This project will examine the guidance and predictions that economic and financial theory can provide with regard to investment decisions in estate planning situations. The researchers' intent is to carefully examine conventional approaches to estate planning and to determine whether the application of central ideas in financial theory can enhance planning strategies, in light of the existing tax structure.
The professors will focus on several areas in which the application of lessons from financial theory may lead to important insights: For example, they will illustrate that capital gains reset provision at death can have greater value in the presence of individual rather than joint ownership of assets, provided that at the first death of one of the owners, the basis of the assets is reset to an average of the value at date-of-death and the survivor's original cost. The authors will show how this conclusion follows directly from the application of an important result in modern financial theory regarding option pricing.
They will also examine asset location and spending policies for investors with funds that both are inside of and outside of a taxable estate. Their research will incorporate the impact of rules that allow the reset of the taxable basis at death for funds inside, but not outside, the taxable estate.
