ........................ 1,240 (1,240)
Ending balances ........................................................... $ 493,640 $

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Ch. 20Exercises

EXERCISE 20-5

(1) Determination of estate tax:

Gross estate..................................................................................... $7,008,000
Less:
Debts ........................................................................................ $380,000
Transfer to charitable remainder trust ...................................... 560,000
Charitable contribution to art museum ...................................... 25,000
Administrative and funeral expenses ........................................ 30,000
Federal and state income taxes ............................................... 13,000
1,008,000
Taxable estate ................................................................................. $6,000,000
Estate tax before credits [$780,800 + ($4,000,000 45%)] ............ $2,580,800
Less unified credit ............................................................................ 1,455,800
Estate tax due .................................................................................. $ 1,125,000

(2) Gross estate..................................................................................... $7,008,000

Distribution before general legacies:
Debts ........................................................................................ $ 380,000
Transfer to charitable remainder trust ...................................... 560,000
Charitable contribution to art museum ...................................... 25,000
Administrative and funeral expenses ........................................ 30,000
Federal and state income taxes ............................................... 13,000
Estate tax due ........................................................................... 1,125,000
Securities to married daughter ................................................. 600,000
Life insurance proceeds to trust ............................................... 1,200,000
3,933,000
Subtotal ............................................................................................ $ 3,075,000
Gain on sale of hunting land ............................................................ 5,000
Cash available for general legacies ................................................. $ 3,080,000

Allocation of cash available for general legacies:

Intended Percentage Allocated
Legacy of Total Amount
Hunting friend #1 unsatisfied demonstrative........ $ 20,000 0.5% $ 15,400
Hunting friend #2 unsatisfied demonstrative........ 20,000 0.5 15,400
Hunting friend #3 unsatisfied demonstrative........ 20,000 0.5 15,400
Friend Ernest Kampmeyer ...................................... 3,940,000 98.5
3,033,800
$4,000,000 100.0% $3,080,000

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Ch. 20Exercises

EXERCISE 20-6

Determination of estate tax liability assuming no trusts are created:

Edith Leppert Gerald Leppert
Initial gross estate equal to net assets ........... $4,300,000 $2,400,000
Add:
Spouses remaining estate (see Note A) . $ 0 $4,125,000
Subsequent appreciation (see Note B) .... 0 1,028,503 5,153,503
Subsequent gross estate ............................... $4,300,000 $7,553,503
Less:
Administrative and funeral expenses ....... $ 25,000 $ 25,000
Charitable contributions ........................... 150,000 150,000
Marital deduction...................................... 4,125,000 4,300,000 0 175,000
Taxable estate ............................................... $ 0 $7,378,503
Estate tax before credits ................................ $ 0 $3,201,126
Less unified credit .......................................... 0 1,455,800
Estimated estate tax due ............................... $ 0 $1,745,326

Determination of estate tax liability assuming a credit shelter trust is created:

Edith Leppert Gerald Leppert
Initial gross estate equal to net assets ........... $4,300,000 $2,400,000
Add:
Spouses remaining estate (see Note A) . $ 0 $ 625,000
Subsequent appreciation (see Note D) .... 0 476,816 1,101,816
Subsequent gross estate ............................... $4,300,000 $3,501,816
Less:
Administrative and funeral expenses ....... $ 25,000 $ 25,000
Charitable contributions ........................... 150,000 150,000
Marital deduction (see Note C) ................ 625,000 800,000 0 175,000
Taxable estate ............................................... $3,500,000 $3,326,816
Estate tax before credits ................................ $ 1,455,800 $1,377,867
Less unified credit .......................................... 1,455,800 1,377,867
Estimated estate tax due ............................... $ 0 $ 0

