chapter BENNY AND MARTHA FRANKLIN CASE Benny and Martha Franklin have come to you for help with their estate plan. PERSONAL BACKGROUND AND INFORMATION Benny and Martha Franklin are 55 -years-old and have been happily married for 35 years. They are both in excellent health and expect they will live well into their 90s. They live in Virginia and have three children and six grandchildren. The Franklins plan to retire at age 65. The chart below! depicts their family as of today. Benny & Martha Franklin Joe (age 34) Children Jeff (age 29) 1 Child James (age 32) 2 Children Sydney Cage 10) Flisabeth (age 2) Jordan (age 7) Willages Colin (age 5) Ivan (age 7) Joe and James are both married and work in the family businesses. Jeff is a lawyer and is recently divorced with custody over his daughter, Elizabeth. Joe's youngest child. Ivan, was born as a special needs child who needs full time care. Benny and Martha have a great relationship with their daughter-in-laws and consider them part of the family. Benny graduated from MIT and is an aerospace engineer. He started and owns three companies that produce components for various weapons systems for the United States Department of Defense, Joe and James both graduated from West Point Academy and spent several years in the military. They have been working for Benny in various roles for the last couple years. The three businesses are structured as C corporations and are owned entirely by Benny and Martha. The three businesses have appreciated over the last five years at an annual compound rate of growth of 10 percent. Benny expects this rate of growth to continue indefinitely majored in communications at Boston College and has been a stay at home mosha now helps with the grandchildren regularly and volunteers with the Wounded Warrior Project Education Information Benny and Martha believe strongly in education and would like their five grandchildren to all attend MIT. Ivan is not expected to attend college. The current cost of undergraduate studies at MIT is $63,000 per year. Tuition has been increasing at an average rate of seven percent and is expected to continue at that rate. BENNY AND MARTHA FRANCASE 553 Vacation Home Benny and Martha used to spend summers with friends at a home on Martha's Vineyard. They had such fond memories that once they became successful, they decided to purchase a home on Martha's Vineyard. They spend a substantial amount of time with their children and grandchildren at the vacation home every summer. Life Insurance The life insurance policy is a second-to-die policy on the lives of Benny and Martha. The policy has a death benefit of $2 million. Assume the replacement value of the policy is $200,000. The policy is currently owned by Benny and the three boys are the beneficiaries. Investment Real Estate The investment real estate includes several pieces of commercial real estate held in separate entities, The value is expected to increase at an average rate of 10 percent per year. Estate Planning Documents Benny and Martha have basic wills that make optimal use of testamentary bypass trusts and the marital deduction. The wills were designed to avoid all estate tax at the death of the first spouse and to make use of their lifetime exemptions. They also have durable powers of attorney for health care, advanced medical directives and financial powers of attorney. Prior Gifts In 2000, Benny established a Charitable Remainder Annuity Trust and funded it with highly appreciated publicly-traded stock worth $1,000,000. Benny and Martha were the income beneficiaries and the Wounded Warrior Project was the remainder beneficiary. The trust was set up with a ten-year term. In 2009, Benny established an irrevocable trust for each of the three boys and funded each trust with $1 million. The trusts were set up in such a way as to allow the trustee of each trust to provide for the health, education, maintenance and support of the beneficiary. The trusts were established as simple trusts. The trustee is directed to not terminate the trust until the beneficiary turns age 45 The trusts were not set up as crummy trusts. The trust name the children (born and unborn) of each of the boys as the contingent beneficiaries for each trust. 2012. Benny gave Uncle George a gift of $1.013,000 in cash. His uncle had been inspiration when Benny was a kid and has fallen on hard times. Martha has not made any taxable gifts in her past. GOALS: PREPARE A PROPER ESTATE PLAN 1. Minimize estate taxes. 