Question

Maxine Warbucks was a successful business woman.  She also was a talented singer.

She owned three major categories of assets individually:

1) The Purple Note, a Jazz and supper club in Manhattan. It was, of course, income-producing realestate with a fair market value of $1,000,000.00;

2) Cash and cash equivalents (bonds, brokerage accounts, etc.), which together have a face amount and fair market value of $3,200,000.00; and

3) Eighty (80) percent of the outstanding common stock of Jazzola, Inc., a family owned

corporation that operated a music management, recording and publishing business. The other twenty (20) percent of the common stock is held by Maxine’s daughter, Elizabeth, who is thirty (30) years old. Jazzola, Inc. has only a single class of shares. If sold together, all of the outstanding shares of Jazzola, Inc. would have a fair market value of $10,000,000.

She owned two additional assets:

1) A house in Muttontown, New York, valued at $ 2,500,000.00. This asset was owned by Maxine and her husband Charlie. Maxine and Charlie hold the property as tenants by the entirety; and

2) A Totten Trust bank account, “Maxine in trust for Elizabeth” in the amount of $30,000.00

Maxine died on December 10, 2019 survived by Elizabeth and by her spouse, Charlie. In her will, Maxine leaves forty-nine (49) percent of the outstanding Jazzola stock to Charlie, and the rest of the stock that she holds (thirty-one [31] percent of the outstanding stock) to Elizabeth.

The will also calls for a specific bequest of $1,000,000.00 cash to Elizabeth, with the rest of the cash and cash equivalents to pass to Charlie. Sometime in April of 2020, Elizabeth signs and files a document releasing all rights to the $1,000,000.00 over to her father, Charlie. This document is called a “qualified disclaimer” and a renunciation under New York’s Estates Powers and Trusts Law. Assume that by virtue of this disclaimer, the $1,000,000.00 passes to and belongs to Charlie under state law, and the personal representative of Maxine’s estate distributes it to Charlie along with the rest of the cash and cash equivalents.

Charlie owned a policy of term life insurance on Maxine’s life. On Maxine’s death, the

insurance company pays $750,000 to the policy beneficiary, Elizabeth.

QUESTION:

What are the federal estate tax consequences to: 1) Maxine’s estate, 2) Charlie, and 3) Elizabeth on each of the transactions and events just discussed, with and without all available tax elections? There are no generation-skipping-transfer tax consequences in this fact pattern, so you can safely ignore that aspect. Be sure to discuss the amount and timing of each item.    

Answer 1