Intro to Estate and Gift
December 2010 Legislation:
§ 2210 Termination - terminated the estate tax after December 31, 2009.
*No estate tax in 2010, but in the years before and after there is an estate tax.
-In 2011, it was set to have a $1 million exemption amount with a maximum rate of
55%. However, this was bumped up to $5 million and reduced the maximum rate to
-Regarding the one year gap in 2010, it did make it retroactively apply to everyone
who died in 2010. However, Congress allowed the executor of anyone who died in
2010 to make an election to opt out of the estate tax.
*This was a two year fix which only apply in 2011 and 2012.
Three Components of Fed. Transfer Tax System:
1. Estate tax (even if you are not subject to the federal level, you might be subject to
estate taxes at the state level)
-Code Section 20xx (26 USC 2001, 2100, or 2200)
2. Gift tax (enacted by Congress to prevent taxpayers from avoiding estate tax with
-Code Section 25xx
3. GST Tax (Generation Skipping Transfer Tax)
-Code Section 26xx (enacted in order to prevent people from running around
the estate tax)
-Ex: If grandma leaves 100 million to granddaughter in order to avoid paying
transfer tax on son's level.
Sources of Federal Tax Law:
-Internal Revenue Code of 1986
-Other IRS Administrative Guidance
-Private Letter Rulings
-Technical Advice Memoranda
State vs. Federal Law:
Morgan v Commissioner (14) -The federal estate tax statute must normally turn to
the state law to determine the existence of the interests in property that may be
held by the decedent at the time of death.
Commissioner v Estate of Bosch (15) - If there is a question of how you determine
state property law, the federal tax authorities are only bound by a decision from the
state' s highest court. In other situations, where it is just a decision of a lower court,
only "proper regard" need be given.
§ 2503(b) - first $10,000 ($13,000 with inflation) of a gift per person, per year does
not constitute a taxable gift
What constitutes a gift?
Ex: Dad sells daughter a used Mercedes convertible worth $20,000 for $5,000 she earned
over the summer.
-This is a gift under Section 2511 and Section 2512(b) - (P. 267). The excess of $15,000 is
treated as a gift.
-Also see Reg. Section 25.2512-8 (p. 1334) - Transfers reached by the gift tax are not
confined to those only which, being without a valuable consideration, accord with
the common law concepts of gifts, but embrace as well sales, exchanges, and other
dispositions to the extent that the value of the property transferred by the donor
exceeds the value in money or money's worth of the consideration given therefor.
Commissioner v Wemyss (33 - 1945) - Donative intent not necessary; consideration
ignored if not reducible to monetary value
-Deceased husband leaves trust for his widow which gives her a monthly payment
until she remarries. Mr. W wants to marry the widow and she agrees to marry him if
he gives her $150,000 in stock to make up for the money she will lose in the trust.
-Issue: Is this a taxable gift?
-Supreme Court held that the transfer of stock constituted a gift. The Court held that
donative intent is not required but that the transfer becomes subject to the gift tax
to the extent that it is not made "for an adequate and full consideration in money or
*See Reg. 25.2512-8
Interest-Free and Low-Interest Loans:
1. Dad gives son $70,000 in cash - gift
2. Dad makes a loan to son of $1,000,000 and son promises to repay that sum? Son
puts money in bank which pays son 7% interest ($70,000 per year). After 3 years son
pays back the $1,000,000 (interest free). Gift?
Dickman v Commissioner (35 - 1984) - interest-free loan is a taxable gift
-Mom and Dad give son over $350,000 in an interest-free loan. Issue: was this a gift?
-COA holds that the intrafamily, interest-free loan constitutes a gift within the
meaning of Section 2501. Court held that there was value in the use of a substantial
amount of cash for an indefinite period of time.
Problem 4 - Page 46
-Using the rationale in Dickman, the condo used by the son for the week constitutes
a gift. However, from a practical standpoint, it would not be enforced, and also the
limit under Section 2503(b) would prevent it from being a taxable gift assuming that
the total didn’t exceed $13,000.
§7872 – (P. 680) Congressional response to interest-free loans - Congress was
concerned because it could be used to manipulate progressive income tax rates.
(a)(1) In the case of any below-market loan to which this section applies, the
forgone interest shall be treated as:
(A) transferred from the lender to the borrower, and
(B) retransferred by the borrower to the lender as interest
*Therefore, lender is treated as having interest income
(c)(1) The following loans apply:
(B) compensation-related loans
(C) corporation-shareholder loans
(D) tax avoidance loans
(e) Below Market Loans and Forgone Interest:
(1) A below market loans is anything below the applicable Federal rate
(2) Forgone interest is the excess of the amount of interest which would have
been payable on the loan based on the AFR and any interest actually paid
Problems (Pg. 45, 56):
Page 45 - Using §§7872(a-c)
(1) Value of loan =
$200,000 * (7%) ($14,000 gift from mom to daughter)
Jane is treated as receiving a $14,000 gift from mom and then Jane is
treated as transferring $14,000 in interest to her mother.
$13,000 of which mom can exclude under §2503(b)
(2) If the amount of the loan did not exceed $10,000, it is uncertain whether the
general de minimis exception under §7872(c)(2)(A) would apply.
-If it does not apply, then taxable gift of $700 from mom to Jane and $700 in interest
transferred from Jane to mom.
(2) No. Principal is incapacitated and therefore the lack of a durable power of
attorney will cause the transfers to be void.
(3) Depends on the state - under the Virginia code from the casebook this would be
okay because of "principal's personal history" and under the Indiana code from the
supplement, this would be okay. However, in states following the logic from Casey,
this would not work.
Gifts of Services:
§2501(a)(1): A tax…is hereby imposed…on the transfer of property by gift
-The Commissioner has not pressed for an expansive interpretation of the word
"property" to include personal services.
-If dad recommends clients go to his daughter for legal services…probably not
-If dad gives his daughter a tangible customer list…much better argument for
Executor waiving fee:
Ex: Husband dies leaving $800,000 which his wife as executor. His will states (1/2) of
his assets go to wife, (1/2) go to husband.
-If wife takes $10,000 as an executor's fee, it would come out of the estate and
would be included in her income.
-Wife would get $395,000 and son would get $395,000.
-If wife waives the executor fee, she gets $400,000 and son would get
-If she doesn't waive it, but doesn’t take it either - this could be
considered an indirect gift to the son
Revenue Ruling 66-167 (Executor waiving fee)
-As long as you waive your right to the compensation within six months of being
appointed as the executor, then the IRS will respect that waiver.
Gifts by Agents:
-Principal allows attorney-in-fact to act on the principal's behalf.
Ex: D has $5,300,000 and three children (A,B,C) who she wants to distribute her
money to equally
-If she dies now, she would pay $105,000 in estate taxes. ($5,300,000 -
$5,000,000 = $5,000,000.00 * 35% = $105,000)
-However, she can begin to make $13,000 gifts to each child to limit her
taxable income upon her death in order to minimize taxes.
-If she does this for 7 to 8 years, her estate will be below the estate tax
maximum and will not be forced to pay an estate tax
Estate of Casey v Commissioner (49) - Power to make gifts must be expressly
granted in durable power of attorney
-O has 3 sons and wants to reduce her potential estate by making these lifetime gifts
to each of her sons. In 1977, she became incompetent to manage her affairs. A few
years before, she had made one of her sons, R, a durable power of attorney. After
O's incapacitation, R continued to make gifts to her sons, including himself, from her
estate. However, the Commissioner determined that the durable power of attorney
did not authorize R to make gifts of the principal's assets.
-The court used the state law in making this determination - did the donor retain the
ability to take back the purported gift?
-Court held that R could not make the gift unless it had been expressly granted in the
durable power of attorney.
Ex 1: If mom transfers $20,000 car to son for $5,000
-This would be a gift to son of $15,000 (2512(b) - P. 267)
-Mom would be able to use the $13,000 exclusion to lower the amount
Ex 2: If son is the sole shareholder of a corporation, and mom sells $20,000 car to
corporation for $5,000.
-This would be held as an indirect gift to son of $15,000.
-This would cause some question as to whether she could use the $13,000 exclusion
to lower the amount of the gift to $2,000.
Gifts by Trustees:
Reg. 25.2511-1(g)(1) – (p. 1318) - A transfer by a trustee of trust property in which
he has no beneficial interest does not constitute a gift by the trustee.
Ex: Cousin puts $1 million into trust with cousin's kids as the beneficiaries, but I
am trustee. When I transfer the funds to cousin's kids, I have not made a gift.
Instead, the gift will have come from the cousin.
There are a few exceptions to this:
(1) If the trustee is also the grantor of the trust.
Ex: I put $1 million into trust and maintain the right to revoke the trust. I am
also the trustee, and in the next year I cause that money to be paid out to the
beneficiaries. Therefore, under the actual distribution of the money in the
trust, it will be a gift from me.
(2) If the trustee himself has a beneficial interest in the property yet makes a
distribution to the other beneficiaries, that might constitute a gift by the trustee.
-However (g)(2), states that it is not a taxable transfer if it is made pursuant to
a fiduciary power the exercise or nonexercise of which is limited by a
reasonably fixed or ascertainable standard which is set forth in the trust
instrument (because I don't have unfettered discretion)
-Ex: a power to distribute corpus for the education, support, maintenance, or
health of the beneficiary
Transfers of Property Incident to Divorce:
Transfers to Spouse:
Ex: If I transfer $10 million to my wife, this would not have any gift tax affect
because you are allowed an unlimited marital deduction
Transfers Incident to Divorce:
§2516: Where husband and wife enter into a written agreement relative to their
marital or property rights and divorce occurs within the 3 year period beginning on
the date 1 year before such agreement is entered into, any transfers of property or
interests in property made pursuant to such agreement shall be deemed to be
transfers made for a full and adequate consideration in money or money's worth
-must be written agreement
-must meet timing requirement: compares date of written agreement, to date
-Divorce must occur one year prior or two years after the date of the
written agreement (3-year window)
Discharge of Legal Obligations:
-When parent provides his child with food and shelter it does not constitute a gift
because the parent receives full and adequate consideration in the form of
discharge of a support obligation that could otherwise be enforced against the
*However, if I pay for a new car for my parents out of gratitude, I cannot use this
§2503(e) - (P. 262): Exclusion for tuition and medical expenses, which permits tax-
free direct payment of tuition without limit as to amount
When a Gift Occurs:
-The gift tax is primarily concerned with the passage of control of the economic
benefits of the property.
Ex 1: Right of revocation = no completed gift
-In 2011, Mom puts $1 million in to trust and names her local bank as trustee and
the beneficiaries are her kids. The trust also contains a provision which says that
mom has a right to revoke this trust at any time.
-Therefore, no gift has been made at this time.
-In 2013, the trust account has gone up to $2 million, and Mom amends the trust
document so that she no longer has a right to revoke the trust.
-As of 2013, a gift has been made. The value of the gift is $2 million.
Ex 2: Right to change beneficiaries = no completed gift
-What if in 2011, she has no ability to revoke but she retains the right to change
-This is still not a completed gift - see Sanford v Commissioner
-The ability to control who is going to enjoy the property constitutes sufficient
control to justify not classifying it as a completed gift
25.2511-2(c) - (P. 1319): A gift is incomplete in every instance in which a donor
reserves the power to revest the beneficial title to the property in himself….or
to name new beneficiaries or to change the interest of the
beneficiaries…unless the power is a fiduciary power limited by a fixed or
-What if mom has the ability to change the distributions for the "health, support, or
-Mom is not viewed as having retained control because of the ascertainable
standard and, therefore, she will be viewed as having made a gift.
Ex 3: "Except as mom determines" = no completed gift
-What if mom transfers $1 million in principal to the trust and upon her death it will
be transferred equally to her 3 nephews. The income earned each year will be
distributed each year equally to the 3 nephews, except as mom determines. Has
there been a completed gift?
-With respect to the income interest: it is not a completed gift yet
-With respect to the principal: it is a completed gift
*To address this, you would place a value on each of those (figure out the PV
of income interest which is a completed gift)
Estate of Sanford v Commissioner (71)
-In 1913, S created a trust with the right to revoke and modify the trust. In
1919, S executed a document which surrendered his right to revoke the trust
but still retained his right to modify the trust. In 1924, S released all of his
remaining rights (so he can no longer amend it). When was gift complete?
-Court held that the gift was not complete until 1924 when he released all
rights to modify the trust. (The IRS was arguing both sides)
Ex 4: Substantial Adverse Interest
-Mom wants to make a complete gift to son in trust, but she does not want to give
up all of her rights to modify the trust. Therefore, she states that she has the rights
to beneficiaries, only if her daughter consents.
-This would not be a completed gift because daughter has no substantial
-What if it states that mom can change the trust but only with consent of the son?
-This would constitute a completed gift because son has substantial adverse
25.2511-2(e) - (P. 1320): A donor is considered as himself having a power if it is
exercisable by him in conjunction with any person not having a substantial
adverse interest in the disposition of the transferred property or the income
therefrom. A trustee is not a person having an adverse interest.
Commissioner v Prouty (76)
-O, grantor, created three trust instruments with a power to revoke or amend, with
the written consent of her husband, L.
-Issue: Does L have a substantial adverse interest? If so, the gift will be complete. If
not, the gift will be incomplete.
-Court held that all of Trust 1 was a completed gift, but only a portion of Trusts 2 and
3 were completed gifts.
Trust 2 and 3: L entitled to $2,500 a year annuity out of the income. The remaining
income, as well as the principal, was to be distributed to L or J as O decided for
either L of J's maintenance, support, or welfare. If O dies, L takes over as trustee and
he could still make distributions, but only to J as he determines. Upon L's death, the
remainder goes to J.
