1 ESTATE AND GIFT TAX GIFT TAX FRAMEWORK Gross Gift Taxable Gifts X Gift Tax Rates Tentative Gift Tax Gift Tax Liability GROSS GIFT A. Definition --§ 2512(b) – Gift is “where property is transferred for less than adequate and full consideration in money or money’s worth. § 2511 – Gift tax applies only to transfer of property (not services), direct or indirect, tangible or intangible (stocks). i. IRS first looks at adequate consideration in money or monies worth. If they think it is a gift, then taxpayer has burden of showing that there was no donative intent, hence the deal was simply a bad business transaction, hence it is not a gift. ii. Type of Consideration: money or money’s worth 1. Generally look to market value of consideration 2. Detriment to the transferee is not an acceptable form of consideration b/c it does not offset the depletion of donor’s estate (promise to finish school, or quit smoking, etc.) 3. Marriage is not worth anything 4. Business Transactions (Unequal) a. Look at donative intent, not just adequate consideration (bad business transactions are not subject to gift tax even though inadequate consideration was furnished) b. Closer the relationship between business actors, higher likelihood of donative intent. If IRS challenges, burden on taxpayer to show no donative intent iii. One can not give a gift to himself – If you set up trust with income interest to yourself, that is not a gift. iv. How to value a gift? 1. Use FMV at the time the gift is given 2. For split gifts (LE and Remainder) use tables and determine value of gift to each person independently at the time the gift is complete 3. If the gift is of encumbered property (debt), the encumbrance is excluded form the value of the gross gift. Technically it is a Gross gift with debt as deduction later on. 4. When you make a gift it is your obligation to pay the gift tax, if the donee pays the gift tax, then that is consideration for the gift. To figure out the amount of the actual gift, use a special table 2 v. What is property for gift tax purposes? 1. Uncompensated services do not constitute property § 2511. 2. Tangible property must have intrinsic value a. If Popovich does my tax returns that is not a gift (services). When he gives me the tax return papers (physical property) that is still not a gift because no intrinsic value, only valuable to me b. If someone writes a book and gives it to me then that probably is a gift c. If architect gives you blue prints to a standard house then that is close to a gift because standard house prints have value to others 2a. Intangible property qualifies as well. a. Stocks, bonds, etc. b. Life insurance policies are valued at interpolated “terminal reserve value” (ITRV) 3. Child support obligations a. Rule – All transfers of property to people to whom you do not have a legal obligation to support are gifts b. You are legally obligated to provide support for your child until age 18. No obligation to support, adult children, parents, or siblings; thus support to them is gift. But IRS may not delve into family matters (letting adult children live at home) c. Support for children is subject to reasonable standards. Generally support is not a taxable gift because the consideration received is the discharge of a legal obligation (support child), but if providing extravagant support (Ferrari) may be considered a gift 4. Loans a. Giving a loan is not generally not a gift because receiving promissory note as consideration b. If loan does not have a FMV interest rate attached then there is a gift. Why? Because the right to use money today is a property right and the value of that right is measured by the current interest rate. If paying less than current interest rate then the deficiency is a gift. For a term loan value it all up front, demand loan is valued each year. He won’t give us term loans situation. vi. Completeness 1. Only have a gross gift when there is a completed gift. 2. Rule – Reg. 25.2511-2(b) --A gift becomes complete and final and thus locks in its value when the grantor relinquishes sufficient dominion and control to leave him no power over its disposition 3. Powers affecting dominion and control a. Power to revoke = Incomplete Gift i. If trust is silent as to power to revoke then split in jurisdictions as to default 1. Majority and CA – Default rule is that trust is revocable thus gift in not complete 2. Minority – Default rule is that trust is irrevocable thus gift is compete 3 ii. Checks from Donor 1. General Rule is that mere delivery of a donor’s check does not give rise to a completed gift because it can still be revoked or cancelled. It is complete when cleared 2. Exceptions A. Charitable Donations B. Gift will relate back to previous year if : (1) check is given with intent to give gift in previous year, (2) unconditional delivery, (3) the check was deposited, or presented for payment in previous year, and (4) the check was deposited or presented for payment within a reasonable time of receiving it. b. Power to Change Beneficiaries = Gift not compete c. Power to allocate amongst named beneficiaries = Gift not complete i. Look for situation where grantor retains power to accumulate income. If income and remainder interest go to different people then this is not a competed gift of the income interest. d. Power to affect the Time/Manner of enjoyment = Completed Gift i. Be careful because this is a completed gift but also may get sucked back in to estate at time of death e. Power to manage and administer trust = Completed gift i. Watch out if the management power allow for more than just administrative powers. What if trustee has power to re-invest money from stocks to property? f. Retained prohibitive power exercisable only w/consent of person having a substantial adverse interest i. If grantor retains a prohibitive power but requires the consent of all parties whose