Your friend SpongeBob visited the doctor yesterday and received bad news. The doctor told him that he has two years to live, at the most. Because of his successful career under the ocean and on television, he has a good sized estate and thinks he should plan for his death. He wants to know how he should distribute his assets to minimize any transfer taxes that would result from the disposition of his estate. SpongeBob has provided the following list of assets with their respective bases and fair market values hoping you can help him.
Property Value Adjusted Basis
Auto $ 17,000 $ 35,000
Personal effects 115,000 130,000
Checking and savings accounts 250,000 250,000
Investments 2,558,000 800,000
Residence 1,500,000 950,000
Life insurance proceeds 500,000 70,000
Real estate investments 5,955,000 2,800,000
Trust 950,000 100,000
He wants to leave some of his assets to his friends, and some to charity. After talking to him further about his future plans and things he has already done to plan for his passing, you have the following information.
SpongeBobâ€™s sister, SpongeBabe, established a trust six years ago. The trust is an irrevocable trust and she funded it with $100,000, planning for the income from the trust to go to her paramour and SpongeBobâ€™s friend, Patrick. As long as Patrick is alive, he will receive the income from the trust, but on his death, anything left would go to SpongeBob or his estate. Patrick is 25 years old. The Â§7520 interest rate is 5.2%. The current value of the trust assets is $950,000.
SpongeBob took out a life insurance policy on himself with his estate as the beneficiary. The policy has a $500,000 face value. He pays the premiums and retains the right to change the beneficiary at any time.
SpongeBob (or SB) wants to leave some of his investments ($1,279,000) and some of his real estate investments ($3,500,000) to Bikini Bottom University Fund, a qualified, 501(c)(3) charity.
SB plans to leave his auto and personal effects to Patrick, his checking and savings accounts to Spongebabe, his residence to Pearl and the remainder of his assets not already assigned to Mermaid Man, Barnacle Boy and Gary, his pet snail. He feels like this will make his friends and family feel loved and appreciated after he is gone. Please calculate SpongeBobâ€™s projected estate tax. Use the 2020 rates, unified credit, exemption amount. While this may not give SB an exact amount of transfer tax he will owe, it should be close enough for planning purposes. Please give SB any suggestions you might have to lower his estate tax bill if you feel that he needs the advice. SB needs this project ASAP (as all clients always do)