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Ch. 20Exercises

Exercise 20-6, Concluded

Comparison of alternatives:
Estate tax without the trust .......... $1,745,326
Estate tax with the trust ............... 0
Savings in estate taxes ............... $1,745,326
Note A: This is the amount of the marital deduction.
Note B: Subsequent appreciation is based on $2,400,000 traceable to husband plus $4,125,000 tra-
ceable to wife, or $6,525,000. Compounded at 5% for three years, this amount grows to
$7,553,503 ($6,525,000 1.053), or appreciation of $1,028,503.
Note C: Gross estate less expenses and charitable contributions is $4,125,000 ($4,300,000
$25,000 $150,000). Of this amount, $3,500,000 is contributed to a credit shelter trust leav-
ing a balance of $625,000 subject to the marital deduction.
Note D: Subsequent appreciation is based on $2,400,000 traceable to husband plus $625,000 tra-
ceable to wife, or $3,025,000. Compounded at 5% for three years, this amount grows to
$3,501,816 ($3,025,000 1.053), or appreciation of $476,816.

EXERCISE 20-7

(a) + (b) = (c) + (d)

Noncash Trust Trust
Cash Assets Principal Income
Transfer of assets into trust ................................ $ 100,000 $ 750,000 $ 850,000
Subsequent discovery of assets ......................... 40,000 40,000
Sale of real estate partnership ............................ 220,000 (200,000) 20,000
Receipt of IBM dividend ...................................... 20,000 20,000
Receipt of interest income .................................. 5,000 $
5,000
Distribution of assets to children ......................... (32,000) (27,000)
(5,000)
Payment of trustees fees ................................... (10,000) (5,000)
(5,000)
Purchase of bonds .............................................. (84,000) 84,000
Receipt of timber income .................................... 22,000
22,000
Depletion of forest land ....................................... 15,400
(15,400)*
Payment of real estate taxes .............................. (6,000)
(6,000)
Distribution from real estate partnership ............. 22,000
22,000
Receipt of interest on bonds ............................... 3,200 400
2,800**
Payment of taxes on trust income....................... (6,000)
(6,000)

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Ch. 20Exercises

Sale of IBM stock ................................................ 80,100 (60,000) 20,100

Subtotal ............................................................... $ 334,300 $ 614,000 $ 933,900$
14,400
Distribution to oldest child ................................... (316,100) (311,300)
(4,800)
Totals .................................................................. $ 18,200 $ 614,000 $ 622,600$
9,600
*Depletion is 11% ($200,000 $60,000).
**The interest on the bonds is $3,200 (8% $80,000 1/2 year).
Of this amount, $400 ($4,000 premium amortized over 10 periods) represents a return of principal.

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Ch. 20Exercises

EXERCISE 20-8

Principal Cash ........................................................................................ 15,000

Land ....................................................................................................... 130,000
Investment in Merkt Stock...................................................................... 54,000
Investment in GTE Stock ....................................................................... 13,000
Dividends ReceivableGTE Stock ....................................................... 1,000
Investment in Trident Bond Fund ........................................................... 40,000
Interest ReceivableTrident Bond Fund ............................................... 2,000
Royalties Receivable ............................................................................. 17,000
Estate Principal ................................................................................ 272,000
To record estate inventory.

(1) Funeral and Administrative Expenses ............................................ 22,000

Principal Cash .......................................................................... 22,000
To record payments.

(2) Investment in IRA Account ............................................................. 37,000

Assets Subsequently Discovered ............................................. 37,000
To record IRA account discovered.

(3) Principal Cash ................................................................................ 1,000

Income Cash .................................................................................. 2,700
Dividends ReceivableGTE Stock .......................................... 1,000
Estate Income ........................................................................... 2,700
To record receipt of dividends.

(4) Principal Cash ................................................................................ 140,000

Land .......................................................................................... 130,000
Gain on Sale of Principal Assets .............................................. 10,000
To record sale of land.

(5) Income Cash .................................................................................. 400

Principal Cash ................................................................................ 19,000
Estate Income ........................................................................... 400
Royalties Receivable ................................................................ 17,000
Interest ReceivableTrident Bond Fund ................................. 2,000
To record payment received for royalties and interest.

(6) Debts of Decedents Paid ................................................................ 28,000

Principal Cash .......................................................................... 28,000
To record payment of tax and various other claims.

(7) Legacies Distributed ....................................................................... 15,000

Principal Cash .......................................................................... 15,000
To record legacy paid to High Adventure Climbing School.

