UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN College of Business D E PAR T M E N T O F F I NAN C E Finance 230 Fall 2007 Assignment 11 Due November 30 2007 Remember all assignments must be turned in by the beginning of class to get credit 1 A man dies in 2007 with a gross estate of 4 000 000 His funeral expenses are 40 000 He leaves 2 000 000 to the American Red Cross Assume there are no other allowable deductions charitable gifts adjustable taxable gifts state estate tax credits previously paid estate and gift taxes or foreign death taxes Use the attached Unified Rate Schedule to determine the total Federal estate tax owed on his estate A D 0 1 600 000 B E 600 800 None of the above C 999 200 4 000 000 Gross Estate 40 000 Funeral Expenses Allowable Deductions 2 000 000 Charitable Deductions 1 960 000 Tax Computation Base 555 800 0 45 1 960 000 1 500 000 762 800 Tentative Federal Estate Tax 780 800 Unified Credit 0 Federal Estate Tax Due 2 A married man dies in 2007 with a gross estate of 6 080 000 His funeral expenses are 80 000 He leaves 3 000 000 to his wife and 3 000 000 to his only son His wife dies later in 2007 with a gross estate of 3 000 000 the amount she inherited from her husband Her funeral expenses are 50 000 and she leaves 2 950 000 to her son Assume there are no other allowable deductions charitable gifts adjustable taxable gifts state estate tax credits previously paid estate and gift taxes or foreign death taxes Use the attached Unified Rate Schedule to determine the total Federal estate tax owed on these two estates A D 0 2 439 100 B E 427 500 None of the above C 877 500 HIS Estate Taxes 6 080 000 Gross Estate 80 000 Funeral Expenses Deduction 3 000 000 Marital Deduction 3 000 000 Tax Computation Base 780 800 0 45 3 000 000 2 000 000 1 230 800 Tentative Federal Estate Tax 780 800 Unified Credit 450 000 Federal Estate Tax Due HER Estate Taxes 3 000 000 Gross Estate 50 000 Funeral Expenses Deduction 2 950 000 Tax Computation Base 780 800 0 45 2 950 000 2 000 000 1 208 300 Tentative Federal Estate Tax 780 800 Unified Credit 427 500 Federal Estate Tax Due TOTAL 450 000 427 500 877 500 3 If you die without a valid will you are said to have died A D Intestate with an estate B E Penniless None of the above C without a trust 4 Which type of trust can be used to reduce the administrative and legal costs of probating an estate A D Testamentary trust Purpose trust B E Inter vivos trust None of the above C Family incentive trust 5 Based on intermediate cost assumptions when is the HI trust fund expected to be exhausted A D 2015 2085 B E 2019 None of the above C 2041 6 You earn 5 880 during your summer 2007 internship and 590 working part time during December 2007 How many quarters of coverage under Social Security would you have earned in 2007 A D 0 6 B E 1 None of the above C 4 For 2007 you earn one Quarter of coverage for each 1000 of annual earnings subject to a maximum of 4 quarters per year 5880 590 1000 6 47 6 47 4 so 4 quarters 7 You are single and you earn 115 000 in 2007 What are the total Social Security taxes paid by both you and your employer A D 0 17 595 B E 7 712 50 None of the above C 15 425 Current 2007 payroll tax is 7 65 of first 97 500 in earnings plus 1 45 of any additional earnings The employer and the employee both pay this amount Employer and employee each pay 0 0765 97500 0 0145 115 000 97 500 7 712 50 2 7 712 50 15 425 8 Refer to the Summary of the 2007 Social Security and Medicare Trustees Report from the hyperlink on the class web page Which part s of Social Security and or Medicare is are projected to remain adequately financed into the indefinite future because the current law automatically provides financing each year to meet the next year s expected costs I OASDI II Medicare Part A HI III Medicare Part B SMI IV Medicare Part D Prescription Drug Coverage A I Only B I II Only C II III only D III IV E None of the above 9 Refer to the Summary of the 2007 Social Security and Medicare Trustees Report from the hyperlink on the class web page What percentage of an increase in the payroll tax to take effect immediately would be required to bring HI into actuarial balance over the next 75 years A 43 B 67 C 88 D 100 E None of the above 122 10 According to Dennis Drent the guest speaker on November 2nd VPI is licensed in which of the following lines of the insurance industry A D Life Property Casualty Column A Taxable amount over 0 10 000 20 000 40 000 60 000 80 000 100 000 150 000 250 000 500 000 750 000 1 000 000 1 250 000 1 500 000 2 000 000 B E Column B Health C None of the above Column C Taxable amount Tax on amount in not over column A 10 000 20 000 40 000 60 000 80 000 100 000 150 000 250 000 500 000 750 000 1 000 000 1 250 000 1 500 000 2 000 000 0 1 800 3 800 8 200 13 000 18 200 23 800 38 800 70 800 155 800 248 300 345 800 448 300 555 800 780 800 Reinsurance Column D Rate of tax on excess over amount in column A Percent 18 20 22 24 26 28 30 32 34 37 39 41 43 45 45