2. Fund college education for the five grandchildren. 3. Set up a special needs trust for Ivan's future needs. 4. Ensure that the vacation home is a permanent family home for children and grandchil- dren. 5. Keep 100 percent of business interests in the family. 6. Maintain control of the business until retirement at which time James and Joe will take over. 7. Transfer an additional $2 million to the Wounded Warrior Project some time in the future. FINANCIAL STATEMENTS Balance Sheet ASSETS Cash/Cash Equivalents JT Checking and Savings Total Cash/Cash Equiv. $1,000,000 $1,000,000 LIABILITIES AND NET WORTH Liabilities Current liabilities JT Credit Card Total Current Liabilities $100.000 $100,000 Invested Assets JT Marketable Securities JT Business Interests H 401(k) Plan JT Investment Real Estate Total Investments $6,000,000 6,000,000 1.250,000 Long-Term Liabilities JT Mortgage - Primary Total Long-Term Liabilities $1.000.000 $1,000,000 $16,250,000 Total Liabilities $1,100,000 Personal Use Assets JT Primary Residence JT Vacation Home JT Autos JT Household Furnishings H Life Insurance Total Personal Use $2,000,000 1.500,000 100,000 500,000 200,000 $4,300,000 Net Worth $20.450.000 Total Assets $21,550,000 Total Liabilities and Net Worth $21,550,000 Statement of Income and Expenses Statement ce p enses Mr. and Mrs. Franklin Statement of Income and Expenses for Past Year CAST INFLORES Salaries [Income $900.000 Investment Income 500.000 Total Cash Inflows CASH OUTYLOWS Lifestyle Needs includes debt repayment) Income Taxes $100.000 Property Taxes $100.000 Homeowners Insurance $25.000 Health Insurance $25.000 Long-term Care Insurance $25.000 Disability Insurance $25.000 Life Insurance $100,000 Total Fixed Outflows $1,200,000 Exces Cash How $100,000 CASE ASSUMPTIONS 1. They want to make maximum use of their annual exclusions. 2. They want to maintain total control over their business interests until retirement 3. They are willing to fully utilize their gift and estate applicable credits any time to accom- plish the best plan. 4. The long-term AFR is 3%. 5. Any minority transfer of business interests will receive a 25% discount, 6. Their life expectancies for GRAT or QPRT purposes are as follows: Him Her 95% 5 years 5 years 759 20 years 25 years 50% 30 years 35 years 2596 35 years 40 years 7. Their principal residence and the vacation home are appreciating at 10% per year and are expected to continue to grow at that rate. DIRECTIONS FOR THE CASE 1. What are the steps Benny and Marcha should take immediately and over the long-term to reduce their gross estate and achieve their goals. Be specific and quantify the impact of THU 10. 2. Prepare the gift tax returns for 2009 and 2012, as well as for the current year, based on rec- ommendations. The applicable credit amount for gift tax purposes was $345.800 in 2009, $1.772.800 in 2012, and $4.417.800 in 2018. The annual exclusion was $13,000 in 2009 and 2012, and is $15.000 in 2018 3. Prepare an estate tax return for Benny as of the end of the current year after any recom- mended transfers. Assume he dies on December 31 of the current year. Assume the com- bined last medical and funeral costs are $100,000 and the estate administration cost is $150,000 GUPTER 14: BASIC ESTATE PLAN chapter 14 EXHIBIT CASE APPENDIX TAX RATE SCHEDULE FOR TAXABLE GIFTS AND ESTATES (2009) Over So but noe over $10,000 18% of such a n Over $10,000 but not over $20,000 $1,800 plus 20% of the excess of such amount over $10,000 Over $20,000 but not over $40,000 53.800 plus 22% of the excess of such amount over $20,000 Over $40,000 but not over $60,000 $8.200 plus 24% of the excess of such amount over $40.000 Over $60,000 but not over $80,000 $13,000 plus 26% of the excess of such amount over $60,000 Over $80,000 but not over $100,000 $18.200 plus 28% of the excess of such amount over $80,000 Over $100.000 but not over $150,000 $23.800 plus 30% of the excess of such amount over $100,000 Over $150.000 but not over $250,000 $38,800 plus 32% of the excess of such amount over $150,000 Over $250,000 but not over $500,000 $70,800 plus 34% of the excess of such amount over $250,000 Over $500,000 but not over $750,000 $155.800 plus 37% of the esce of such amount over $500,000 Over $750,000 but not over $1,000,000 $248,300 plus 39% of the excess of such amount over $750,000 Over $1,000,000 but not over $1,250.000 $345.800 plus 4196 of the excess of such amount over $1,000,000 Over $1,250,000 but not over $1,500,000 $448.300 plus 43% of the excess of such amount over $1.250,000 Over $1,500,000 but not over $2.000.000 $555,800 plus 45% of the excess of such amount over $1,500,000 Over $2,000,000 $780,800 plus 45% of the exces of such amount over $2,000,000 EXHIBIT TAX RATE SCHEDULE FOR TAXABLE GIFTS AND ESTATES (2012) Over So but not over $10.000 18% of such amount. Over $10,000 but not over $20,000 $1,800 plus 20% of the excess of such amount over $10.000 Over $20,000 but not over $40,000 $3,800 plus 22% of the exces of such amount over $20,000 Over $40,000 but not over 560,000 $8,200 plus 249 of the excess of such amount over $40,000 Over $60,000 but not over $80,000 $13.000 plus 26% of the excess of such amount over $60,000 Over $80,000 but not over $100,000 $18,200 plus 28% of the excess of such amount over $80.000 Over $100,000 but not over $150,000 $23.800 plus 30% of the excess of such amount over $100,000 Over $150,000 but not over $250,000 $38.800 plus 32% of the excess of such amount over $150,000 Over $250,000 but not over $500,000 $70,800 plus 34% of the excess of such amount over $250.000 Over $500.000 $155,800 plus 35% of the excess of such amount over $500,000 EXHIBIT TAX RATE SCHEDULE FOR TAXABLE GIFTS AND ESTATES (2018) Over $0 but not over $10,000 18% of such amount Over $10,000 but not over $20.000 $1,800 plus 20% of the excess of such amount over $10.000 Over $20,000 but not over $40.000 $3,800 plus 22% of the excess of such amodet over $20.000 Over $10,000 but not over $60,000 $8,200 plus 24% of the excess of such amount over $10,000 Over $60.000 but not over $80,000 $13,000 plus 26% of the excess of such amount over $60,000 Over $80,000 but not over $100.000 $18.200 plus 28% of the access of such amount wer $80.000 Over $100,000 but not over $150.000 $23.800 plus 30 of the access of such amount over $100,000 Over $150,000 but not over $250.000 $38.800 plus 32 of the c o uch amount over $150.000 Over $250.000 but not over $500.000 $70,00 plus of the scene of such amount over $250.000 Over $500,000 but not over $750,000 $155.800 plus 37% of the excess of such amount over $500.000 Over $750,000 but not over $1.000.000 $248.300 plus 39% of the access of each amount 5750.000 Or 1.000.000 5345.500 plus 10% of the c o uch amount over $1.000.000 BENNY AND MARTHA FRANKLIN CASE 557 chapter BENNY AND MARTHA FRANKLIN CASE Benny and Martha Franklin have come to you for help with their estate plan. PERSONAL BACKGROUND AND INFORMATION Benny and Martha Franklin are 55 -years-old and have been happily married for 35 years. They are both in excellent health and expect they will live well into their 90s. They live in Virginia and have three children and six grandchildren. The Franklins plan to retire at age 65. The chart below! depicts their family as of today. Benny & Martha Franklin Joe (age 34) Children Jeff (age 29) 1 Child James (age 32) 2 Children Sydney Cage 10) Flisabeth (age 2) Jordan (age 7) Willages Colin (age 5) Ivan (age 7) Joe and James are both married and work in the family businesses. Jeff is a lawyer and is recently divorced with custody over his daughter, Elizabeth. Joe's youngest child. Ivan, was born as a special needs child who needs full time care. Benny and Martha have a great relationship with their daughter-in-laws and consider them part of the family. Benny graduated from MIT and is an aerospace engineer. He started and owns three companies that produce components for various weapons systems for the United States Department of Defense, Joe and James both graduated from West Point Academy and spent several years in the military. They have been working for Benny in various roles for the last couple years. The three businesses are structured as C corporations and are owned entirely by Benny and Martha. The three businesses have appreciated over the last five years at an annual compound rate of growth of 10 percent. Benny expects this rate of growth to continue indefinitely majored in communications at Boston College and has been a stay at home mosha now helps with the grandchildren regularly and volunteers with the Wounded Warrior Project Education Information Benny and Martha believe strongly in education and would like their five grandchildren to all attend MIT. Ivan is not expected to attend college. The current cost of undergraduate studies at MIT is $63,000 per year. Tuition has been increasing at an average rate of seven percent and is expected to continue at that rate. BENNY AND MARTHA FRANCASE 553 Vacation Home Benny and Martha used to spend summers with friends at a home on