(8) Funeral and Administrative Expenses ............................................ 3,100

Expenses Chargeable against Income ........................................... 100
Principal Cash .......................................................................... 3,100
Income Cash ............................................................................ 100
To record payment of administrative expenses.

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Ch. 20Exercises

EXERCISE 20-9

(1) Estate of Jason Jackson

________________ , Executor
Charge and Discharge Statement
For Period _________ to _________

As to Principal
I charge myself with:
Assets per original inventory ...................................................... $272,000
Assets subsequently discovered ................................................ 37,000
Gain on sale of principal assets ................................................. 10,000
Total charges ....................................................................... $319,000
I credit myself with:
Funeral and administrative expenses ........................................ $ 25,100
Debts of decedent paid .............................................................. 28,000
Legacies distributed ................................................................... 15,000
Total credits .......................................................................... 68,100
Balances as to estate principal, consisting of:
Cashprincipal .......................................................................... $106,900
Investment in Merkt stock .......................................................... 54,000
Investment in GTE stock ............................................................ 13,000
Investment in Trident bond fund................................................. 40,000
Investment in IRA account ......................................................... 37,000 $250,900

As to Income
I charge myself with:
Estate income ............................................................................ $3,100
I credit myself with:
Expenses chargeable against income ....................................... 100
Balance as to estate income, consisting of:
Cashincome............................................................................ $3,000

(2) Entries to transfer assets to trust:

Principal Assets Transferred to Trust ............................................... 250,900

CashPrincipal ........................................................................ 106,900
Investment in Merkt Stock ........................................................ 54,000
Investment in GTE Stock .......................................................... 13,000
Investment in Trident Bond Fund ............................................. 40,000
Investment in IRA Account ....................................................... 37,000

Income Assets Transferred to Trust ................................................. 3,000

CashIncome .......................................................................... 3,000

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Ch. 20Problems

PROBLEMS

PROBLEM 20-1

Strategies to minimize estate tax should include:

1. Maximizing the use of the annual gift tax exclusion amount of $12,000 per donor per donee.
Both James and Susan could gift to their children and grandchildren.

2. James should implement a credit shelter trust in order to take advantage of the unified credit that is
available to him.

3. Recognizing that tuition payments to an educational organization made on anothers behalf are not
considered taxable gifts if paid directly to the organization.

4. Recognizing that charitable contributions reduce the amount of a taxable estate.

Consideration of the above strategies and factors set forth in the problem could result in a significant
reduction in estate taxes determined as follows:

James Wagner Susan Wagner

Initial gross estate ......................................... $5,700,000 $1,800,000
Add:
Spouses remaining estate (see Note A) $ 0 $1,690,000
Subsequent appreciation (see Note B) ... 0 450,000 2,140,000
Subsequent gross estate .............................. $5,700,000 $3,940,000
Less:
Debts....................................................... $ 215,000 $ 0
Administrative and funeral expenses ...... 25,000 25,000
Gifts exempt from tax (see Note C) ........ 60,000 240,000
Tuition payments for grandchild .............. 10,000 20,000
Charitable contributions (see Note E) ..... 200,000 490,000
Marital deduction (see Note D) ............... 1,690,000 2,200,000 0 775,000
Taxable estate .............................................. $3,500,000 $3,165,000
Estate tax before credits ............................... $ 1,455,800 $1,305,050
Less unified credit ......................................... 1,455,800 1,305,050
Estimated estate tax due .............................. $ 0 $ 0

Note A: This is the amount of the marital deduction.

Note B: Appreciation of $150,000 per year times three years.

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Ch. 20Problems

Problem 20-1, Concluded

Note C: Gifts to each of the two children and the three grandchildren could be made by both spous-
es as follows:
By James By Susan
Gifts during 20X5 ............................................... $60,000 $ 60,000
Gifts during 20X6 ............................................... 0 60,000
Gifts during 20X7 ............................................... 0 60,000
Gifts during 20X8 ............................................... 0 60,000
Total ................................................................... $60,000 $240,000

Note D: The marital deduction amount reflects the creation of a credit shelter trust in the amount of
$3,500,000. The tax on this amount will be offset by the unified credit.