-Everyone agreed that to the extent of L's $2,500 income per year, he has a
substantial adverse interest. So the court states that L has a substantial adverse
interest in the portion of the initial transfer that relates to the $2,500/year annuity.
-However, with respect the value of the remainder that did not constitute the
annuity, the court concludes that L did not have a substantial adverse interest. Court
concluded that he did not have a substantial chance to get anything from
"maintenance or support. Court also stated that parental interest in seeing the trust
fulfilled for the advantage of another was not enough. He, himself, had to have a
substantial right to get money out of this.
Trust 1: L entitled to $2,500/year annuity out of the income. However, in this trust
after O's death, L as trustee, had full discretion to make distributions for his own
support and maintenance.
-Again, everyone agreed that L had a substantial adverse interest in the $2,500/year
-Here, the court realized that L had a substantial adverse interest in the remainder,
because he could make distributions to himself upon O's death.
Power to Change Trustees:
Ex: Mom puts money in trust for children with family friend acting as trustee.
Trustee has the power to change the beneficiaries. Mom has the power to change
trustees. Are we going to attribute trustee's powers to mom?
-If the donor retains power to replace the trustee with a person who is neither
the grantor nor a person related or subordinate to the grantor, the retention
of such a power will not cause the transfer in trust to be an incomplete gift.
*Therefore, make clear in the trust document, that Mom is not permitted to
name herself, related party, or subordinate, as replacement trustee.
1. The income to be paid to A constitutes a completed gift at the time the money
was placed into the trust (PV of income interest)
2. The income to A and B constitutes a completed gift
3. Completed gift - both in income and in remainder (g)
4. Completed gift in the remainder to C. No completed gift to A and B in regards to
5. Remainder interest in C is a completed gift. Income to A and B is also a completed
6. No completed gift - E has no substantial adverse interest. (If multiple trustees, one
trustee acting by himself cannot make decision - must have majority)
7. Completed gift of both income and principal beginning in Year 6. However, in the
first 5 years, the income distributed to A is a completed gift when distributed.
8. Completed gift when it is made (d)
Promissory note - written promise to pay specific amount at a future date
Revenue Ruling 84-25 (83) -The promisor makes a completed gift on the date when
the payment is binding and determinable in value rather than when the promised
payment is actually made.
-Must be legally enforceable to be a completed gift. If it is not legally
enforceable, it is a completed gift when paid.
*On exam, if silent, answer how it would be if it is enforceable and if it is not
Ex: Mom promises $15,000 to son if he graduates from college. Son graduates in
2014; mom pays $15,000 in 2015.
-Becomes legally binding in 2014, therefore it is a completed gift in 2014.
(Taken from Rev. Ruling 79-384)
-Can Mom argue that it was for consideration in a state law sense?
-No. You can only take into account consideration to the extent that it is
reducible to money or money's worth
Ex: Mom gives $10,000 check to her son on 13/31/10. Son deposits the check on
-IRS would say that it is not a completed gift until it is deposited, however
there are differing opinions.
Reg. §25.2511-2(b) - (P. 1319) - a gift is complete only when the donor has put the
property beyond the donor's "dominion and control".
Rev Ruling. 96-56 (85): The delivery of a check to a noncharitable donee will be
deemed a completed gift on the earlier of:
1. the date on which the donor has so parted with dominion and control under
local law as to leave in the donor no power to change its disposition
2. the date on which the donee deposits the check or presents the check for
payment or presents the check for payment if:
Metzger v Commissioner (85)
-Tax Court held that the gift relates back to the delivery of the check to the donee if:
(1) there is an unconditional delivery to the donee,
(2) the check is deposited by the donee within a reasonable period of time,
(3) the donor's account has a sufficient balance to permit payment when the
check is delivered to the donee,
(4) the check is ultimately paid by the drawee bank
-Often transferors will transfer title to property to another person as a co-owner
(often to avoid probate)
Ex: Mom might take her apartment building while she is alive and change the title
into a joint tenancy with her son (with right of survivorship).
-If apartment is worth $4 million and mom transfers title into JT with her son,
there is a completed gift of $2 million.
*Because as one owner in a JT, mom can't take it back. Son can sever it
and dispose of his 1/2 interest.
*Other issues: rents now belong to each of them 50/50, so there is a
secondary tax concern that son is gifting her by allowing her to keep all of
the rental income.
Reg. §25-2511(h)(5) – (P. 1318) - If A with his own funds purchases property and has
the title conveyed to himself and B as joint owners, with rights of survivorship, but
which rights may be defeated by either party severing his interest, there is a gift to B
in the amount of half the value of the property.
Joint Bank Account - Reg. §25-2511(h)(4) – (P. 1318)
-If A creates a joint bank account for himself and B, there is a gift to B when B draws
upon the account for his own benefit (but not until then).
-Ex: If the property transferred to JT is a bank account, there is not a completed gift
(because mom can still withdraw the entirety of the funds)
Ex: Mom has asset worth $65,000. If she transfers it to son in this year, it is a taxable
gift of $52,000. If instead, she gives 1/5 of this asset each year, each year she is
making a $13,000 transfer and it will not constitute a taxable gift.
Problem (97): M wants to transfer land currently worth $120,000 and wants to limit
her taxation. What can she do?
1. She can transfer a portion of the property itself each year.
-If she transfers 8 acres this year, at a total of $12,000, it will be
respected as a transfer. (although the valuation might be questioned)
-This case was illustrated on Rev. Ruling 83-180 (page 94)
*She could also do a percentage TIC
2. She can use an installment sale technique (Known as a valuation freeze)
-She would sell the entire 80 acres to her son and in exchange son gives
her a promissory note promising to pay $120,000 over 10 years.
-The plan would be that each year she would forgive a portion of the
note that is coming due ($12,000/year) as a gift.
*The advantage of this is that they do not need an annual appraisal
of the land, however the IRS might question the donor's intention
and will challenge it (Rev. Ruling 77-299 - page 93)
*Another disadvantage to this is that it would have to be a sale for
income tax purposes.
Haygood v Commissioner (89) - because the vendor's liens would have
been legally enforceable, court held that it was a transfer for
consideration. Court says if it legitimately looks like a sale, then it will not
look at the intent and it will not constitute a gift.
3. She can contribute that 80 acres to an entity and then gift a few shares of
stock in the entity each year.
-This would cause a complicated valuation because the value of the
corporation would have to be measured each year.
-If Mom views keeping control of the farm for the longest period of time,
this would be her best option because she would keep control as long as
she retained a majority of the entity.
*A qualified tuition program can be treated as a present interest gift for the $13,000
exclusion under §529
-Under 529(c)(2)(B) - you can put the money all in up front but treat it as if you put it
in over a period of years in the amount of the $13,000 exclusion.
-Ex: If you put $65,000 up front, it can be treated as if you actually paid
$13,000/year over a 5-year period.
Powers of Appointment:
§2514(b) - (P. 269) - the exercise or release of a general power of appointment shall be
deemed a transfer of that property by the individual possessing such power.
Ex: Dad creates a trust: Income to Mom for Mom's life. Principal to son and daughter
equally $100,000 at Mom's death. Mom can change the allocation between the son and
the daughter and can distribute to them during her lifetime.
-This is a power of appointment. (Dad is donor, Mom is the holder (donee), son and
daughter are appointees)
-This allows decisions to be made for dad's estate even after dad dies by someone
that he trusts (mom)
*Make sure to distinguish power of appointment from power of attorney
-Power of appointment: donor has already disposed of the property and the holder
decides who gets in (can act in any way she wants)
-Power of attorney: the attorney-in-fact is acting as the principal's agent (fiduciary
capacity on behalf)
Main gift tax issues:
-To what extent is the holder going to be treated as having made a gift when she exercises
the power of appointment?
-Also, when can the power holder be treated as having made a gift when the power
Key question: Is the power of appointment general or nongeneral?
-If the power is general, it could constitute a taxable gift if used to appoint trust property
to a person other than the holder. If the power is nongeneral, no taxable gift will occur.
General Power of Appointment:
§2514(c) - (P. 269) - a power which is exercisable in favor of the individual possessing the
power, his estate, his creditors, or the creditors of his estate
Reg. §25.2514-1(c) - (P. 1343) - a power of appointment not otherwise considered to be a
general power of appointment is not treated as a general power merely by reason of the
fact that an appointment may, in fact, be a creditor of the possessor or his estate.
§2514(e) - Lapse of Power - 5 and 5 exclusion only applies to lapses
-Lapse of power only applies if the lapsed power exceeds in value the greater of the
(2) 5% of the aggregate value of the assets out of which, the exercise of the
lapsed powers could be satisfied.
1. (a)(i) Gift of $700,000 under §2514(b)
1. (a)(ii) Gift of $500,000
1. (a)(iii) Gift of $515,000 ($550,000 - $35,000 which was 5% of total trust)
1. (b) - None would be gifts because these are nongeneral powers of appointment.
What if D had died? If you die holding a general power of appointment, you have to
include in your gross estate the full value of what you had the power to appoint.
2. She does not make a taxable gift because of §2514(e).
-A lapse is treated as a taxable event only to the extent that the value of the property
subject to lapse exceeds the greater of $5,000 or 5% of the aggregate value of the trust.
Because $40,000 (the amount allowed to lapse) does not exceed $50,000 (5% of the trust
fund), there is no taxable gift.
*Often, in trusts you will see a specific reference to the 5 and 5 amount to ensure that gift
tax issues are avoided.
Self v. United States (100)
-P received the income from a trust fund and had a power of appointment to transfer the
corpus to his descendants (but not himself). P exercised the limited power of appointment
by executing 2 deeds appointing 100 shares for his son and daughter.
-Court holds that because P's power of appointment was nongeneral, there were no tax
consequences even though the principal was indirectly supporting his interest.
Ex: Dad has $1 million and dies intestate, son executes a disclaimer that says he doesn't
want the money, therefore it passes to the grandson who is next in line under laws of
intestate succession. Has the son indirectly made a gift?
-At common law, an heir (person who is entitled to receive under rules of intestate
succession) was not allowed to execute a disclaimer.
-However, at common law, if dad had executed a will, the Son could have executed a
§ 2518: Disclaimers - (P. 274); Reg. §25.2518-2(d) - (P. 1360)
(a) If a person makes a qualified disclaimer with respect to any interest in property, the
interest will be treated as if it had never been transferred to such person. (There will be
no gift tax consequences for disclaimer, however it could cause an extra tax on the
donor's estate based on the generation-skipping transfer tax)
(b) In order to qualify as a qualified disclaimer, the disclaimer must be irrevocable and
unconditional. In addition, the following requirements are necessary:
(1) such refusal is in writing
(2) such writing is received by the transferor of the interest not later than the date
which is 9 months after the later of -
(A) the date on which the transfer creating the interest in such person is made,
(B) the day on which such person attains age 21
(3) such person has not accepted the interest or any of its benefits, and
(4) as a result of such refusal, the interest passes without any direction on the part
of the person making the disclaimer and passes either -
(A) to the spouse of the decedent, or
(B) to a person other than the person making the disclaimer
Reg. §25.2518-3(c) - (P. 1365) -If Mom only takes 2/5 of the income in the first few
months, she can disclaim 3/5 of the overall gift.
-Note: Examples 17 and 18 on P. 1367
-Dad has assets worth $5 million and Mom has assets of $5 million. Dad's will states that
he wants to leave everything to Mom when she is alive and then to son.
-If Dad dies leaving it all to Mom and then she dies, she dies with $10 million, $5
million of which is subject to the estate tax.
-If Mom disclaims her interest, Dad can use his $5 million unified credit when he dies
and Mom can use her $5 million unified credit when she dies, therefore, the entire
$10 million will be exempt from tax.
*The 2010 legislation changed this a little bit, as it contains a provision allowing a
surviving spouse to utilize his/her decedent spouse's unused unified credit amount.
However, because we don't know what is going to happen after 2011, 2012, you
might have the default rules but also list an alternative approach in which mom uses
the disclaimer. If the alternative approach would give better tax consequences, then
you would have mom exercise a qualified disclaimer.
1. Sally's will leaves $2.5 million in stock to daughter Alice, and residue of $500,000 to
Allan. Alice executes a disclaimer within 7 months
-There is no estate tax for Sally and no gift tax for Alice. This is a valid disclaimer and
Sally can pass all of her assets to her spouse tax-free.
2. What if she waits until after 9 months before executing a disclaimer? (No longer a
-There is an estate tax of $500,000 on Sally's estate because she transferred the
stock to Alice which exceeded the $2,000,000 unified credit.
-There is a gift tax of $2.5 million on Alice because it is treated as if she received the
stock and then transferred it to her dad as a gift.
Unified Credit, Exclusion, and Deductions:
Annual Per Donee Exclusion:
§2503(b) - first $10,000 ($13,000 with inflation) of a gift per person, per year does
not constitute a taxable gift (if there is a present interest)
Ex: If grandpa has 4 kids and 10 grandkids, he can give each $13,000/year for a total
-This could reduce his tax liability by $65,000/year in taxes.
-Whatever he is giving them in the aggregate cannot be more than $13,000.
§2642(c) - there is not going to be any generation-skipping tax for a nontaxable gift
(for the first $13,000/year per donee)
§6019 - Gift Tax Returns - Generally, if you make a transfer by gift, you have to make
a gift tax return, however, if it falls within the annual exclusion, you do not have to
file a gift tax return. You do have the option to file even if you do not have to file.
