CASE STUDY 1
Before her death, Sarah entered into the following transactions:
• Sarah borrowed $600,000 from her brother, David, so that she could start a business. The loan was on open account, and no interest or due date was provided for. Under applicable state law, collection on the loan was barred by the statute of limitations before Sarah died. Because the family thought that David should recover his funds, the executor of the estate paid him $600,000.
• Sarah borrowed $300,000 from a bank and promptly loaned that sum to her controlled corporation. The executor of Sarah’s estate prepaid the bank loan, but never attempted to collect the amount due Sarah from the corporation.
• Sarah promised her sister, Ida, a bequest of $500,000 if Ida would move in with her and care for her during an illness (which eventually proved to be terminal). Sarah never kept her promise, as her will was silent on any bequest to Ida. After Sarah’s death, Ida sued the estate and eventually recovered $600,000 for breach of contract.
• One of the assets in Sarah’s estate was a lavish residence that passed to Barry under a specific provision of the will. Barry did not want the residence, preferring cash instead. Per Barry’s instructions, the residence was sold. Expenses incurred in connection with the sale were deducted on the Form 706 filed by Sarah’s estate.
• Before her death, Sarah incurred and paid certain medical expenses but did not have the opportunity to file a claim for recovery from her insurance company. After her death, the claim was filed by Sarah’s executor, and the reimbursement was paid to the estate.
In 1 full page, discuss the estate and income tax ramifications of each of these transactions (1 paragraph per transaction). Support your conclusions using tax sources from CCH Intelliconnect
Sample Solution