Martha's Vineyard. They had such fond memories that once they became successful, they decided to purchase a home on Martha's Vineyard. They spend a substantial amount of time with their children and grandchildren at the vacation home every summer. Life Insurance The life insurance policy is a second-to-die policy on the lives of Benny and Martha. The policy has a death benefit of $2 million. Assume the replacement value of the policy is $200,000. The policy is currently owned by Benny and the three boys are the beneficiaries. Investment Real Estate The investment real estate includes several pieces of commercial real estate held in separate entities, The value is expected to increase at an average rate of 10 percent per year. Estate Planning Documents Benny and Martha have basic wills that make optimal use of testamentary bypass trusts and the marital deduction. The wills were designed to avoid all estate tax at the death of the first spouse and to make use of their lifetime exemptions. They also have durable powers of attorney for health care, advanced medical directives and financial powers of attorney. Prior Gifts In 2000, Benny established a Charitable Remainder Annuity Trust and funded it with highly appreciated publicly-traded stock worth $1,000,000. Benny and Martha were the income beneficiaries and the Wounded Warrior Project was the remainder beneficiary. The trust was set up with a ten-year term. In 2009, Benny established an irrevocable trust for each of the three boys and funded each trust with $1 million. The trusts were set up in such a way as to allow the trustee of each trust to provide for the health, education, maintenance and support of the beneficiary. The trusts were established as simple trusts. The trustee is directed to not terminate the trust until the beneficiary turns age 45 The trusts were not set up as crummy trusts. The trust name the children (born and unborn) of each of the boys as the contingent beneficiaries for each trust. 2012. Benny gave Uncle George a gift of $1.013,000 in cash. His uncle had been inspiration when Benny was a kid and has fallen on hard times. Martha has not made any taxable gifts in her past. GOALS: PREPARE A PROPER ESTATE PLAN 1. Minimize estate taxes. 2. Fund college education for the five grandchildren. 3. Set up a special needs trust for Ivan's future needs. 4. Ensure that the vacation home is a permanent family home for children and grandchil- dren. 5. Keep 100 percent of business interests in the family. 6. Maintain control of the business until retirement at which time James and Joe will take over. 7. Transfer an additional $2 million to the Wounded Warrior Project some time in the future. FINANCIAL STATEMENTS Balance Sheet ASSETS Cash/Cash Equivalents JT Checking and Savings Total Cash/Cash Equiv. $1,000,000 $1,000,000 LIABILITIES AND NET WORTH Liabilities Current liabilities JT Credit Card Total Current Liabilities $100.000 $100,000 Invested Assets JT Marketable Securities JT Business Interests H 401(k) Plan JT Investment Real Estate Total Investments $6,000,000 6,000,000 1.250,000 Long-Term Liabilities JT Mortgage - Primary Total Long-Term Liabilities $1.000.000 $1,000,000 $16,250,000 Total Liabilities $1,100,000 Personal Use Assets JT Primary Residence JT Vacation Home JT Autos JT Household Furnishings H Life Insurance Total Personal Use $2,000,000 1.500,000 100,000 500,000 200,000 $4,300,000 Net Worth $20.450.000 Total Assets $21,550,000 Total Liabilities and Net Worth $21,550,000 Statement of Income and Expenses Statement ce p enses Mr. and Mrs. Franklin Statement of Income and Expenses for Past Year CAST INFLORES Salaries [Income $900.000 Investment Income 500.000 Total Cash Inflows CASH OUTYLOWS Lifestyle Needs includes debt repayment) Income Taxes $100.000 Property Taxes $100.000 Homeowners Insurance $25.000 Health Insurance $25.000 Long-term Care Insurance $25.000 Disability Insurance $25.000 Life Insurance $100,000 Total Fixed Outflows $1,200,000 Exces Cash How $100,000 CASE ASSUMPTIONS 1. They want to make maximum use of their annual exclusions. 2. They want to maintain total control over their business interests until retirement 3. They are willing to fully utilize their gift and estate applicable credits any time to accom- plish the best plan. 4. The long-term AFR is 3%. 