Ex 2: If grandma and grandpa want both want to make transfers to their
grandchildren, each individual donor can transfer $13,000 tax-free without having to
file any gift tax returns. However, if the majority of the assets are in grandma's
name, and grandma transfer $26,000 to each donee, each year, she has two options.
1. She can do a gift-splitting under §2513 which, if they both consent, allows
them to treat all the gifts that either of them makes during the year as having
been made equally by each of them. To make this election, grandma would
have to file a gift tax return.
-Then this would be treated as if grandma and grandpa both transferred
2. Grandma can transfer $13,000 to grandpa tax-free under the marital
deduction and grandpa can transfer that amount to the grandchild from that
amount. Here, no gift tax would have to be filed.
-The IRS could argue that the substance of this is that grandma is giving
both gifts, therefore it is smart to let grandma's check sit in grandpa's
account for a while before he makes the transfer.
Present Interest Requirement:
§2503(b) - states that the $13,000 exclusion does not apply in gifts of future
interests in property. (p 261)
Reg §25.2503-3 - (P. 1312): "Future Interests" is a legal term, and includes
reversions, remainders, and other interests or estates, whether vested or
contingent, and whether or not supported by a particular interest or estate,
which are limited to commence in use, possession, or enjoyment at some
future date or time.
Problems (116-117) - Examples in: Reg §25.2503-3 - (P. 1312)
(a) Gift of present interest
(b) Ask: What exactly is the property being gifted? She has a gift of present
interest of $5,000.
(c) This is a gift of present interest based on Example 6 of the Regulation. The
premium that keeps the policy in force is keeping the asset alive.
(d) No present interest because, since there is no guarantee that there will be
dividends, there is no assurance that the shareholders will have an immediate
economic benefit. (based on cases on page 115)
(e) The 1/2 of the income that must be paid to Ernest is a gift of present
(f) No present interest because Felipe is not entitled to the income for the first
(g) There is a present interest because partners in a partnership have the right
to immediately access the funds.
(h) There is no present interest because, since the trustee has discretion over
distributions, no particular donee is entitled to it. (based on b, c, and Ex. 3)
(i) There is no present interest because the principal can be distributed to
Jennifer at any time. (25.2503-3(b) - page 1312)
Ex: Mom transfers something into trusts with income to son for life and
remainder goes to grandchild at son's death. Instead of putting cash into the
trust, mom puts a painting into the trust (FMV: $40,000)
-Similar to Calder case (page 118), if the property that is transferred is not
reasonably expected to produce income, son does not have present interest in
income. However, if mom makes outright gift of painting to son, it is a present
interest to son.
Hackl v Commissioner (119)
-Court held that gift of corporate stock was not a present interest, and
therefore not available for the annual deduction, because it is not easily
transferrable (it could only be sold with the managing partner's consent).
There was no substantial present economic benefit.
-This comes up in the section of "gifts to minors", but Crummey trusts are not
limited to minors.
Revenue Ruling 54-400:
-It doesn't matter whether or not the child can do anything with the property
at the time of the gift.
-As long as it is an unqualified and unrestricted gift to a minor, with or without
the appointment of a legal guardian, it is a gift of a present interest.
*In Crummey a trust, you don't have to give the income or the corpus of a trust
to the beneficiary in order to get the annual exclusion.
Right of withdrawal (124)
Ex: Both the income and the principal of a trust are to be accumulated until
future for grandson. Grandson has a right to withdraw the principal of the
trust. Grandson knows that if he takes the money out of the trust immediately,
then grandma might cut him off from any future gifts.
*Technically, because he could take it out, court in Kieckhefer held that this did
constitute a present interest for purposes of the annual deduction.
*However, the court in Stifel took the opposite approach, holding that this
scenario did not constitute a gift of present interest.
Crummey v Commissioner (124)
-This is not a lifetime withdraw, but instead contains a time limit. What matters
is that, at the time of the initial transfer, did the beneficiary have the right to
the immediate economic enjoyment of that property? If so, then an annual
deduction is allowed.
*Kirsch - Crummey trusts kind of go against what I've told you courts do all
semester - this is form over substance, as opposed to, substance over form
*Crummey trust is not anything more than a time-limited general power of
Private Letter Ruling 8004172:
-Grandma contributed $20,000 trust for her 5 grandchildren. Each of the 5
grandchildren was allowed to make a withdrawal of their proportionate share
of a gift made by grandma within 30 days after grandma contributed to the
trust. It was held that this was a present interest gift, and therefore, grandma
could say that she made a $4,000 gift to each grandchild for purposes of the
Example: What if it grandma instead made a $50,000 gift? ($10,000 to each of
-Grandma is able to avoid the gift tax based on the annual exclusion.
-However, the kids will have a taxable lapse which is outside of the 5 and 5
exclusion. By not taking it out, 2514(e) states that it is like she is putting it in
herself (to the extent that it exceeds the 5 and 5 amount). This would be
treated as if each grandchild made a $1,000 gift to each of the other donees.
*Note - these gifts made by the children would also not be covered under the
*Many trusts have clauses to avoid this issue - "shall not exceed the greater of
$5,000 or 5% of the value of the additional contribution."
-If that is the case, then $5,000 of the transfer per grandchild is a present
interest gift. But Grandma will have a taxable gift of $5,000 per grandchild.
1. Charles puts $13,000 into trust. Income is to go 1/2 to A and 1/2 to S. At the
end of 12 years, G gets the principal. A is also given a 30 day Crummey power.
A does not exercise the Crummey power over the $13,000.
-Charles has made a $13,000 completed gift and can use the $12,000
annual exclusion. $1,000 is left over that has not been sheltered.
-S has no present interest because A can take the underlying
-However, A has a present interest gift of $13,000 enabling Charles
to use the annual deduction.
-A has made a taxable gift due to the lapse of the general power of
-2514(e) tells us that the $13,000 is treated as a transfer by A to the
extent that it exceeds the 5 and 5 amount.
-So, in effect, she is deemed to have made an $8,000 transfer to the
trust. Are any of these gift of a present interest?
-1/2 of the income interest that is going to herself, does not
count as a taxable gift.
-1/2 of the income interest that is going to S is a present
interest gift that is excludable under the annual deduction
(.681 * $8,000/2) = $2,725) - will be excluded under the
-She will only have a taxable gift equal to the PV of principal
interest (.318 * $8,000 = $2,550)
What if Charles donated $7,000 and gives Alice a withdrawal right of
-Alice would avoid the gift tax under 5 and 5, but Charles will have a
taxable gift of $2,000.
-If Charles uses a "hanging power", then if Alice allows her withdrawal
right lapse, she can no longer withdraw the $5,000 but can still have the
option of withdrawing the access. This would allow Charles to use the
exclusion for the entire $7,000 without having Alice make a taxable gift.
Year Contribution Lapse Hanging
1 $7,000 $5,000 $2,000
2 $7,000 $5,000 $4,000
3 0 $4,000 0
*This would shelter everything by the 5 and 5 amount.
When is a Crummey trust allowed?
IRS: Beneficiary must have a realistic and meaningful right to withdraw. This
-Beneficiary must be given notice of right to withdrawal
-Beneficiary must be given adequate time to exercise the right to
withdraw (Requirement usually around at least 15 to 30 days)
Cristofani v Commissioner (134)
-M has 2 children, F and L, and 5 grandchildren. M sets up a irrevocable trust
with all of the income while M is still alive going to F and L. Upon M's death, all
of the principal is going to be distributed in equal shares to F and L (F and L are
the principal beneficiaries). There are contingent circumstances where
grandkids might get income from the trust (if F or L die before M). She gives
her children and grandchildren all the right to withdraw after a contribution
not in the amount to exceed $10,000. She took annual exclusions in the
amount of $70,000 and the IRS challenged the grandchildren's amount based
on the fact that they did not constitute a present interest.
-The Tax Court agreed with the taxpayer and respected each of the Crummey
powers as being valid. Court stated, "we must examine the ability of the
beneficiaries, in a legal sense, to exercise their right to withdraw trust corpus,
and the trustee's right to legally resist a beneficiary's demand for payment.
-Court implied that if there was stronger evidence that they had all agreed not
to exercise their withdrawal rights, it could have been invalid.
*The IRS acquiesced in the result of this case but not the rationale
2. Same facts as Cristofani, that are extremely remote contingent beneficiaries,
that also have a right to withdraw.
-Although the IRS is unlikely to respect this based on Page 140, based on the
decision in Cristofani, the Tax Court probably will respect it.
3. Six of M's friends are added with withdrawal rights but with no other
interest in the trust.
-This would be a much tougher case for Maria because of the naked
withdrawal rights. IRS would argue that it has to be a prearranged agreement.
-If court focuses on the question of whether they had a legal right to take it
out, it might work. However, it would be hard to argue against a prearranged
2503(c) Trust & Uniform Acts Regarding Minors
-Trust that has certain provisions which will allow it not to be treated as a gift
of future interest.
*Not of that much practical use today because of 529 which is more beneficial
for college saving trusts.
Requirements: Reg. §25.2503-4 - (P. 1313)
1. Principal and income may be spent for donee's benefit before he attains the
age of 21 years (however, it does not have to be used)
-Can't put any significant restrictions on trustee's ability to use the
principal or income for child's interest before he turns 21
-"Education, comfort, and support as necessary" was not considered
substantial restriction. However, it is better to be more clear.
2. Once the beneficiary reaches age 21, he must be entitled to the full income
-This doesn't require that on the 21st birthday all of the retained income
and principal be distributed out.
Heidrich v. Commissioner
-Trust constitutes a present interest under 2503(c) even if it has a general
need restriction as long as the trust's unexpended income will pass to the
donee upon turning 21.
Uniform Gifts to Minors Act
-Easier and cheaper way to make transfers to minors. You don't have to go
through the cost and paperwork to create a trust.
-To set this up: Grandma would title to property to Bob Smith, as custodian
under the Indiana Uniform Transfers to Minors Act, for the benefit of Mary
Smith. (This creates a trust-like situation)
Revenue Ruling 59-357:
-Generally speaking, it is treated as a completed gift of present interest
when transferred. As a result, she could utilize her annual exclusion.
-Main estate tax concern: If grandma names herself as custodian, the
value of the property at the time she dies is going to be brought back in
to her gross estate. (Lesson: Don't name the donor as the custodian.)
Qualified Tuition Programs
§529 - Qualified Tuition Programs
-Specialized investment vehicle operated by a state. You are not required to
use your own state's investment plan (it is not tied into that state's colleges)
-If goal of grandma is to help grandchild save for college education, Section 529
would be best to use.
-There are some significant income tax consequences (similar to a Roth IRA)
-It gives grandma significant flexibility. As the owner of this account, grandma
can change the beneficiary to some certain other family member.
-Grandma can also revoke the entire thing (however, she would have to pay an
income tax on the growth and a 10% penalty on the growth)
-The transfer is considered to be a completed gift of present interest for gift
tax purposes. (Entitled to annual exclusion)
-You can frontload the present interest gifts and elect to treat it as if you
contributed 1/5 of it each year over the next five years (up to $65,000)
-No amount of a Section 529 Plan is included in the estate of an individual
Reciprocal and Sham Transfers:
Sather v Commissioner (153)
-Four siblings, and three spouses owned 100% of the stock of Sather Inc. Each
of the 3 married couples had three kids. Each of the three couples had
$180,000 of stock in the company (and the unmarried brother had $90,000)
that they wanted to transfer to their children.
-Each of the couples donated $20,000 ($10,000 from each spouse) to each of
their 3 children and each of their 6 nieces and nephews. Each donor claimed
nine $10,000 gift tax exclusions. The unmarried brother also made 9, $10,000
gifts to each of their children.
-Two prong test: (1) The gifts were interrelated. (2) The settlors were left in
approximately the same economic position as they would have been had they
created trusts naming themselves as life beneficiaries.
-Court held that the 6 married donors could only take 3 annual exclusions (for
those transfers made to their own children). "In this case, the parents
transferred stock to their nieces and nephews in exchange for transfers to their
own children by the nieces' and nephews' parents. Though the Sathers
received no direct economic value in the exchange, they did receive an
economic benefit by indirectly benefitting their own children."
-The unmarried brother was allowed to take 9 annual deductions.
Ex: Mom gives son 13 shares valued at $1,000/share. She is worried that the
IRS will later challenge this value and argue that they were actually worth
$26,000. Knowing there is a chance that the IRS will challenge the valuation,
Mom puts a clause in the gift stating that if it is later valued more than
$13,000, the son will have to give back stock in the amount of the excess.
-This will not work, as the IRS states in Revenue Ruling 86-41 that adjustment
clauses will be disregarded for federal tax purposes.
Exclusion for Educational and Medical Expenses:
§2503(e) - (P. 262) - Any qualified transfer shall not be treated as a transfer of
property by gift. Reg. §25.2503-6 (P. 1314) describes qualified transfers.
-All payments for tuition at an educational organization is treated as a qualified
transfer with no annual limitation
-there is no requirement that you have any specified relationship to the
person (no limitation on who the donor can be - page 1314 of code)
-however, the exclusion is available only for tuition, (room and board,
books, other expenses are not includable - §25.2503-(6)(b)(2)
-the payment must be made directly to the school, cannot be given to the
daughter to pay the school - §25.2503-(6)(b)(2)
-the amount excluded under §2503(e) does not take away from the
annual exclusion under §2503(b)
-there is no limitation that it can only be college level - it would also cover
law school or other graduate level education
-taxpayer will not owe a generation-skipping transfer tax
-All payments for medical expenses will be treated as a qualified transfer with
no annual limitation
-again, there is no limitation as to who the donor can be (no required
-payment must be made directly to the doctor or hospital that rendered
the medical care (insurance premiums also qualify)
-donor cannot give the money directly to the sick/injured person and
can't reimburse injured person for medical bills already paid
-taxpayer will not owe a generation-skipping transfer tax
-M is an 80-year-old widow with $4 million who wishes to reduce her estate taxes
before her death. She would like to minimize her estate taxes by providing for the
education of her seven grandchildren. What should she do?