Note E: At the time of Jamess death, Susan desired a survivors estate of $3,000,000. Her estate
alone was valued at $1,800,000. Therefore, all but $1,200,000 of the amount received from
her husbands estate could be contributed to a charitable organization.

PROBLEM 20-2

Entries to record activities of estate:

Principal Cash ................................................................................ 50,000
Personal Residence ....................................................................... 450,000
Automobile and Sailboat................................................................. 65,000
Investment in Mutual Funds ........................................................... 3,280,000
Collection of Antique Duck Decoys ................................................ 85,000
Death Benefit of Life Insurance ...................................................... 500,000
Farmland in Ozaukee County ......................................................... 800,000
Mortgage on Personal Residence ............................................ 150,000
Life Insurance Policy Loan ....................................................... 50,000
Credit Cards Payable ............................................................... 5,000
Estate Principal ......................................................................... 5,025,000
To record initial estate inventory.

Devises Distributed......................................................................... 300,000

Mortgage on Personal Residence .................................................. 150,000
Personal Residence ................................................................. 450,000
To record transfer of personal residence to sister.

Legacies Distributed ....................................................................... 85,000

Collection of Antique Duck Decoys .......................................... 85,000

Legacies Distributed ....................................................................... 65,000

Automobile and Sailboat ........................................................... 65,000
To record contribution of sailboat and gift of automobile.

Funeral and Administrative Expenses ............................................ 25,000

Principal Cash .......................................................................... 25,000

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Ch. 20Problems

Problem 20-2, Continued

Principal Cash ................................................................................ 450,000

Life Insurance Policy Loan ............................................................. 50,000
Death Benefit of Life Insurance ................................................ 500,000
To record collection of death benefit and payment of
policy loan.

Credit Cards Payable ..................................................................... 5,000

Principal Cash .......................................................................... 5,000
To record payment of credit card balances.

Principal Cash ................................................................................ 170,000

Income Cash .................................................................................. 10,000
Investment in Mutual Funds ..................................................... 170,000
Estate Income ........................................................................... 10,000
To record sale of mutual funds.

Estate Tax Expense ....................................................................... 621,000

Principal Cash .......................................................................... 621,000
To record payment of estate taxes determined as follows:
Gross estate ............................................................. $5,025,000
Less: Funeral and administrative expenses ............ (25,000)
Charitable contributionsduck decoys .......... (85,000)
Charitable contributionssailboat ................. (35,000)
Taxable estate .......................................................... $4,880,000
Estate tax before unified credit ................................. $2,076,800
Unified credit ............................................................ 1,455,800
Estate tax due .......................................................... $ 621,000

Principal Assets Transferred to Trust ............................................. 3,929,000

Income Assets Transferred to Trust ............................................... 10,000
Investment in Mutual Funds ..................................................... 3,110,000
Farmland in Ozaukee County ................................................... 800,000
Principal Cash .......................................................................... 19,000
Income Cash ............................................................................ 10,000
To transfer estate assets to childrens trust.

Estate Principal............................................................................... 5,025,000

Estate Income................................................................................. 10,000
Devises Distributed ................................................................... 300,000
Legacies Distributed ................................................................. 150,000
Funeral and Administrative Expenses ...................................... 25,000
Estate Tax Expense ................................................................. 621,000
Principal Assets Transferred to Trust ....................................... 3,929,000
Income Assets Transferred to Trust ......................................... 10,000
To close out balances.

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Ch. 20Problems

Problem 20-2, Concluded

Entries to record activities of trust:

Principal Cash ................................................................................ 19,000

Income Cash .................................................................................. 10,000
Investment in Mutual Funds ........................................................... 3,110,000
Farmland in Ozaukee County ......................................................... 800,000
Trust Principal ........................................................................... 3,929,000
Trust Income ............................................................................. 10,000
To record distribution from estate.

Income Cash .................................................................................. 25,000

Trust Income ............................................................................. 25,000
To record rental income.

Expenses Chargeable against Income ........................................... 8,000

Income Cash ............................................................................ 8,000
To record property taxes and operating expenses.