5. Any minority transfer of business interests will receive a 25% discount, 6. Their life expectancies for GRAT or QPRT purposes are as follows: Him Her 95% 5 years 5 years 759 20 years 25 years 50% 30 years 35 years 2596 35 years 40 years 7. Their principal residence and the vacation home are appreciating at 10% per year and are expected to continue to grow at that rate. DIRECTIONS FOR THE CASE 1. What are the steps Benny and Marcha should take immediately and over the long-term to reduce their gross estate and achieve their goals. Be specific and quantify the impact of THU 10. 2. Prepare the gift tax returns for 2009 and 2012, as well as for the current year, based on rec- ommendations. The applicable credit amount for gift tax purposes was $345.800 in 2009, $1.772.800 in 2012, and $4.417.800 in 2018. The annual exclusion was $13,000 in 2009 and 2012, and is $15.000 in 2018 3. Prepare an estate tax return for Benny as of the end of the current year after any recom- mended transfers. Assume he dies on December 31 of the current year. Assume the com- bined last medical and funeral costs are $100,000 and the estate administration cost is $150,000 GUPTER 14: BASIC ESTATE PLAN chapter 14 EXHIBIT CASE APPENDIX TAX RATE SCHEDULE FOR TAXABLE GIFTS AND ESTATES (2009) Over So but noe over $10,000 18% of such a n Over $10,000 but not over $20,000 $1,800 plus 20% of the excess of such amount over $10,000 Over $20,000 but not over $40,000 53.800 plus 22% of the excess of such amount over $20,000 Over $40,000 but not over $60,000 $8.200 plus 24% of the excess of such amount over $40.000 Over $60,000 but not over $80,000 $13,000 plus 26% of the excess of such amount over $60,000 Over $80,000 but not over $100,000 $18.200 plus 28% of the excess of such amount over $80,000 Over $100.000 but not over $150,000 $23.800 plus 30% of the excess of such amount over $100,000 Over $150.000 but not over $250,000 $38,800 plus 32% of the excess of such amount over $150,000 Over $250,000 but not over $500,000 $70,800 plus 34% of the excess of such amount over $250,000 Over $500,000 but not over $750,000 $155.800 plus 37% of the esce of such amount over $500,000 Over $750,000 but not over $1,000,000 $248,300 plus 39% of the excess of such amount over $750,000 Over $1,000,000 but not over $1,250.000 $345.800 plus 4196 of the excess of such amount over $1,000,000 Over $1,250,000 but not over $1,500,000 $448.300 plus 43% of the excess of such amount over $1.250,000 Over $1,500,000 but not over $2.000.000 $555,800 plus 45% of the excess of such amount over $1,500,000 Over $2,000,000 $780,800 plus 45% of the exces of such amount over $2,000,000 EXHIBIT TAX RATE SCHEDULE FOR TAXABLE GIFTS AND ESTATES (2012) Over So but not over $10.000 18% of such amount. Over $10,000 but not over $20,000 $1,800 plus 20% of the excess of such amount over $10.000 Over $20,000 but not over $40,000 $3,800 plus 22% of the exces of such amount over $20,000 Over $40,000 but not over 560,000 $8,200 plus 249 of the excess of such amount over $40,000 Over $60,000 but not over $80,000 $13.000 plus 26% of the excess of such amount over $60,000 Over $80,000 but not over $100,000 $18,200 plus 28% of the excess of such amount over $80.000 Over $100,000 but not over $150,000 $23.800 plus 30% of the excess of such amount over $100,000 Over $150,000 but not over $250,000 $38.800 plus 32% of the excess of such amount over $150,000 Over $250,000 but not over $500,000 $70,800 plus 34% of the excess of such amount over $250.000 Over $500.000 $155,800 plus 35% of the excess of such amount over $500,000 EXHIBIT TAX RATE SCHEDULE FOR TAXABLE GIFTS AND ESTATES (2018) Over $0 but not over $10,000 18% of such amount Over $10,000 but not over $20.000 $1,800 plus 20% of the excess of such amount over $10.000 Over $20,000 but not over $40.000 $3,800 plus 22% of the excess of such amodet over $20.000 Over $10,000 but not over $60,000 $8,200 plus 24% of the excess of such amount over $10,000 Over $60.000 but not over $80,000 $13,000 plus 26% of the excess of such amount over $60,000 Over $80,000 but not over $100.000 $18.200 plus 28% of the access of such amount wer $80.000 Over $100,000 but not over $150.000 $23.800 plus 30 of the access of such amount over $100,000 Over $150,000 but not over $250.000 $38.800 plus 32 of the c o uch amount over $150.000 Over $250.000 but not over $500.000 $70,00 plus of the scene of such amount over $250.000 Over $500,000 but not over $750,000 $155.800 plus 37% of the excess of such amount over $500.000 Over $750,000 but not over $1.000.000 $248.300 plus 39% of the access of each amount 5750.000 Or 1.000.000 5345.500 plus 10% of the c o uch amount over $1.000.000 BENNY AND MARTHA FRANKLIN CASE 557