-For the grandkids that are currently in college, she can use the unlimited
annual exclusion under §2503(e) by paying directly for their tuition
-For the grandkids that are not currently in college, and not eligible for
§2503(e), she could use the annual deduction under §2503(b)
-She could make outright gifts of $13,000 per year, but it might not be
used for college tuition
-She could make a §2503(c) trust - but again, no guarantee that it would
be used for the child's higher education
-She could also put a Crummey power into the trust, giving them the
ability to withdraw for 30 days after her contribution
-Best alternative: Section 529 - college savings plan
§2523(a) - (P. 280) - provides an unlimited deduction for transfers by gift between
spouses during their lives.
Ex 1: If I transfer $1 million to spouse. I make a $1 million gift and have a $1 million
deduction. Therefore, there is no taxable gift.
-Must be married at the time the transfer was made. (Whether the state in
which they reside views them as married)
-Exception: same-sex couples are not eligible for this deduction even if the
state in which they reside recognizes their union
-This also does not apply to couples in divorce settlements
Ex 2: H makes $10 million trust with right to income to wife for her life (value of $8
million) and remainder to kids when wife dies (value of $2 million)
-§2523(b) - (P. 281) - deals with terminable interests - where upon the
occurrence of an event, such interests transferred to spouse will terminate or
fail, if the donor transfers or has transferred to any person other than the
donee spouse an interest in the property, which they will have after her death,
then you don't get the marital deduction
*§2523(e) and (f) - allow deductions for terminable interests that allows you to
get around §2523(b)
Two Exceptions (in which you can get the full marital deductions on terminable
1. §2523(e) - Life estate with power of appointment - if it is life interest, but she can
appoint the entire property to herself and/or her estate, then the interest will be
considered transferred to the spouse (and the husband will get the marital
deduction for the full transfer)
-This avoids the problem of property going untaxed, because the full value of
the trust will be included in the wife's estate when she dies.
-Also a significant nontax downside in that the wife can now give the estate to
whoever she wants
2. §2523(f) - Qualified Terminal Interest Property exception (QTIP) - P. 282
-Upside: you don't need to give donee spouse a general power of appointment over
-Downside: the wife will have to include the full value of the trust property in her
gross estate when she dies
(A) any property transferred by the donor spouse
(B) in which the donee spouse has a qualifying income interest for life payable
at least annually
(C) husband must make an election on a gift tax return
§2522 - Gives an unlimited charitable deduction
§6019 - To the extent you are donating your entire interest in something to a
charity, you do not have to file a gift tax return
-Even if you make a gift to a foreign entity, you could claim the gift tax deduction.
Cannot be to any political party.
Ex: Charitable remainder trust
-Father creates trust to kids for life, with remainder to charity. He might like to claim
a deduction for the present interest value of the charity's remainder.
-§2522(c) - trying to ensure that, in the case of the charitable remainder trust, there
is actually going to be something significant for the charity to get at the time of the
Gift Tax Returns and Administrative Requirements
§6019 - Gift Tax Returns - (P. 349)
-General rule: a return must be filed if any "transfer by gift" is made during the
-Return is filed on Form 709
1. Annual per donee exclusion gifts within §2503(b)
2. Educational and medical expenses within §2503(e)
3. Transfers for which the §2523 marital deduction is allowed
4. Certain transfers for which the §2522 charitable deduction is allowed.
§6075(b) - Time for Filing Returns - (P. 363)
-Gift tax returns shall be filed on or before April 15 following the close of the
-If you get an extension to file the income tax return, it carries over to the gift tax
return (however, it doesn't give you an extension of time to pay)
-If you make a transfer to a foreign trust, you must report it (even if you would not
need to pay a tax). If not, the penalty is 35% of what you transferred to the trust. If
you receive a gift from a foreign person, also need to report.
Spousal Gift Splitting:
§2513(d) - Joint and several liability for tax
-If mom and dad agree to gift-split, and dad doesn't pay his gift taxes, the IRS can go
after mom for the taxes.
Statute of Limitations:
§6501- Limitations on Assessment and Collection - (P. 510)
-Generally speaking, there is a 3-year limitation for the IRS to look at the gift tax and
inquire about it
-However, there are numerous exceptions to this general rule
Exceptions (that increase the period)
-If you file a false or fraudulent return, the period never runs
-If you make a transfer by gift not shown on the return, the 3 year period never
expires (this will not apply to any item disclosed or in a statement attached to
the gift tax return)
*Even if you thought your gift came within the annual exclusion and not did
not report it, the IRS could question it forever, therefore you should file one
anyway if you feel that the property you are transferring is close to the annual
Proper disclosure: Reg. §301.6501(c)-1(f)
-A description of the transferred property and any consideration received by
-The identity of, and relationship between, the transferor and transferee
-In the case of property transferred in trust, a brief description of the terms
-A detailed description of the method used to determine the fair market value
of property transferred
General Principles of Valuation:
-Valuation of gifts often involves complicated judgment calls (often the biggest issue
being debated between taxpayer and IRS)
-The manner in which you value property depends on the type of property in
-In some cases, Congress has put in statutory valuation rules (which are not
favorable to taxpayers - meant to fix abuses)
-The Regulations equate "value" to "fair market value"
§20.2031 - 1(b) - (P. 1082) - "the fair market value is the price at which the property
would change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or sell and both having reasonable knowledge of
§25.2512-1 - identical gift tax valuation definition
*The gift and estate taxes reach far and can be difficult to value because they are so
broad. In Estate of Andrews, the family had to include the right of Virginia Andrew's
name which was valued at $703,500
§2031(a) - (P. 162) - The value of the gross estate of the decedent shall be
determined by including to the extent provided for in this part, the value at the time
of his death of all property, real or personal, tangible or intangible, where situated.
-For purposes of §2031, an unforeseen event changing the value of the estate after
the death of the decedent is not relevant for tax purposes.
-However, events that occurred after the death can provide evidence of value (if
painting was sold for a value 2 months after death, it can be evidence for painting's
value at the date of death)
Ex: Jane died on 6/1/2008 and owned stock worth $6 million at the time of her
death. By 12/1/08, the assets were only worth $4 million. What value should he put
on the estate tax return?
-He could use the alternative valuation date under §2032 and could record the
assets at $4 million (the date of the value 6 months after death)
Alternative Valuation Date:
§2032(a) - Alternative Valuation (P. 165)
(1) Assets sold or distributed out of the estate to the beneficiaries within 6 months
of the decedent’s death are valued as of the date of distribution or sale
(2) In the case of property not distributed within 6 months of death, executor may
elect to value the decedent's estate 6 months after the death, rather than on the
date of death
-You can't pick and choose whether you choose the valuation date or alternative
valuation date (all-or-nothing election)
(3) If the interest is affected by a mere lapse of time, the interest shall be included at
its time of death (ex: patent value)
Ex: If J has a right to income for 10 years and dies after 6 years, with 4 years going
into her estate, she has to include the PV of that right in her estate. At the date of
her death it was worth $500,000 and six months later it is worth $350,000. Can she
use the alternative date?
-No. Based on §2032(a)(3) - because this is a lapse, it must be valued at the date of
1. Trust with income going to A and his estate until death of J when it will then be
paid to Z and M. A dies on 2/10 with value of $1 million and J dies on 5/10 with value
of $700,000. A's executor elected to use the alternative valuation date. What is the
value of the income interest?
-If you elect the alternative valuation date under §2032, $0 would be added to the
estate because that is what it was worth at the time.
2. Emily's patent should be valued at $500,000 (based its value at the date of her
death, due to the lapse)
§2032(c) - No election may be made under this sections with respect to an estate
unless such election will decrease:
(1) the value of the gross estate and
(2) the sum of the estate tax imposed
*They won't allow you to take the alternative date election, to raise the basis
in the assets to eliminate income tax
§1014 - Basis of property in the hands of a person acquiring the property from a
decedent is the fair market value of the property at the date of the decedent's death
(unless you choose the alternative valuation date)
Ex: J puts property in trust, income going to Friend 1 during J's life, remainder going
to Friend 2 after J's death.
-One of the reasons we care about the separate values, is the annual exclusion. It
would also come up in the estate tax area.
Table B (1087) - Gives us the value of the remainder for a term certain (based on
interest rates and years)
-For Term Certain Remainder: Use Table B
-For Term Certain Income interest: (1 - remainder)
*Remainder factor increases as the time you have to wait to get the property
Ex: $1 million in trust with income to Friend 1 for ten years, income to Friend 2
after ten years. Interest rate is 4.2%.
$1,000,000 * (.662709) is the PV of the remainder interest.
$1,000,000 * (1 - .662709) is the PV of the income interest.
Table S (1102) - Gives us the value of a the remainder after a single life (based on
interest rates and age rounded to nearest birthday)
-For Life Estate Remainder: Use Table S
-For Life Estate Income: (1 - remainder)
*Make sure you pay attention to who is the measuring life with respect to the
1. Transferred $100,000 to irrevocable trust. Income to M for 12 years, reversion to
Arthur after 12 years. Interest rate at 7%.
$100,000 * (1 - .444012) - From Table B page 1089 - 7% Interest for 12 years
2. Keep the same facts except that Arthur dies at the beginning of Year 3 with trust
value at $120,000.
$120,000 * (.508349) - From Table B page 1089 - 7% Interest for 10 years
3. W transfers $100,000 to irrevocable trust. Income to be paid to G, age 64, until
her death. Remainder to E or his estate.
G = $34,356
$100,000 (.34356) - From Table S on page 1112 - 7% interest at age 64
E = $65,644
$100,000 (1 - .34356) - From Table S on page 1112 - 7% interest at age 64
*Not responsible on exam for annuity calculations
Exceptions to Actuarial Values: Reg. §25.7520-3
Ex 1: Terminable Illness (Page 1674)
-Dad, at age 75, transfers $1 million to son and in exchange son pays dad an annuity
of $80,000/year for as long as dad lives. Looking at Table S, the annuity is valued at
$531,944. Therefore, the taxable gift only $468,056. However, Dad has an incurable
illness and will probably die within a year (which is far less healthy than the table
-Table will not be applied if dad is "terminally ill" - if there is at least a 50%
probability that he will die within 1 year
Ex 2: If no realistic chance to get income (Page 1671)
-If you transfer a painting, that will not produce income, in exchange for an income
-If you make a transfer for an income interest in stock that never produces dividends
Shackleford v. United States (181)
-Dad wins $10 million in lottery and after receiving 3 of 20 annuity payments he dies.
Although his estate is entitled to the other annuity payments, they are not entitled
to sell the right to the payments. Therefore, taxpayer argues that it is not fair to
value it using Table B because he can't sell or assign it to anyone. Court holds that
taxpayers should not have to use the valuation tables from the Regulations.
*However, other courts with similar facts came out the other way on this case.
§§2701 - 2702:
-If dad gives trust to son but retains an income interest. However, he will operate
the trust in a way that will help out his son that has a remainder interest.
2702 assigns a zero value to the retained interest unless there is a required
payment, at least annually, of a fixed dollar amount.
Closely Held Businesses and Other Assets:
Valuation of stocks and bonds Reg. §20.2031-2 at (P. 1083)
-You don't look at just the closing price of the stock on the date of death. You have
to look at the highest price that the stock sold for on that day with the lowest price
that the stock sold for on that day and take the average of those prices.
Ex: IBM closed yesterday at $162.28. The lowest it traded at was $159.21. The
highest it traded at was $163.43.
-Rather than focusing on the stock price, take the average of the high and low
Closely Held Stock
-If it was a closely held stock that did not actively trade on the open market, you
would have to bring in appraisers to assess the FMV.
-§20.2031-2(f) (P. 1085) - lists other relevant factors in determining price
-Valuation techniques for appraisers in Rev. Ruling 59-60 (189) - 2nd best approach
is to look at similar companies that are actively trading stock to see their FMV.
Estate of Cook v. United States:
-Court had to value stock of a company that was not publicly traded, so it looked at
the value of the stock of similarly traded companies.
-Using stock values from similar companies, court determines the value of the stock
between that which the IRS stated and what the taxpayer stated.
-Control premium is added to the value of stock when it gives the stockholder the
controlling interest in the company.
-Rationale - if you can control the corporation, than you are going to be able to make
the important decision in the corporation - who is hired and fired, how much
executives should make in salaries, when dividends should be made
*The control premium does not always have to equal the minority discount.
-See §20.2031-2(e) (P. 1084) and §25.2512-(2)(e)
Ex: A owns 60% of the stock in a $10,000,000 company. An outside buyer would
probably pay more than $6 million because it would give him the ability to control
the company. Therefore, a control premium is assessed.
Estate of Chenoweth (199)
-The taxpayer is arguing for a control premium for the stock given to the decedent's
spouse because they wanted a larger marital deduction. 51% of stock in corporation
was left to decedent's wife and 49% was given to his daughter. The estate claims a
38% control premium.
-Court holds that the separate blocks of stock must be viewed separately and
therefore, the controlling interest should be included in the spouse's share and
should be entitled to the marital deduction. (Use hypothetical willing buyer and
willing seller to make determination)
*IRS could argue that daughter will have to recognize a basis in her stock based on a
-Minority discount is deducted from the value of stock when a stockholder is
susceptible to the control of a majority shareholder.