Principal Cash ................................................................................ 170,000

Income Cash .................................................................................. 7,000
Investment in Mutual Funds ..................................................... 170,000
Trust Income ............................................................................. 7,000
To record sale of mutual funds.

Income Cash .................................................................................. 22,000

Trust Income ............................................................................. 22,000
To record income on mutual funds.

Distribution of Corpus ..................................................................... 25,000

Principal Cash .......................................................................... 25,000
To record distribution of corpus to daughter.

Distribution to Income Beneficiary .................................................. 15,000

Income Cash ............................................................................ 15,000
To record distribution of income.

Investment in Mutual Funds ........................................................... 200,000

Principal Cash .......................................................................... 164,000
Income Cash ............................................................................ 36,000
To record investment of all cash except $5,000 in
mutual funds.

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Ch. 20Problems

PROBLEM 20-3

(1) Assuming no credit shelter trust is employed:

Decedent Decedent
Spencer Cook Sara Cook
Gross estate ................................................. $4,600,000 $ 7,300,000
Less allowable deductions:
Funeral, administrative, etc., expenses .. $ 180,000 $420,000
Other debts ............................................. 210,000
Charitable contributions .......................... 500,000 500,000
Marital exclusion ..................................... 3,710,000 4,600,000 920,000
Taxable estate .............................................. $ $ 6,380,000

Estate tax before credits (see Note A) .......... $ $ 2,751,800

Less unified credit ......................................... (1,455,800)
Net estate tax due ......................................... $ $ 1,296,000

Note A: The estate tax before credits is $780,800 plus 45% on the balance of the taxable estate over
$2,000,000. Therefore, the tax is $2,751,800 [$780,800 + (45% $4,380,000)].

(2) Assuming a credit shelter trust is employed:

Decedent Decedent
Spencer Cook Sara Cook
Gross estate ................................................. $ 4,600,000 $ 5,400,000
Less allowable deductions:
Funeral, administrative, etc., expenses .. $ 180,000 $420,000
Other debts ............................................. 210,000
Charitable contributions .......................... 500,000 500,000
Marital exclusion ..................................... 210,000 1,100,000 920,000
Taxable estate .............................................. $ 3,500,000 $ 4,480,000

Estate tax before credits (see Note B) .......... $ 1,455,800 $ 1,896,800

Less unified credit ......................................... (1,455,800) (1,455,800)
Net estate tax due ......................................... $ $ 441,000

Note B: The estate tax before credits is $780,800 plus 45% on the balance of the taxable estate over
$2,000,000. Therefore, the tax is $1,896,800 [$780,800 + (45% $2,480,000)].

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Ch. 20Problems

PROBLEM 20-4

Calculation of estate tax:

Gross estate:
Rug and pottery collection...................................................................... $ 120,000
Personal residence ................................................................................ 550,000
Brokerage account at Wachovia Securities ........................................... 2,200,000
Brokerage account at Schmidt Investment Services.............................. 900,000
Antique pistol collection.......................................................................... 85,000
Buffalo County hunting land ................................................................... 750,000
Life insurance proceeds ......................................................................... 250,000
All other assets....................................................................................... 1,500,000
Total ................................................................................................. $ 6,355,000
Less allowable deductions:
Deductions excluding charitable donations ............................................ $ 235,000
Donation to Museum of Northern New Mexico ...................................... 120,000
Donation to First Church of Brookfield ................................................... 200,000
Total ................................................................................................. $ 555,000
Taxable estate ................................................................................................... $ 5,800,000
Estate tax [$780,800 + (45% $3,800,000)] ...................................................... $ 2,490,800
Less unified credit .............................................................................................. (1,455,800)
Net estate tax ..................................................................................................... $ 1,035,000
Available cash to satisfy general legacies:
Excess amount realized on Buffalo County hunting land ....................... $ 50,000
Excess insurance policy proceeds ......................................................... 50,000
Liquidated value of other assets ............................................................ 1,500,000
Subtotal ............................................................................................ $ 1,600,000
Less: Allowable deductions excluding charitable contributions.............. (235,000)
Net estate tax ................................................................................... (1,035,000)
Total cash available to satisfy general legacies ..................................... $ 330,000
General legacies as set forth in will:
Amount due eight grandchildren ............................................................ $ 400,000
Amount due three children ..................................................................... 1,200,000
Unsatisfied demonstrative legacies that constitute a general legacy:
Not satisfied by Wachovia Securities account for brother Thomas ........ 300,000
Not satisfied by Schmidt Investment Services account for two sisters .. 100,000
Total needed to satisfy general legacies............................................................ $ 2,000,000
General legacies can be satisfied at the rate of 16.5% ($330,000/$2,000,000)
and are satisfied as follows:
Amount due eight grandchildren (allocated equally) .............................. $ 66,000
Amount due three children (allocated equally) ....................................... 198,000
Amount due brother Thomas ................................................................. 49,500
Amount due two sisters (allocated equally)............................................ 16,500
Total ................................................................................................. $ 330,000

