Tax Case Study Lecturer

TaxCase Study


TaxCase Study


Megis the majority shareholder in their jointly owned plasticsmanufacturing company where she owns 80% of the shares whereby herhusband Maynard who is also a teacher owns 20%. Recently, thebusiness was appraised at %7.2 million as well as approximately $1million of other jointly held assets. Meg was previously married andborne four children: 26 year old Tom is a lawyer, 24 year old Marthaa Manager in the family business, while 20 year olds twins Al and Halare college students. Hal and Martha have a vested interest inprogressing the family business. Meg and Maynard have not made anylifetime transfers as yet, though they desire for their children toeventually inherit all their property. Given that Meg is ten yearsolder than Maynard, her goal is to ensure incase she dies beforeMaynard that he has enough income to live on comfortably and to passon the entire estate to her children in his demise. The couple wouldalso like to leave behind a gift to state University’s scholarshipprogram in the range of $500,000.


Duringthe establishment of a financial plan for Meg and Maynard to meettheir wishes, there are some pertinent issues that arise. Since Megis older than Maynard, is it prudent for Meg to transfer her estateto Maynard so as to avoid estate tax? If so, what proportion of herestate should Meg transfer and how much assets should remain in herpossession to completely maximize the unified credit, which wouldtranslate to a potentially huge tax burden befalling Maynard, ifwasted?


Inorder to qualify for an income tax deduction and avoid paying forgift taxes, in this regard, Meg and Maynard ought to discuss onwhether to give their scholarship gift of $ 500,000 while they arestill alive so as to avoid future tax burdens. This charitable giftis also estate taxes exempt, although delaying the transfer untildeath would mean the loss of income tax deduction. However a distinctadvantage of waiting till death is the fact that the tax payer hasthe freedom to change his mind at will, the taxpayer can attest tothe transferring the will.

Megought to transfer enough property to Maynard so that incase he diesfirst, his entire estate at least reaches the threshold of theunified credit exemption equivalent. If this threshold is notreached, there will be wastage of some of Maynard’s unified credit.Nonetheless, the DSUEA election can come in handy to ensure thatMeg’s unified credit amount will remain intact, although such anelection would present some negative outcomes as earlier discussed.

Maynardand Meg should also consider setting up a lifetime gifting program,transferring a specified fixed amount of money to each child by meansof gift-splitting elections. Incase each spouse is making such giftsthis may have a significant effect on the equalization totals.

Anotheroption would be to move the most possible assets into living truststo do away with probate, and make a provision in a “pour over”will, stating that assets still maintained at death are transferredto the living trust.

Anotherviable option would be for Meg to establish a marital deduction trustand bypass trust that would offer a lifetime income to Maynard, andthe property be passed to the children after Maynard’s demise. Thetrust ought to be enjoined in Meg’s estate, but be fixed at theequivalent unified credit level such that estate tax would not bepayable, albeit even a minimum amount. The balance of assets would betransferred directly to Maynard and be exempted from marital tax.


Sinceevery sane individual would take advantage of any opportunity topostpone their tax burden, a vital question is the viability andwisdom behind a decision for an older spouse to pass a majority ofhis or her property to a younger spouse in the quest to avoid estatetax in case of demise of the older spouse first? To a certain extent,this move would be logically correct, albeit on condition that Meg,in this case the older couple, is left with enough property in herpossession to entirely utilize her unified credit, of which theremaining spouse, in this case Maynard, may suffer an extremely hugetax burden if the unified credit is wasted.

Duringmarital deduction funding, among the main important variables is theexpected demise date of the surviving spouse, in this case Maynard.Without a doubt, in the time value of money perspective, it makesmore economic sense to pay as minimal tax as possible on the estateof the first to demise among the couples, in this case Meg. A whileago, this idea would be excegerrate by gifting the surviving spouseeverything (“I love you” syndrome), which would bear a wastefuleffect on the descendants’ unified credit. Such a provision whichhas potential disastrous effect has recently been reduced by the“portability election” option. As the time lapse between thedemise of the couples causes a reduced potential harm expected fromdecisions regarding poor marital deductions.


SinceMeg is 10 years older than Maynard, the probability of Meg dyingbefore Maynard is higher therefore it would be prudent for Meg totransfer her estate to Maynard so as to avoid estate tax. However,Meg should not transfer all the property but should remain with justenough assets in her possession to completely maximize the unifiedcredit, which would translate to a potentially huge tax burden whichwould befall the surviving spouse, in this case Maynard, if wasted.


EverettJ.O, Hennig,C,Nichols, N (2013)ContemporaryTax Practice: Research, Planning and Strategies.Cch Incorporated.