Ex: A owns 60% and B owns 40% of the stock in a $10 million company. Although
based on a pro rata share it appears that B shares would be worth $4 million,
because it is subject to the control of A's controlling block, a willing buyer would pay
less than $4 million. Therefore, a minority discount is assessed.
Estate of Bright (203) - Does not aggregated family interests
-Mr. and Mrs. B own 55% of the stock of various corporations and live in Texas which
is a community property state. Upon Mrs. B's death, her interest was put into a trust
for her children.
(1) IRS argues that the entire 55% interest should be valued with the control
premium and then, once that is determined, divide it by 2 to see what her
(1/2) is worth. However, court holds that to determine the value of her estate,
it must look at half of the block (27.5% without the controlling interest).
Therefore, under this method, Mrs. B's estate actually got minority discount.
(2) IRS next argues that because Mr. B is the executor of Mrs. B's estate, and
also owns the other 27.5%, as a practical matter the stock should be
aggregated for a total of 55%. Court again rejects this, stating that the two
different interests cannot be combined, but rather that Mrs. B's block must be
viewed separately from Mr. B's. (What would a hypothetical buyer pay a
hypothetical seller for this block?)
Estate of Bonner (210) - QTIP - Does not aggregate
-In QTIP trust (H died leaving his 50% shares in trust with life interest to wife) and W
dies with the other 50% in her estate. Although she had to include both the trust
interest and outright ownership in her estate, because they were two different types
of interest, Court held that they could not be aggregated.
Estate of Fontana (210) - General Power of Appointment = Aggregation
-Court changes view and aggregates the interest in the stock when wife has general
power of appointment over trust with stock, that she could have given to herself
Swing Vote Premium:
Ex: A owns 49% of corp., B owns 2%, C owns 49%. Because both A and C need B's
cooperation to gain control, the 2% block is going to be in great demand which
should be reflected in its valuation. (Hypothetical buyer would be in a good position
to be in control of corporation)
Technical Advice Memorandum (213)
-Taxpayer has 100% share of stock in corporations and gives 30% to each of his 3
daughters, keeps 5% for himself, and gives 5% to his spouse.
-IRS acknowledges that these blocks cannot be aggregated, but also acknowledges
that the 3, 30% blocks are only one side deal away from being able to control.
Therefore, IRS states that there should be a slight premium on that.
**Note - Technical memos not binding on IRS
Marketability Discount (217)
-Reflects the fact that a certain percentage of stock in a corporation whose stock is
not freely tradable will be worth less than an identical block of stock in an active
market. This loss of value should be accounted for in its valuation.
-Therefore, a lack of marketability can lead to a discount.
1. $39.50/share or $39,500 (average of high and low prices for the day)
-Even if Warren Buffet owned 51%, you would not take a minority discount
because, since it is a publicly traded company, the selling price already reflects
2. Here, you would argue that it deserves a marketability discount since the stock
hasn't been publicly traded like the other companies.
-You wouldn’t have to worry about the control premium because you don't
have to value shares more than the company is worth.
3. This time there could potentially be a marketability discount, but also a control
premium (since he owns 60%)
4. This time there could potentially be a marketability discount, as well as a minority
discount (since he owns 40%)
-This could drop the value significantly.
5. Marketability discount, but no minority discount (because no one person has a
controlling interest), however this is probably a Swing Vote situation.
6. This is identical to Rev. 93-12, there will not be a family aggregation here. Instead,
each gift is valued individually.
Family Limited Partnerships:
-Parents have other assets that they want to pass on to their children, such as
publicly traded stock, that they contribute into an entity. They then transfer a
minority interest in the stock to their children in an attempt to get marketability and
-The IRS has been very active in challenging these types of discounts.
Retained Interests and Valuation Freezes:
Section 2701 Valuation Rules: (P. 319)
§2701 - Transfers of corporate stock to a family member
-Concern is that Dad will use preferred stock to lock in the value of the company so
any future appreciation in the company will never be subject to estate and gift tax. If
Dad makes a transfer of common stock to a family member while at the same time
retaining the preferred stock, the IRS will take a very cynical view of the value of that
2701(a)(1)(B) - This applies only when there is an “applicable retained interest”
which is defined in 2701(b) as having “control” (at least 50%) of the company.
2701(a)(3)(A) - P. 319 - As a practical matter, the default rule is that it is valued at
zero for purposes of calculating the amount he transferred to his family member. He
is not allowed to attribute any value to the preferred stock that he retains.
Exceptions: If it is qualified payment - if it is a cumulative preferred stock, that has a
fixed amount which must be distributed, its value can be calculated.
(see Reg. §25.2701-2(b)(6) - P. 1458)
Ex: Dad is trying to give stock to daughter while avoiding gift taxes. He recapitalizes
the company and creates $980,000 in preferred stock and $20,000 in common stock.
He gives the daughter the common stock and retains the preferred stock. He gives
the preferred stock liquidation rights, voting rights, and distribution rights to make it
look very valuable. However, because this is a family situation, and because these
would all be discretionary rights, they are really not worth as much as they appear to
be. Examples in Reg. §25.2701-1(e) and Reg. §25.2701-2(d) on Pages 1456-59.
Trusts Valuation Rules: (P. 324)
§2702 - Transfers of property into trust to family member
(a) Applies when either one of two conditions are satisfied:
(1) when transfer of an interest in trust is made to any family member -
includes spouse, any ancestor or lineal descendant, brother or sister of the
individual, or any spouse of children or brother/sister-in-law OR (2) when dad
or dad's spouse retains an interest in the trust (as defined in 2704(c)(2))
(2) (A) Default rule when Dad transfers interest in property to family member
but retains income interest, is that his interest must be treated as zero unless it
is a qualified interest.
(3) EXCEPTIONS - this section shall not apply if:
(i) the transfer is an incomplete gift
(ii) if such transfer involves the transfer of a personal residence into a
(b) Qualified interest - qualified interest means: (if qualified, use 7520 - P. 642)
(1) any interest which consists of the right to receive fixed amounts payable
not less frequently than annually (GRAT)
(2) any interest which consists of the right to receive amounts which are
payable not less frequently than annually and are a fixed percentage of the
FMV of the property in the trust (GRUT)
*See Reg. §25.2703 (P. 1476) for more information on qualified interests.
-Assume Dad has a painting worth $1 million that he decides to transfer to his
daughter through a trust. Therefore, he transfers it into a "grantor retained income
trust" (GRIT). Trust states that income goes to Dad for 15 years and remainder to
Daughter after 15 years. Using the valuation tables, the value of the remainder
would be $539,491 (rather than the $1 million gift of the painting)
-If he is to die in those 15 years, the entire value of the painting would be included in
his estate - so he must choose a date long enough to reduce the remainder value,
but short enough that he can be sure he will survive that period.
-The problem is, Dad is not likely to take any income out of this trust so Dad was
overvaluing his income interest. This would not work under
§2702 because it is not a "qualified interest"
-Dad puts his house into a trust but maintains the right to live in the house for 15
years. This would not be stuck with a zero valuation, instead you could use Table B
to value it. This can be used for up to 2 homes.
1.This is a "qualified interest" under 2702(a)(2)(B) because it is a "grantor retained
annuity trust", therefore the usual 7520 rules will be used.
-2702(a)(2)(B) will be used because it is "qualified" under 2702(b)(1)
2. This would not qualify as a "qualified interest" under 2702(a)(2)(A) because it is
not a fixed dollar amount or a fixed percentage of the trust value. Therefore, his
trust interest will have a zero value and it will be treated as though he made a
-It is not qualified, because it fails to meet the requirements of 2702(b)
-You also don't get to back out the $13,000 because the remainder is not a
-If it said lesser of $50,000 or income, it would not be a "qualified interest"
Other Valuation Methods:
-There is a market for the asset, but because the decedent owned so much, if the
estate tried to sell a large block of it, it would drive the price down.
Ex: Calder's estate owned 1300 watercolor paintings. Only about 60 of these
were sold in a typical year. If the estate tried to sell all 1300 at once, it would
severely depress the price. Therefore, court gave a 60% discount below the
recent market prices.
Reg. §20.2031-2(e) and Reg. §25.2512-2(e) discuss block discounts.
Penalty for Undervaluation of Property:
Ex: If there is an asset that the taxpayer values at $7 million and the IRS later comes
around and determines that the asset should have been valued at $10 million, the
taxpayer will owe the unpaid tax.
-Might also owe interest on the unpaid amount under §6601 from the date on
which the tax was owed up until when it was paid
-Based on the interest rates listed in §6621
-Might also owe penalties (for fraudulent or negligent undervaluation - 6662
Property Owned: §2033
§2001 - A tax is hereby imposed on the transfer of the taxable estate of every
decedent who is a citizen or resident of the United States.
§2051 - The taxable estate = Gross Estate - deductions allowed by this part
§2031 - The value of the gross estate of the decedent shall be determined by
including to the extent provided for in this part, the value at the time of his death of
all property, real or personal, tangible or intangible, wherever situated
Interests at Death: §2033, Reg. §20.2033-1 (P. 1172)
§2033 - The value of the gross estate shall include the value of all property to the
extent of the interest therein of the decedent at the time of his death.
-Things get trickier when you are not looking at direct interest of property at
Helvering v. Safe Deposit and Trust Co. (269) - general power of appointment not
included if not exercised (no longer good law)
-Z had 3 trusts when he died at age 20. He had an income interest until 28. He had a
remainder interest at age 28. Also, if her were to die he had a general power of
appointment to decide who got the property. Everyone agreed that his income
interest was not enough to have it included in his estate. However, the IRS argued
that because he had a general testamentary power of appointment, he had an
interest at the time of his death.
-Court holds that unexercised testamentary power of appointment does not
constitute an includible property interest at the time of death.
*However, in response to this decision, Congress enacted 2041(a)(2) which stated
that it must be included even if not exercised.
First Victoria National Bank (272)
-Under a government program, rice farmers were entitled to land allotments based
on production history which could be transferred to heirs.
-Court held that, like goodwill, transfer of production history had value and must be
included in decedent's estate
Technical Advice Memo 005 (275)
-Even stolen property might have to be included in decedent's estate
Estate of Moss (277) - Interests at Death
-M sold his interest in mortuary to his employees under contract that provided for
monthly installment payments which shall be canceled and extinguished upon the
death of M. M dies and court holds that the remaining payments were not
includible in M's estate because the cancellation was part of the bargained for
1. AM transfers Blackacre to A for life, remainder to A's issue, gift over to Red Cross
on failure to issue. When A dies, how much will be included?
-Nothing. Because the only property interest had ended at her death, she is not
transferring anything to her estate at her death. Therefore, nothing is
includible in her taxable estate.
2. A transfers Blackacre to C for life, remainder to T in fee simple. T dies while C is
living. At his death, what is includible?
-Because Ted's heirs will step into his shoes and get the property, he does have
to include the PV of the remainder interest in his gross estate.
3. P gave his 53 year old daughter J, a term of years for 20 years, with remainder to
J's issue. J died 5 years after establishment of the trust.
-Because there is still 15 years to go on the income interest, it will go to her
estate for the next 15 years and is includible.
4. Assume same facts as 3, except that it is P that dies when the trust is in existence.
-Because P might have a reversion in the remainder (if J has no issue at the
time of her death),
5. Similar to the Moss case, because the payments stop at death and because a
premium was paid, nothing is included in her estate.
8. S owns Blackacre which she inherited from her father( worth $500k) and
Whiteacre which she purchased 2 years before with the savings from her job and is
-Total of $900k is included in her estate. (With respect to Whiteacre, 400k is
included. With respect to Blackacre, 500k is included.)
-Example: If H and W owns Whiteacre in a community property state, when H
dies (1/2) of the value is included in his estate. However, the entire property
gets a basis step up.
Lapsing Rights in Family Controlled Business: §2704 (P. 326)
Ex: Dad and Daughter own a controlling interest in Ajax. Dad has 100 shares of
Class A common stock. Daughter has 900 shares of Class B in common stock.
Dad's shares have 10-1 voting rights. Dad shares also have very favorable
liquidation rights. Upon Dad's death, all of the favorable provisions terminate.
Dad's estate argues that he transferred nothing to daughter, his rights just
-However, under §2704, these lapsing rights are treated as a direct transfer.
Estate of Hill (282) - Under §2033, the proper method is to determine as of the date
of death the decedent's contingent interest
Claims under Wrongful Death and Survival Statutes:
Rev. Ruling 54-19 - IRS indicated that damages under pure wrongful death statute
were not includible in the estate of the deceased.
Community Property in Gross Estate:
Revenue Ruling 54-89 - In a community property state, where the husband
purchases real property with community funds and take title thereto in his own
name, he holds a 1/2 interest in the property as trustee for wife and therefore only
1/2 is includible in his growth estate upon death.
Joint Tenancies: §2040
-Joint Tenancy - has right of survivorship
Ex: If A and B are joint tenants and A dies, B automatically gets A's share.
-Tenancy by the Entirety - similar to joint tenancy, but can only have between
husband and wife. It also has right of survivorship.
§2040. Joint Interests (189)
(a) The value of the gross estate shall include the value of all property to the extent
of the interest therein held as joint tenants with right of survivorship by the
decedent and any other person…
-We need to know how A and B acquired the property in joint tenancy.
Situation 1: If property held in joint tenancy was transferred to A and B as a gift
-§20.2040.1(a)(1) - (P. 1191) - If acquired by gift, when one of us dies, the
decedent’s fractional share of the property is included in his gross estate.
Ex: If A and B are the only 2 joint tenants, 1/2 is included. If there had been 3
joint tenants, 1/3 is included.