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Ch. 20Problems

PROBLEM 20-5

Estate of Alex Dunn, Jr.

________________ , Executor
Charge and Discharge Statement
For Period January 15, 20X7, to January 31, 20X7

As to Principal
I charge myself with:
Assets per original inventory ............................................................ $122,750
Assets subsequently discovered (see Note A) ................................ 2,500
Total charges ............................................................................. $125,250
I credit myself with:
Funeral and administrative expenses .............................................. $ 750
Decedents debts ($8,000 + $1,000) ................................................ 9,000
Legacies distributed ......................................................................... 10,000
Losses on realization of principal assets (see Schedule A) ............. 6,250
Total credits................................................................................ 26,000
Balances as to estate principal, consisting of:
Cashprincipal................................................................................ $ 61,000
Stocks (see Note B) ......................................................................... 27,500
Household effects ............................................................................ 8,250
Dividends declared on Dunn, Inc., stock .......................................... 2,500
$ 99,250

As to Income
I charge myself with:
Estate income (see Note C) ............................................................. $940
I credit myself with:
Distribution to income beneficiaries ................................................. 500
Balance as to estate income, consisting of:
Cashincome ................................................................................. $440

Note A: Although the stocks subsequently discovered would not be part of the estate, the dividends
declared on the stocks would be:
$1.25/share 2,000 shares = $2,500
Note B: The stocks remaining would be the original stocks inventoried at $50,000 less the stocks
sold, inventoried at $22,500.
Note C: Estate income = $8 additional interest on the note + $32 additional interest accrued on the
mortgage + $900 dividends not previously declared = $940.

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Ch. 20Problems

Problem 20-5, Concluded

Schedule A
Gain and Losses on Realization of Principal Assets
Inventory Proceeds on
Asset Value Realization Loss Gain
Stocks ............................................... $22,500 $20,900 $(1,600)
Mortgage receivable ......................... 20,000 20,100 $100
Real estate ........................................ 35,000 30,250 (4,750)
Total .................................................. $77,500 $71,250 $(6,350) $100

PROBLEM 20-6

(1) The estate was not subject to estate tax because the value of the gross estate less the allowable
deductions, including the transfer to a charitable organization (Ducks Unlimited), was less than the
exclusion amount associated with the unified credit.

(2) Estate of Maxwell Stevens

Janice Edquist, Executrix
Charge and Discharge Statement
For Period August 12, 20X8, to _________

As to Principal
I charge myself with:
Assets per original inventory (see Note A) ............................... $836,250
Assets subsequently discovered .............................................. 300,000
Total charges ...................................................................... $ 1,136,250
I credit myself with:
Net loss on realization of principal assets (see Note B) ........... $ 27,600
Debts of decedent paid (see Note C) ....................................... 101,830
Funeral and administrative expenses ....................................... 11,200
Income tax expense ................................................................. 3,200
Miscellaneous expenses .......................................................... 1,300
Legacies distributed .................................................................. 991,120
Total credits ........................................................................ (1,136,250)
Balance as to estate principal......................................................... $ 0

