Memo: Estate Plan for Kathi and Darrin
Date: May 9, 2024
To: Professor Jantz
From: Leah Andersen
Subject: Estate Plan for Kathi and Darrin
Introduction
I would like to introduce my new clients, a married couple named Darrin and Kathi, whom have
been married for over 50 years. They have a bit of a complicated situation and I have taken the
liberty to work through an estate plan to help them sort out finances. This memo is in reply to my
assessment of Kathi and Darrin’s estate plan as coordinated through the estate plan scenario
exam questions.
Full Title
My current clients have a very complicated situation with their current family and assets, as well
as expenses. Darrin has been married to Kathi for over 50 years and have 3 children: Elizabeth
who is 45, James 35 and Lynn who is deceased. Both of his living children are very successful
career-wise.
Elizabeth is an attorney who is married to Scott. Elizabeth and Scott share 4 children. One of
their children is Andrew, who was born with a serious physical disability. To provide additional
support for Andrew, Darrin created an irrevocable trust with an $8,014,000 transfer of a different
property over 5 years ago. The trust meets the requirements of Section 2503(c). This plan
qualifies from gifted tax exclusion, which is also a stipulation of the plan. The only grandchild
with a “named” trust is Andrew.
James is a successful investment consultant who recently divorced his ex-wife, Catherine.
Darrin and Kathi have never particularly “liked” Catherine, but since the divorce, Kathi and
Catherine’s relationship is very unstable. It is for this reason why she is not listed in the will.
Darrin and Kathi are hesitant to give many gifts to James or his children, since he seems to be
reckless and may be going through a mid-life crisis.
1. Estate does not have sufficient cash:
Any losses on the sale of the assets are deductible as losses on the estate tax return. Usually,
if you hold the asset for more than one year before you dispose of it, your capital gain or loss is
long-term. Any short-term losses are deducted against short-term gains and vice versa via long-
term losses and long-term gains. If your capital losses exceed your capital gains, the amount of
the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married
filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040).
2. Vacation Home 2
If Elizabeth inherits Vacation Home 2 on the day Kathi dies, Elizabeth’s adjusted basis in
Vacation Home 2 would be 500,0000. This is because the adjusted basis of an inherited property
is generally the fair market value of the property on the date of death of the decedent.
3. Transfer of Fresh Veggies
A family limited partnership allows for the transfer of a business into the control of the next
generation without many taxes and red tape. The transfer is easier because family members can
be listed on the business and therefore have ownership over the company, but do not take part in
the day-to-day operations. The company will still be left in their name when the chief operator
passes away. This business classification can be used to help protect businesses from creditors
(Bishop, p. 1). This is by far the easiest way to keep the business intact through the death of a
significant owner.
4. Kathi’s filing status
Since Darrin died within the same year that Kathi is filing her taxes, she would use the
married filing jointly because she was married to Darrin during the current year. This is different
from the beforementioned scenario where Kathi was filing the year after the death of her
husband. As stated previously, if this were the case Kathi would have to file as being single.
5. Transfer to Andrew
Since Andrew withdrew the money for medical purposes, he would be able to qualify for the
annual GSTT exclusion. This would help him not have to pay the taxes he normally would have
to on the transfer had it not been for medicinal means. This only qualifies if the money is paid
directly to the hospital so that it can be shown on paper as having been done this way.
6. Personal residence to Darrin
Since the primary residence is in both names and is communal property, if Kathi were to die
tomorrow Darrin would have one hundred percent of the property’s adjusted basis. Since Kathi
nominated Darrin to be the sole inheritor of her share of the residence, this value would account
for a total of $1,500,000. This is a simple calculation because it is the full valuation of the fair
market value of the property at the time of being deceased (IRS, p. 1).
7. Transfers in Darrin’s will
In Darrin’s will, many specific bequests were made on behalf of his family to receive certain
tangible and intangible gifts. When it comes to these types of bequests they can be grouped or be
separate. We see that some bequests are lumped together when we look at the company
ownership bequest that; Elizabeth will receive 75% and James will have 25%.
8. Clauses in Darrin’s will
There also was a survivorship clause that states that “there needs to be someone surviving the
deceased for a certain amount of time before anyone can claim the property or intangible item”
(Dalton & Langdon, 2017). This is the case in Darrin and Kathi’s situation because their heirs
will more than likely outlive them both. These were the only two clauses that were contained
within Darrin’s will.
9. Failure-to-file penalty
Unfortunately, Keith forgot to file an Estate Tax Return (Form 706) and pay the estate tax
due 45 days after the return’s due date. To calculate the failure-to-file penalty, first Keith needs
to understand the penalty rules for late filing of the Estate Tax Return (Form 706). The IRS
imposes a penalty for both late filing of the tax return and late payment of any taxes due. The
penalty for late filing is generally 5% of the unpaid taxes for each month or part of a month that a
tax return is late, but not more than 25% of the unpaid taxes. First, we need to calculate the
monthly penalty rate. Given that the penalty rate is 5% per month, we need to determine how
many months or part of a month the filing is late. Since Keith is 45 days late, this counts as more
than one month but less than two months. Therefore, for calculation purposes, we consider this
as 2 months late. Then the monthly penalty rate to the amount of estate tax due is applied. Lastly,
the penalties for each month are added to find the total penalty; this gives the calculated failure-
to-file penalty of $70,259.
10. Valid disclaimer for Darrin
If Darrin died tomorrow and Elizabeth had an interest in the yacht and Elizabeth disclaims
the property, this would then be subject to GSTT. The GSTT is a federal tax imposed on transfers
of property to skip persons, subject to parties who are two or more generations younger than the
transferor. Essentially, if Elizabeth shows a disinterest in the yacht, the property would then be
passed to the next legal inheritor. “The GST doesn't only apply to grandchildren. It also
addresses gifts or transfers made to other family members and to unrelated individuals who are at
least 37-1/2 years younger than the donor.JAll such beneficiaries are referred to as "skip persons”
(Garber, 2023).
Overall, this seems to be the best plan for Darrin and Kathi as they have a will that is drawn
up well. They just need to make sure that as they prepare for their transfer of wealth to not worry
about it and leave it in our hands. We are the true fiduciaries in this scenario, and we will entrust
ourselves as doing the best job that we know how to do.
Reference List
Garber, J. (2023, January 17). How the Generation-Skipping Transfer Tax Exemption Works.
Retrieved May 10, 2024, from https://www.thebalancemoney.com/exemption-from-generation-
skipping-transfer-taxes-3505526.
Dalton, M. A., & Langdon, T. P. (2017). Estate planning. Metairie, LA: Money Education
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