Situation 2: If property held in joint tenancy was purchased by A and B
-§20.2040.1(a)(2) - (P. 1192) - If purchased, the entire value of the property is
included except such part of the entire value as is attributable to the amount of the
consideration, in money or money’s worth furnished by the other joint owner or
-Amount Excluded = Entire value of the property on the date of death * (survivor's
consideration/entire consideration paid)
Ex: If A and B are joint tenants of property worth $5 million. (A paid for 80%, B
paid for 20%). If A dies, only $4 million must be included in his estate.
Ex 2: If B's 20% portion was made as a result of a gift from A, the entire $5
million must be included in the estate of A. (§20.2040.1(c)(4) - Example)
Situation 3: If property is held in joint tenancy by spouses (and there are no other
-For such spousal interests, 1/2 of the value of the joint tenancy property is
includible in the estate of the deceased spouse based on §2040(b).
-Based on 1014(b)(9) - the amount of the deceased spouse that is included in the
gross estate has an increase in basis to that which it was worth on the date of death.
1. Brad's estate includes $40,000 (However, the marital deduction will apply).
Maria's basis = $65,000
-If this had been community property, both shares would have gotten stepped
up to FMV and would have been $80,000.
2. Brad's estate includes $80,000. Maria's basis = $80,000
3. $30,000 included in Bob's estate.
4. Similar to Goldsborough, $4,000 can be excluded from Bill's estate
-the original $5,000 is treated as 1/2 bill, 1/2 gift to Angelo
-the appreciation from $2,500 to $5,000 is treated as Angelo's income
-therefore, 1/4 of the $10,000 land is attributed to Angelo, meaning $4,000 of
*As a practical matter, this can get fairly complicated
5. Carol = 60%, Bill = 40%. Carol estate tax = $120,000
Mortgages and Contributions
-To the extent that the joint tenants are personally liable for the mortgage payment,
each tenant is treated as contributing toward the purchase price his or her share of
the debt, as well as the cash which each contributes.
Life Insurance: §2042
Two basic types:
1. Term insurance: where you are just paying for this coverage in case you die
sooner than you hoped. If you die during the term in which you had paid the
premium, your beneficiary will get the proceeds.
-Ex: A pays $500 premium, if he dies during the year B gets $100,000. If A
lives, the insurance company keeps the $500 and B receives nothing.
2. Whole life insurance (cash value): you pay a higher premium for the same
$100,000 of protection. You are paying a portion of it into an investment
-Ex: A pays $2,000 premium: $500 insurance premium, $1,000
investment, $500 in expenses
*On the estate tax side, the type of insurance does not matter.
-It is possible that the policy can be taken out by someone other than the insured.
-Ex: Kirsch's wife could take out a policy on his life, he would be the insured,
but she would be the owner of the policy.
-State law limits the class of people who can own a life insurance policy on
someone else's life.
-Must have an "insurable interest" - an economic interest in the continued
existence of the insured.
-Who is the beneficiary of the policy?
-The person who will receive the life insurance proceeds when the insured
-You can also name your estate as the life insurance beneficiary, you can name
a specific beneficiary, or you can name a trust.
-In certain circumstances, it is possible to change the beneficiary of a life
-The value of the gross estate shall include the value of all property
(1) to the extent of the amount receivable by the executor as insurance under
policies on the life of the decedent.
(2) to the extent of the amount receivable by all other beneficiaries…with
respect to which the decedent possessed at his death any of the incidents of
ownership (If decedent had no incidents of ownership at the time of his death -
nothing is includible in his estate.)
Ex: Premium of $500/year, Proceeds $100,000. Beneficiary is his estate.
-Reg. §20.2042-1(a)(3) - the amount to be included in the estate is the full
amount receivable under the policy
Possession of Incidents of Ownership:
Reg. § 20.2042-1(c)(1) - (P. 1201)- requires inclusion if exercisable either alone or in
conjunction with any other person
Reg. § 20.2042-1(c)(2) - (P. 1201) - The term "incidents of ownership" is not limited
in its meaning to ownership of the policy in the technical sense. Generally speaking,
the term has reference to the right of the insured or his estate to the economic
benefits of the policy. Including:
-the power to change the beneficiary
-to surrender or cancel the policy
-to assign the policy
-to revoke an assignment
-to pledge the policy for a loan
-to obtain from the insurer a loan against the surrender value of the policy
Reg. § 20.2042-1(c)(3) - “incidents of ownership also includes a reversionary interest
in the policy, but only if the value of the reversionary interest immediately before
the death of the decedent exceeded 5% of the value of the policy.
Rhode Island Hospital Trust (318) - Policy facts take precedent to intent facts -
-Dad buys life-insurance policy on his son's life when he was 18 years old. Dad treats
it as if it were his own and paid all of the premiums. The policy said that the son, the
insured person, had the right to change the beneficiaries. Mom was beneficiary and
son dutifully changes the beneficiary to Dad. Son then dies. Issue: Does this life
insurance have to be included in the son's estate?
-Court holds that it does, because the son had the right to change the beneficiary
which is an "incident of ownership" within 2042(2). It did not matter that, as a
practical matter, son could not exercise his power. Policy facts take precedent to
Morton (322) - Decedent apparently did not have the legal right to change the
beneficiaries even though policy said he did - no inclusion
-Decedent had life insurance which was paid for by his father-in-law. Here, even
though the wording of the policy appears to give several incidents of ownership to
the taxpayer, the Court held that the decedent's estate did not have to include the
value of the policy.
-Court looked at state insurance law and held that it is not enough that the policy
said the decedent had certain rights, because as a result of his wife's involvement
(she had paid the premiums and was irrevocably listed as the beneficiary), his
purported rights could not be exercised.
-The executor can recover from the beneficiary such portion of any tax paid on an
insurance policy distributed to another person.
Avoid Possession of Ownership:
(1) The insured could apply for and acquire a policy on her life and assign the
policy to the intended beneficiary.
(2) Have a party (other than the insured) who has an insurable interest acquire
the policy on the life of the insured.
Revenue Ruling 72-129 (332)
-Created trust that, generally speaking was irrevocable. However, the insured person
could borrow from the policy whatever he had paid in premiums. The Court held
that this was an "incident of ownership", and therefore, the entire amount was
includible in the gross estate.
-However, had that clause not been included, would not have been considered
"incident of ownership"
1. None of the $100,000 would be included in her estate because she transferred all
of the incidents of ownership over 3 years prior to her death.
-Based on 20.2042-1(c)(1), it would be viewed as to Franklin as her son in his
individual capacity, rather than as the executor
*There is no premium-payment test, so the fact that Alice paid the premium
has no effect
2. (Similar to Goodman case on 327)
Judy - Because Scott was a revocable beneficiary at the time of Charles' death,
she is deemed to have made a gift of the policy proceeds ($200,000) to Scott.
Charles' estate - nothing is included in Charles' estate because it was not his
policy and he has no incidents of ownership at the time of his death.
Scott - received a gift in the amount of $200,000
*If Judy dies while holding the policy, it will not be relevant under 2042
because that looks just at if the decedent owns the policy. However, it is an
asset that has value, it is includible under 2033
6. Nothing would be included in her gross estate based on 20.2042-1(c)(4) and
Revenue Ruling 79-129.
-Assigned all incidents of ownership, to an irrevocable trust, over 3 years prior
to death. When she transferred the policy, she's made a completed gift.
*If P made herself trustee, she would get hit by 2042 (unless she didn't
originally retain the incidence of ownership as in Skifter)
*Note - If a person gets a life insurance policy and transfers it and dies within 3 years
of the transfer, the insurance policy will be included in decedent's estate. To avoid
any risk, normally the insured will contribute cash into the trust, and the trustee will
go out and purchase an insurance policy (which will then never be included in the
gross estate because decedent will never have "incident of ownership".
Retained Life Estates: §2036
§2036(a) - (P. 181) - The value of the gross estate shall include the value of all
property to the extent of any interest therein in which the decedent has at any time
made a transfer (except in case of a bona fide sale for an adequate and full
consideration in money or money's worth) by trust…
-under which he retained for his life OR
-for any period not ascertainable without reference to his death OR
-for any period which does not in fact end before his death
Three requirements: Reg. §20.2036-1(a) - (P. 1172)
1. Decedent transfers property during his lifetime to a trust
2. The trust was not for full or adequate consideration
3. He retained for 1 of 3 time periods, certain rights:
(1) the use, possession, right to income, or other enjoyment of the
property (2036(a)(1)), OR
(2) the right, either alone or in conjunction with any person, to designate
the persons who shall possess or enjoy the property or income
Note: Reg. §20.2036-3(c) - where the donor retained an income interest in only a
portion of the asset (ex: ½), just that portion will be included in the D’s estate.
-Also, where contingent interest - deduct value of any outstanding income interest.
Ex 1. Dad donates property in trust where income goes to child until he reaches age
25 and then the son gets the full principal.
-This is not includible in Dad's estate under 2036 (However, it would be a
Ex 2. What if Dad retained an income interest in the trust and gave the son a
remainder interest in the principal?
-Based on 2036, dad might have to include the entire trust in his estate.
-However, at the time of the transfer, the son's remainder interest is a taxable
gift. To ensure there is not double taxation, the amount of gift tax paid on the
remainder interest will be credited when computing the estate tax
§2207B (corollary to 2206)- If any part of the gross estate on which tax has been
paid consists of the value of property included in the gross estate by reason 2036,
the decedent's estate shall be entitled to recover from the person receiving the
property the amount which bears the same ration to the total tax under this chapter
1. Based on Rev. Ruling 79-109 (page 354), only that portion of the value of the
home represented by the retained use need be included in the estate.
-There was a completed gift. The value of the retained interest could not be
calculated on 2702 because it was implied.
-She retained enjoyment of the property. The Court has made clear that they
will look at informal understandings.
Estate of Maxwell (347)
-L sells house to W in exchange for a mortgage note which she had no intent to
collect on. She forgave enough of the note each year so that the forgiven amount
came within the annual exclusion. As part of this arrangement, W paid interest to L
and L was permitted to stay in the home, provided that she paid rent to W. The
court determines that the rent and interest are almost identical and are therefore a
wash. Also, since L never planned to collect on the note, it was ignored. Therefore,
all that was left was that L transferred the house and was allowed to enjoy it for the
rest of her life. Therefore, Court held that 2036 applied and the entire value of the
house was included in her estate.
*This was different from the treatment of the court in the gift tax context in
Haygood (89), which respected a similar note.
Contingent Retained Life Estates: (note: deduct outstanding interest)
Estate of Nathan (355) - 2036 applies even to a contingent remainder interest
-N sets up an income trust, with income to be paid to S while she is alive and then to
N if he is alive. Here N only retained a contingent right to income and because he
died first, before his sister, he never got his hands on the income.
-Court held that the statute must be so construed as to impose an estate tax on the
property covered by this trust less the value of the life estate of the sister. 20.2036-
1(b)(1)(ii) - (Page 1173) now supports this reading.
Support of Dependents and Other Beneficial Retentions:
20.2036-1(b)(2) - the "use, possession, right to the income, or other enjoyment of
the transferred property" is considered as having been retained by or reserved to
the decedent to the extent that the use, possession, right to the income, or other
enjoyment is to be applied toward the discharge of a legal obligation of the
decedent." (Estate of Gokey - 375)
Estate of Chrysler (372)
-D set up a trust in which income may be paid to support minor children. D was not
a trustee, instead trustees were disinterested. Therefore, it was held that D did not
have possession or enjoyment necessary to make the trusts includible in his estate.
Retention of Control - § 2036(a)(2)
Reg. §20.2036(b)(3) - (P. 1173) - Even the right just to control the timing is enough
to include in gross estate
-Ex: Dad sets up an irrevocable trust for son and Dad can decide when the son gets
the income for the next 20 years. In 20 years estate will go to son, or If son dies,
income and principal goes to son's estate.
-This is enough to include the trust in Dad's estate under 2036 as illustrated in
Struthers v. Kelm (384)
*Key point - don't name the donor as a trustee, because the donor even controlling
the timing can cause the trust to be included in his estate
Rev. Rul. 59-357 (380) - where a parent, who has a legal support obligation with
respect to a minor child, makes a gift to the child under the Uniform Gifts to Minors
Act, and appoints himself as custodian for the gift and then dies when the child is
still a minor, the property which is the subject of the gift shall be included in the
Retention of Control - Ascertainable Standards
-If donor can vary distributions based on an ascertainable standard such as "support,
maintenance, health, and education" it is not interpreted as discretion and therefore
is not includible in donor's estate under 2036(a)(2)
-However, if not ascertainable standard, it is includible under 2036(a)(2)
Byrum (404) - no longer good law, Congress enacted 2036(b) in response
-D originally owned 3/4 of the stock in a corporation which he transferred to an
irrevocable trust for the benefit of his children. However, he retained the right to
vote the stock and to veto any sale of the trust's stock. The Court sides with
taxpayers, holding that defacto control over directors is not the same as the legal
right to determine who gets the benefits of the trust. Indirect ability is not going to
be viewed in the same way as the direct ability to control the distributions of income
from the trust.
*2036(b) - for purpose of 2036(a)(1) - the right to vote the stock to control
corporation is considered retention of enjoyment
-Sold retained income interest within 3 years of dad's death for adequate and full
consideration to keep 2036 from applying. Court holds that this does not work. 2036
means that was the initial trust transfer for adequate consideration. It is not saying
did he get full consideration for selling it before his death. 2035 does not say that all
property transferred within 3 years has to be brought in.