As to Income
I charge myself with:
Estate income (see Note D) ..................................................... $ 11,300
I credit myself with:
Expenses chargeable against income (see Note E) ................. $4,270
Distribution to income beneficiary ............................................. 7,030
Total credits .............................................................................. (11,300)
Balance as to estate income .......................................................... $ 0

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Ch. 20Problems

Problem 20-6, Concluded

Note A: Original inventory consists of the following:

Cash .............................................................................................. $ 34,000
Stocks ........................................................................................... 278,000
Bonds ............................................................................................ 138,000
Real estate .................................................................................... 380,000
Accrued rents ................................................................................ 6,250
Total .............................................................................................. $836,250

Note B: Net loss on realization of principal assets:

Loss on sale of securities ($267,000 $278,000)......................... $ (11,000)
Dividend income ............................................................................ 1,200
Gain on sale of bonds ($143,000 $850 $138,000) .................. 4,150
Sale of real estate ($390,000 $380,000 $31,200 $750) ....... (21,950)
Net loss ......................................................................................... $ (27,600)

Note C: Debts of decedent paid:

Expenses on rental property ......................................................... $ 3,600
Principal amount of land contract .................................................. 97,000
Accrued interest on land contract .................................................. 1,230
Total debts paid ............................................................................. $101,830

Note D: Estate income consists of the following:

Dividend income ............................................................................ $ 2,200
Interest income .............................................................................. 850
Rental income ($14,500 $6,250) ................................................ 8,250
Total income .................................................................................. $ 11,300

Note E: Expenses chargeable against income:

Rental expenses ($6,550 $3,600) .............................................. $ 2,950
Interest on land contract ($2,550 $1,230) .................................. 1,320
Total expenses .............................................................................. $ 4,270

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Ch. 20Problems

PROBLEM 20-7

(1) CashPrincipal [($40,000 1.03) + accrued interest]................... 41,467

CashIncome ($40,000 0.08 1/12) ......................................... 267
Pittsburgh 8% Bonds (fair value, February 1, 20X6) ................ 40,400
Accrued Interest on Pittsburgh Bonds ($40,000 0.08 1/12) 267
Estate Income ($40,000 0.08 1/12) .................................... 267
Gain on Realization of Principal Assets
[$40,000 (1.03 1.01)] .................................................... 800
To record sale of bonds that were included in
estate principal.

(2) Investment in 5% Detroit Bonds ..................................................... 50,000

Accrued Interest on Detroit Bonds ($50,000 0.05 5/12) ........... 1,042
Discount on Detroit Bonds Purchased ...................................... 1,000
CashPrincipal [($50,000 0.98) + $1,042] ........................... 50,042
To record purchase of Detroit bonds.

(3) Investment in 7% Newark Bonds.................................................... 10,000

Accrued Interest on Newark Bonds ($10,000 0.07 3/12) ......... 175
Premium on Newark Bonds ($10,000 0.02) ................................ 200
CashPrincipal ........................................................................ 10,375
To record purchase of Newark bonds.

(4) CashPrincipal .............................................................................. 1,042

CashIncome ($50,000 0.05 1/12) ......................................... 208
Accrued Interest on Detroit Bonds ............................................ 1,042
Estate Income ........................................................................... 208
To record interest received on Detroit bonds. Discount on
purchased bonds is not amortized to prevent excess
distribution of income.

(5) CashPrincipal (amortization + accrued interest) ......................... 202

CashIncome ................................................................................ 148
Premium on Newark Bonds [($200 21 months) 3 months] . 29
Accrued Interest on Newark Bonds .......................................... 175
Estate Income ($175 $29) ..................................................... 146
To record interest received on Newark bonds.
CashPrincipal is increased by the amount of the
accrued interest plus the amortization of premium.

(6) CashIncome ($50,000 0.05 5/12) ......................................... 1,042

CashPrincipal ($50,000 1.01) .................................................. 50,500
Discount on Detroit Bonds Purchased............................................ 1,000
Investment in 5% Detroit Bonds ............................................... 50,000
Estate Income ........................................................................... 1,042
Gain on Realization of Principal Assets ($50,500 $49,000) .. 1,500
To record sale of Detroit bonds. Gain is the difference
between the bond sale price and purchase price.

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