Problems (417 - 418)
2. This would not be included in Nick's estate because he has to replace the trustee
with an independent trustee (meaning he couldn't replace it with himself). Even if he
could put himself as the trustee, it would not have been included in his estate
because the trustee cannot alter who is going to get the income.
-Ask: Did the trustee have any power, that if he had himself, would cause the
trust to be included in his estate.
3. Even if the trustees had the discretion to distribute income among people, it
would not be included in his estate because he could only put in place an
independent corporate trustee (and not himself)
-Based on Revenue Ruling 95-58 (395) - not includible unless he could replace
with himself or someone subordinate to himself
-This is also represented in Estate of Wall (393)
-If donor could replace trustee with himself or a subordinate party, the trust
would be included in his estate based on Estate of Farrel (388)
6. The $50,000 is includible in his estate under 2036(a)(1) or (a)(2) because he was
the custodian and could control timing. (See page 388)
7. If he had appointed his wife, this would work to prevent the amount from being
included in his estate.
-However, if wife also appointed husband this could bring up a reciprocal trust
doctrine issue and would still be includible
10. If S establishes a trust in which she retains the right to alter distributions for
-In this case, the trust is not includible in her estate under 2036(a)(2) because she is
limited by an ascertainable standard
-If trustee can go further and provide for beneficiary's "happiness" or "pleasure" or
"reasonable requirements" it would held that it was not an ascertainable standard
and it would be enough to include it in S's estate.
*In gift tax context, if you only have an ascertainable standard, you don't have
discretion and it is treated as a completed gift.
11. If Sally has discretion to alter for "any other valid reason"
-It is too broad and not an ascertainable standard - therefore includible in gross
estate under 2036(a)(2)
-Illustrated in Old Colony Trust - 400
Powers to Alter, Amend, Revoke or Terminate: §2038
§2038 - the decedent previously made a transfer of the property and at the date of his
death, he possessed the right, alone or in conjunction with any other person, to change
the enjoyment of the property by altering, amending, revoking, or terminating the
enjoyment (or where any such power is relinquished during the 3-year period ending on
the date of the decedent's death).
-Typically applies where you retain the right to revoke a trust at any time. Because at
the time of death, you held the power to revoke that transfer, 2038 would apply and
include that trust property in your estate.
-Right to alter OR Right to control timing
Does not apply: - Reg. §20.2038-1 (P. 1178)
(a)(1) - to the extent that the transfer was for an adequate and full consideration in
money or money’s worth
(a)(2) - If the decedent’s power could be exercised only with the consent of all
parties having an interest
(a)(3) - To a power held solely by a person other than the decedent. But…if the
decedent had the unrestricted power to remove or discharge a trustee at any time
and appoint himself trustee, the decedent is considered as having the powers of the
-M transferred property in a trust for the benefit of his son. M was the trustee of the
trust. Trust was supposed to accumulate income until son was 21, when M was
supposed to distribute accumulated income to son. When son turned 25, the entire
principal was to be distributed to son. However, dad could also distribute any
income whenever he decided to. M dies when son is still under the age of 21.
-SCOTUS holds that §2038 applies and therefore the trust is includible in dad's
estate, because M could alter the enjoyment of the property by accelerating both
the income and the principal.
Ex: Mom puts money in a trust, income goes to Dad and remainder goes to adult son
upon Dad's death. Trust provides that mom can revoke this trust but only with the
consent of Dad. If Mom dies, is this going to be included in Mom's estate because of
the revocation power?
-It would be included in her estate based on 2038(a)(1) - "by decedent alone or by
the decedent in conjunction with any other person.
Ex 2: What if Mom could only make a change with the consent of all beneficiaries?
-It would not be includible in her estate based on 20.2038-1(a)(2)
Round (429) - Incompetency
-Mr. R sets up a trust for the benefit of his children. Trust income was to be paid
annually to the children. Mr. R was a co-trustee with the Bank and the trustees
retained the ability to distributed the principal to the beneficiary at their discretion.
Prior to his death, Mr. R became incapable of handling his own affairs. Trust
provided that if Mr. R was incapacitated, the Bank would act as the sole trustee.
Estate argues that 2038 should not apply because once Mr. R became incapacitated,
the Bank became the sole trustee, and therefore Mr. R had no discretionary powers
at date of his death. Court holds that it is includible under 2038, because based on
the trust agreement, Mr. R could have resumed acting as trustee if he had regained
*Court seems to imply that if under state law trustee had no way to regain his
capacity, 2038 may not apply.
*If trust had stated that his trustee power lapses at incompetence, this could have
been avoided and would not be included in his estate. An automatic lapse would
also be outside the 3 year time period required in 2035.
1. If David had the power, 2038 would most likely be triggered because the standard
is too broad to be an ascertainable standard.
-Because David can remove and replace trustee, and can replace the trustee
with a person related or subordinate to him, the IRS will apply the underlying
substantive provisions to David.
-20.2038-1 - for example, if the decedent had the unrestricted power to
remove or discharge a trustee at any time and appoint himself trustee, the
decedent is considered as having the powers of the trustee.
-Only the PV of the income interest at the date of death would be included.
4. This would not be included in M's estate based on 2038 and the logic of the court
in Jennings v. Smith
5. This would be included in B's estate under 2036(a)(1), (a)(2), and 2038.
Differences between 2036 and 2038:
(1) Contingencies treated differently
2036 - decedent's retained interest. Contingent interest enough to trigger 2036(a)(1)
(although you can subtract value of present interest).
2038 - must just hold power at the date of death. Contingent interest not enough to
trigger, you must actually have power at death.
(2) Did you retain discretion at the time of transfer? (retain vs. held)
2036 - If you did not initially retain discretionary powers, but got them afterwards,
will not constitute retain
2038 - as long as you held the powers at the date of your death, it doesn't matter
how you got them
(3) Type of enjoyment the power can affect.
2036(a)(2) - concerned with playing around with the enjoyment of the income of the
2038 - talks generally about interest in property (both income and principal)
Ex: Mom creates trust with income to son for 10 years and son gets everything
after 10 years. Mom can accelerate principal distribution.
-This would not get caught under 2036 because it does not affect the
enjoyment of the income of the property
-This would get caught under 2038 because she is accelerating the principal
(4) Amount included in gross estate when provision is triggered:
2036 - requires the inclusion of all of the underlying property (subject to exceptions
on page 410)
2038 - often has a narrower amount included - What property interest were you
able to control the beneficial enjoyment of?
Ex: If Mom can alter only the income interest
2036 - the entire amount is includible
2038 - only the income interest amount in includible
*Whichever generates the larger inclusion will end up applying
Transfers Taking Effect at Death: §2037
2037(a): General rule
-The value of the gross estate shall include the value of all property to the extent of any
interest therein of which decedent has made a transfer (except in case of bona fide sale
for adequate consideration)
Two main requirements:
(1) possession or enjoyment of the property can, through ownership of such
interest, be obtained only by surviving the decedent, AND
(2) the decedent has retained a reversionary interest in the property, and the value
of such reversionary interest immediately before the death of the decedent exceeds
5 percent of the value of such property
1. Tom establishes trust with income to S for her life, remainder to be distributed to N at
S's death. If N had died already when S dies, then to Tom.
-Nothing included in Tom's estate because there is no survivorship requirement
-2036 would not apply, neither would 2038
-Tom does have a contingent reversionary interest under 2033, as a result he did
own some property interest which he would have to pay based on actuarial
calculations. (Therefore, some relatively small value would have to be included -
2. J sets up a trust were the income goes to a charity for his life, remainder to go to
daughter B or her estate. J dies 4 years later survived by B.
-First prong of survivorship is met, however J did not retain any reversionary interest
in the property under 2037(a)(2)
*You have to keep in mind that there could be a reversionary interest as a matter of
state law (Spiegel 451)
*If it had just been to Barbara, and not to her estate, you would have to look to state
3. A creates a trust, income to go to a charity for her life with remainder to B, if living. A
died 8 years later survived by B.
-First prong is met, because no one could get hands on property while A is alive.
-Second prong is met (assuming 5% reversionary interest), because trust document
doesn't specify what happens if B is dead when A dies (similar to Spiegel). The entire
$1,200,000 is included in A's estate.
4. M establishes a trust upon which interest is to be paid to E for life, with the remainder
to be distributed to M if alive at E's death, otherwise to P or his estate. M dies while E and
P are still alive. Corpus = $1.3 million, Life estate = $500,000.
-Because M has to be dead for the property to go to P, the survivorship requirement
-Because M retained a reversionary interest in the trust, the second prong is met.
-The reversionary interest is not is the same thing as the remainder interest, it
is comparing M's life to E's life.
-The remainder interest is valued at $800,000 (it just looks at how long E has left to
live and subtracts out the PV of E's life estate.
5. G establishes a trust with corpus of $400K. All of the income is accumulated. When only
1 child of her father's children is left surviving, that survivor gets everything. G dies first
and at her death the full trust is worth $900K.
-The first prong of survivorship is met because her siblings cannot get it if she is still
-She has also retained a reversionary interest, because if he 2 siblings die first, it will
all come back to her.
*To determine whether the reversionary interest is over 5%, you would look at her
life span compared to her siblings.
*The full value of the trust would be included in G's gross estate.
Estate of Marshall (451)
-H creates a trust, income to W for life, remainder to W's will, else to W's heirs under PA
law. Husband under PA law is entitled to (1/3) share of his wife's property. Were there
any beneficiaries who could take that (1/3) interest in the property? If so, survivorship
prong is not met.
-Because the court found that there were multiple events upon which the beneficiaries
could have take the 1/3 interest without surviving the decedent, the transfer is not
includible in Marshall's gross estate. (Possibility of divorce was the key circumstance)
5 Percent Rule:
-You do not look at the actual health of the decedent in calculating whether or not the
decedent's reversionary interest exceeded 5% as to be included under 2037.
-The value of the reversionary interest is not what is included in the decedent's estate.
Revenue Ruling 76-178 (459)
-D made a trust. Income to A for A's life, remainder to D, if D is living at A's death. If D is
not living at A's death, it goes to D's child or D's estate.
-With respect to the remainder interest, the interest in survivorship is satisfied. Since the
value of the reversionary interest was valued at 43% (which exceeded 5%) the percentage
requirement was satisfied and 2037 applied.
-The court included in D's estate the value of such property less the value of the
outstanding life estate in A (which came to $81,569).
-To calculate the reversionary interest, court compared A's life expectancy to B's life
-What the court included is the remainder interest, just based on A's life expectancy.
Powers of Appointment: §2041
Reg. 20.2041-1(b) - (P. 1192) Power of appointment includes all powers which are in
substance and effect powers of appointment regardless of the nomenclature used in
creating the power.
*It is only a power of appointment when another person gives you the power, not if you
give it to yourself.
Ex: If A creates a trust for B and makes B the trustee with the power to distribute the
funds, this is a power of appointment even if not referred to as a power of
*Ask: Is the power general or special? Is there a limited ascertainable standard?
-Both rules turn on whether or not the power holder holds a general power of
appointment or whether it is a non-general power of appointment.
2041 (b)(1) - The term "general power of appointment" means a power which is
exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate.
What if trustee can be removed and replaced by the beneficiary?
-Generally speaking, if B can name himself, a relative, or a subordinate as trustee,
the current trustee's powers will be attributed to B.
What if B has the general power to withdraw money from the trust to support his
-Reg. 20.2041-1(c)(1) - ability to withdraw to pay legal obligations is treated as
having power to withdraw for himself
-Pre-1942, the power of appointment only has to be included in his estate if he used
the power. There is no inclusion merely because he happened to hold a general
power of appointment at his death.
-After 1942 - merely holding a general power of appointment when he dies is
enough to trigger an inclusion of the property in his estate
Rev. Ruling 69-432 (498)
-Must look to state law to determine what rights the power holder at the time of his
2041(a) - The value of the gross estate shall include the value of all property:
(2) To the extent of any property with respect to which the decedent has at the time
of his death a general power of appointment OR with respect to which the decedent
has at any time exercised or released such a power of appointment by disposition if,
had you transferred your own property, it would have been includible in your estate
under 2035 to 2038.
Reg. §20.2041-3(d)(1) - (P. 1198) - Whenever there is an exercise, lapse, or release - check
to see if it would have been included under 2035, 2036, 2037, or 2038.
*However, under Reg. §20.2041-3(d)(2) - 2041(a)(2) is not applicable to the complete
release of a general power of appointment…if the release was not made in contemplation
of death under 2035 and after the release the holder retained no interest in or control
over the property subject to the power which would cause the property to be included
under 2035 to 2038 if the property had been transferred by the holder.
Ex: B had the power of appointment to appoint trust property to anyone. He
appoints the property to a new trust which states: income to B for life, remainder to
C. If B had just taken his own money, 2036 would say that when you die all of it has
to be included in your estate.
-Therefore, it is includible in B's estate under 2041.
Ex 2: A sets up trust with income to B for life, remainder to others, and B has a
general power of appointment for life.
-Because B released the power of appointment, 2036 would have applied had B put
in the money himself.
-Therefore, it is includible in B's estate under 2041.
2041(b)(2) - the lapse of a power of appointment during the life of the power holder, shall
be considered a release of the power.
-5 and 5 amount applies (greater of 5% of $5,000 excluded)
Ex: A creates trust for B. B had the power to withdraw up to $7,000 each year
(noncumulative). B is also entitled to the income from trust for life. He lets it lapse. If
he had put his own $7,000 in a trust like that, 2036 would have applied.
-Therefore, it is includible in his estate under 2041 (however, the 5 and 5 rule applies
so it is only the excess of the $7,000 over the 5 and 5)
Reg. §20.2041-3(b) - a power of appointment is considered to exist at death even though
the exercise of the power is subject to the precedent giving of notice, or even though the
power takes effect only on the expiration of a certain period…whether or not notice has
been given before the decedent’s death.
2041(b) - Exceptions to "general power of appointment":
(1)(A) - if power to invade is limited by an ascertainable standard relating to health,
education, support, or maintenance
(1) (C) - a power that is exercisable by the decedent only in conjunction with another
person (joint power)
(a) If the Bank is the trustee, there is no inclusion because Sun has no general power
of appointment. If Sun is the trustee, there is no inclusion in her gross estate
because it is an ascertainable standard under 2041.
(b) This would not be includible based on regulation 20.2041-1(c)(2) on page 1193.
(c) This will be includible because it is not limited by any ascertainable standard.
(d) This will be includible because it still includes "welfare and happiness" which is
not an ascertainable standard.
2. In 1964, M put stock into trust when she died with H as trustee. Income is divided
equally among H's children and remainder to H's grandkids at the last kid's death. If
no living grandkids, to H or H's estate. Trust provides H with the ability to withdraw
$10,000/year for his "needs". H's remainder is $5,000 and the corpus is $150,000.
Two children alive upon H's death.
-It is a general power of appointment because he can take money out for himself
and there is no ascertainable standard.
-He must include the $10,000 he could take out at the date of his death (based
-In looking back at the prior lapses, if he had put money directly into the trust
himself, he would have no powers that would trigger 2035 and 2038 (he
doesn't have the power to alter the enjoyment of the property)
-He also didn't have income coming to him for his life (unless his kids were
minors), therefore nothing included for lapse under 2036.
-His contingent remainder interest is also includible under 2033.
3. Ma sets up a trust with trustees as Pa, Bo, Moe, Luke. Income and principal can
go to Pa and sons for their "health, education, maintenance, and support" as
needed. In addition, distributions can be made to sons to buy a house or start a
business. Trust is to terminate upon Pa's death. Is any part of the estate attached to
Moe for estate tax purposes?
-With respect to first power, it will be an ascertainable standard and will not be
includible in his estate.
-The second power is an ascertainable standard, but it is not relating to his
"health, maintenance, etc." However, if you have to exercise it as a joint
power, it might not be included. Because the brothers have a substantial
adverse interest in Moe taking the money out of the trust, there is a good
argument that it should not be included in his estate.
Joint Power Exception: 2041(b)(C)(ii) - page 193
-Post 1942: you only get out of the general power of appointment definition if joint power
holder is one of 2 types of people:
(1) the other holder of the power is the donor
(2) the other holder has a substantial interest in the property adverse to that of the
donee. (This is similar to the substantial adverse interest in completed gift)
Ex: B gets income, D gets remainder interest. B has power of appointment only with
the approval of D. Because D's consent is required, B does not have a general power
Ex 2: If remainder is going to go to trust for D's benefit with bank as trustee, and B
can withdraw money but only with bank's consent.
-The bank does not have a substantial adverse interest based on Towle (fiduciary
duty is not enough)
-Substantial adverse interest, at very least, requires that the third person have a
present or future chance to obtain a personal benefit from the property itself.
Transfers Within 3 Years of Death: §2035
Advantages of Gifts:
1. With gift tax, you have an annual gift exclusion of $13,000/year
2. Get future appreciation out of tax base - With respect to property appreciating in value,
if you make the transfer in an earlier year, the future appreciation of the asset will not be
included in your gross estate (as long as you don't retain some sort of interest in it)
3. Get the amount of tax out of the tax base - The donor may use other assets to pay the
gift tax, however, with the estate tax you are paying the tax out of the assets of the estate
§2035 - (P. 178) - Adjustments for gifts made within 3 years of death
(a)(1)- if the decedent made a transfer of an interest in property during the 3 year
period ending in their death AND
(a)(2) - the value of such property would have been included in their estate under
2036, 2037, 2038, 2042, the value of the gross estate shall include the value of any
property which would have been so included..
*focuses on not letting you get the future appreciation of out tax base
Ex: Dad transferred property into trust worth $10,000 that appreciated to $10
million - income to Dad for life, remainder to others.
-2036 states that the entire amount must be included in his estate. Therefore,
if dad tries to cut the tie in the last 3 years, it will be included in 2035(a).
*As a practical matter, this comes up most often with life insurance policies.
(b) The amount of the gross estate shall be increased by the amount of any tax paid
under chapter 12 by the decedent or his estate on any gift made by the decedent or
his spouse during the 3-year period ending on the date of the decedent's gift.
Ex: Mom is terminally ill and she has a very large amount of assets. Mom
makes deathbed gift transferring everything she owns to her kids (except for
the amount of gift tax that will be owed). Her kids will end up with more
money in their hands than had she held onto it before death. This is because
the amount used to pay the gift tax is not used in calculating the total amount
of the gift, whereas it would be included in the estate for tax purposes.
2035(b) focuses on lot letting you get the amount out of your tax base. The
amount of gift tax that is being paid has to be included in the gross estate if the
gift was made within three years of death.
*It does not look at your subjective intent.
*One practical problem is that because the amount she paid for tax is included
in her estate, which has no assets left, the taxes from the extra amount will be
paid from the gift beneficiaries based on 6324(a)(2)
1. The $15,000 of gift tax paid is includible under 2035(b). The appreciation is not included
in her estate under 2035(a) because it is not one of the types of property (because there
was no retained or partial interest).
2. T took out a $100,000 life insurance policy on his life 10 years ago. Last year, T
transferred the policy to his son C, with it worth $40,000. T paid the $10,000 gift tax on his
-If Tony had not transferred this the entire amount would have been included under
2042, s a result, under 2035(a), he has to include the full $100,000 proceeds. The
$10,000 amount of gift tax must also be paid as a result of 2035(b)
3. M encouraged D to purchase a $100,000 on M's life. D paid for the policy premiums
using money she got indirectly from M.
-Here, 2035(a) does not kick in because 2042 would never have applied. As a result,
there is no inclusion under M's estate.
Calculating the Estate and Gift Tax:
-Through 2009, you could transfer $1 million in gifts, $3.5 million at death
-In 2011, you can transfer $5 million in gifts, $5 million at death (can't add them)
2502(a) - Page 258 - Current Year's Tax Liability (before credits) =
Tentative Tax (Current Taxable Gifts + Prior Taxable Gifts)
-Tentative Tax (Prior Taxable Gifts)
2505 - Current Year's Tax Liability
Excess (if any) of: (i) Current Year's Tax Liability (before credits) - (ii) Unused Credit
Year Taxable Gift Tax Liability Tax Payable Credit Used
2008 $250,000 $70,800 $0 ($70,800)
2009 $750,000 $275,000 $0 ($275,000) total amount of
For 2009: (Using chart on Page 144)
Step 1: Tentative Tax on ($750,000 + $250,000)
Step 2: (-) Tentative Tax on $250,000 gift from 2008
= $345,800 - $70,800 = $275,000
Alice Dies in Taxable Estate Tax Liability (before Unified Credit Estate Tax
2011 credits) Payable
$6,000,000 $2,430,800 $1,730,800 $700,000
For 2011: (using rate schedule for 2011)
Step 1: $6 million taxable estate + Adjusted lifetime gifts of $1 million = $7 million in
Step 2: (-) Tentative Tax on prior gifts of $1 million
Step 1 = $155,800 + (35% * $6,500,000) = $2,430,800
Step 2 = 0
Unified Credit = $1,730,800
Total Tax Payable = $2,430,800 - $1,730,800 = $700,000.00
*We subtract out the full unified credit at the time of death, because we are not
subtracting it out in Step 2.
§2051 (P. 195): Taxable Estate = Gross Estate - Taxable Deductions
What deductions can you take?
1. Deductions aimed at trying to accurately measure net amount available to transfer to
§2053, 2054 - What is actually available for transfer? (Deductions with respect to
debts that you owe, administrative expenses, etc.)
2053: Deductible Expenses
(a) the value of the taxable estate shall be determined by deducting from the value
of the gross estate such amounts:
(1) for funeral expenses
(2) for administrative expenses (discussed on page 1210)
(3) for claims against the estate (debts that were incurred during decedent's
(4) for unpaid mortgages
1. Must be allowable under the relevant state law
Ex: Husband dies and wife says that she was working for husband in
business and wants back salary as a claim against the estate. This must be
recognized under the valid state law. Because it was not recognized
under state law, it could not be taken as a deduction.
2. 2053(c)(1)(A) - debt must be, when founded on a promise or agreement, be
limited to the extent that they were contracted bona fide and for an adequate
and full consideration in money or money's worth.
3. 2053(c)(2) - generally cannot exceed the value of the probate estate
2. Charitable and Marital Deductions
§2055, 2056 - Charitable and marital deductions
§2056 - Marital Deduction
(a) requires that the property pass to the surviving spouse at the decedent's death.
Ex 1: H has a will which says everything to W if living, or else to son. Wife
makes a qualified disclaimer.
-If Wife executes disclaimer, no marital deduction would be allowed.
Ex 2: Will says to my father then to wife. Father executes qualified disclaimer.
-This would qualify for the marital deduction.
-Issue: Instead of leaving full interest, what if they leave a terminable interest like a
(b)(1) - (P. 207) you don't get the marital deduction if the interest passing to the
surviving spouse is a terminable interest
Terminable interest (Reg. §20.2056(b)-1) - (P. 1238) - two conditions must
apply to constitute a nondeductible terminable interest
(1) if interest given to spouse could terminate upon some future event and
(2) upon the happening of that event, the interest passes to any person other
than such surviving spouse (or the estate of such spouse)
Ex: H gives an interest to W for her lifetime with a remainder to son at W's
*Concern - if we allow for a marital deduction for a terminable interest, there
will be no tax when the husband dies and no tax later when the wife dies.
(b)(3) - not a terminable interest if such death will cause a termination only if it
occurs within a period not exceeding 6 months after the decedent's death AND such
termination or failure does not occur.
Ex: H dies with will that says all property distributed to W if still living at the
end of H's probate, otherwise to son.
-This would still be a terminable interest because her interest could terminate
upon a future contingency. Upon this contingency it would go to son. (b)(3)
would not help them on these facts because it is possible that the probate
proceeding could last more than 6 months.
Ex 2: To W if living 6 months after his death, else to son. W survives past the 6
-This would work under (b)(3).
(b)(5) - Life Estate with Power of Appointment - Reg. 20.2056(b)-(5)(a) - (P. 1245)
1. The surviving spouse must be entitled for life to all of the income from the
entire interest or a specific portion of the entire interest, or to a specific
portion of all the income from the entire interest.
2. The income payable to the surviving spouse must be payable annually or at
more frequent intervals.
3. The surviving spouse must have the power to appoint the entire interest or
the specific portion to either herself or her estate.
4. The surviving spouses power must be exercisable by her alone and must be
exercisable in all events (no contingencies placed on it).
5. You cannot give some other person a power of appointment to start giving it
some other people. You could give someone else the ability to appoint it to the
*This works because it is includible in the surviving spouse's estate under 2041
(b)(7) - QTIP exception - In the case of a QTIP, you get the full amount of marital
deduction for the property.
QTIP means property:
-which passes from the decedent
-in which the surviving spouse has a qualifying income interest for life, and
-to which an election under this paragraph applies (unlike LEPA, executor must
make an election for this to apply)
*This works because of 2044 which states that "the value of the gross estate
shall include the value of any property to which this section applies in which
the decedent had a qualifying income interest for life.
*If surviving spouse transfers away any interest in this trust when she is alive,
she will get hit with a gift tax based on 2519.
Qualifying income interest for life:
-if surviving spouse is entitled to all the income form the property, payable
annually or at more frequent intervals, and
- no person has a power to appoint any part of the property to any person
other than the surviving spouse
(d) - Disallowance of the Marital Deduction Where S.S. is not a U.S. Citizen.
(1) In general, if the surviving spouse of the decedent is not a US citizen no
deduction is allowed unless
(2) the property is passed to the surviving spouse in a qualified trust
Common Estate Planning Issues:
Option #1 - Transfer all assets outright to S.S.
Ex: Gross estate has $7 million at time of death. H gives all assets to W at death.
-At H's death, not tax (marital deduction)
-At W's death, full $7 million in included in her gross estate
-First $5 million will be cancelled out by her unified credit, but $2 million will
-This is because they wasted H's unified credit
Option #2 - Transfer all assets to QTIP trust for S.S.
Ex: Gross estate $7 million at time of death. One trust meeting QTIP requirements.
*Same tax consequences as Option #1
*Nontax consequences are different because wife does not have the power to
transfer to anyone
Option #3 - Typical A/B Trust Structure
Ex: Gross estate $7 million at time of death. Two trusts, one will utilize the marital
deduction, the other will not
-First trust could be either QTIP, LEPA, or outright distribution depending on how
much control H wants.
-Second trust (bypass trust) is set up not to qualify for the QTIP or LEPA so that it is
included in H's estate and utilizes H's unified credit.
-Marital deduction used on $2 million in QTIP trust. Unified credit used for the
$5 million in bypass trust. No estate tax will be owed.
*In this situation, the first decedent's unified credit was not wasted.
*The 2010 law changed things by providing for portability of the unused spousal
exclusion amount. The new provision says that when the surviving spouse later dies,
she can use both her unified credit and the amount of her deceased husband had
that he did not use.
*This is only in effect for 2011 and 2012 as of right now.
*H's executor must make an election to allow this portability in order to allow it. This
is why you would file an estate tax return even if no tax is due.