interests are adverse, then the gift will be considered complete ii. Trustee is not considered an adverse 3rd party. g. Power retained by independent 3rd party: Discretionary trust i. As long as 3rd party (TE) is independent and not under the control of grantor, then the gift is complete regardless of what powers the TE has. Exception: Some states (majority and CA) have a law that allows creditors to invade a trust and get money that could potentially go the debtor. If that debtor is the grantor and the creditor has the right to get that money in satisfaction of the debt, then the trust was never a competed gift. Law that governs is generally the laws of state of domicile of grantor. Possibly can put a provision in trust stating what state laws apply. ii. Actions by TE can be triggered by an event or just outright discretion h. Power to replace TE with anyone other than himself – This is ok because each trustee is supposed to be independent and subject to 4 fiduciary duty. If grantor can become a trustee with prohibitive power, then no gift. i. Grantor retains prohibitive power but subject to ascertainable standard – This is a completed gift because in theory there is not power or control on part of grantor, just following orders of trust (standard must be ascertainable) Distributions for heath, education, welfare, medical, support, or maintenance/comfortable living is ascertainable. For the best interest or for the happiness is not ascertainable. For comfort has been seen to go both ways. j. Watch for sneaky life interest. Give house but continue to live there, this is only a gift of remainder interest. B. Disclaimers --§ 2518 – A disclaimer is an irrevocable refusal to accept a gift (1) Such refusal must be in writing; (2) Must be done within 9 months of receipt of the gift; (3) Must not have accepted the gift or any of its benefits; and (4) Can not redirect the gift (can not say where it goes) • If properly done, one can disclaim the gift and it is as if they never got it. If not properly done then one may suffer gift tax consequences. (e.g. Popovich gives gift of law books in his will, you don’t want them so you send them back to estate and they are redirected, if you don’t follow the rules, then you will be considered to have given the books as a gift) C. Exclusions i. Annual exclusion --§ 2503(b) – 11K per year per donee (12K in ‘06) 1. To get the annual exclusion, it must be a gift of a present interest, not a future interest 2. Test – Is the person to whom the gift is being made getting a present, immediate use and enjoyment of the property at the moment the gift is complete? 3. Examples of present interest a. Reg 25.2503-3(b) --Income interest in form of life interest or term of years interest counts as a present interest if the interest starts immediately upon completion of gift. Must be an unrestricted right to present enjoyment. b. Crummie powers – Gives power to withdraw X amount for X period of time, beginning immediately upon grantor’s contribution to trust. This creates a present interest in the amount of X i. Notice requirement: if no Rx notice given (typically written) then it is illusory ii. Must also give a Rx amount of time to withdraw. 15 days was considered reasonable in Cristofani. iii. When the right to withdraw expires it can be considered a lapse. See Notes Later. When someone has crummy withdrawal right, there is a limited period to withdraw. That is a GPA, what happens when it lapses. A lapse is not a problem, a release does create a power. A release is when you give up the power and then you are deemed to have exercised it. A lapse is considered a 5 release to the extent that it exceeds the greater of $5000 or 5% of the trust value. c. Gift of life insurance policy – When the owner of a policy transfers ownership, that is a gift valued at the “interpolated terminal reserve value” (ITRV) and that gift is considered a present interest, thus qualifying for the annual exclusion 4. Examples of future interest (thus no annual exclusion) a. Remainder interests are future interests b. If trust shall or may accumulate income, then it is a future interest c. If TE has ability to accumulate income, then future interest because not unrestricted present use and enjoyment. Does not matter if accumulation is subject to ascertainable standard. Just look to see if person is guaranteed the right to present enjoyment. 5. Watch for Reciprocal Gift Arrangements – No good for annual exclusion. Look to substance over style a. This is where parents make a deal to give 11K to each other’s kids so they get more exclusion ii. § 2503(e) – Educational and Medical Expenses i. Gross gift, but total amount excluded and not subject to gift tax if meet the following requirements: a. Amount is for tuition/fees (no books, room, or board) or qualified medical expenses b. Amount is paid on behalf of the donee c. Amount is paid directly to the provider (School or Hostiptal) ii. Note – If paying for your minor child’s tuition or medical then not gross gift to begin with D. Deductions i. Charitable Gifts --§ 2522 – Must be to a qualified charity ii. Gifts to Spouses --§ 2523 – Unlimited deduction for gifts to a spouse. The marital unit is treated as one unit so we don’t tax transfers in that unit. Still gross gift, but totally deductible ESTATE TAX FRAMEWORK Gross Estate Taxable Estate X Estate Tax Rates Tentative Tax Tax Liability Owed A. Gross Estate: Snapshot at death (Goodman) or § 2032 (you value the decedent’s estate either at the time of death OR exactly 6 months after death, but can only value at the later time if result would be a lower overall value of estate) 6 i. § 2031-33 – GE will include the value at the time of death of all property, tangible or intangible, wherever located. a. State property law determines who owns the property. However, the Feds assess estate tax and they apply applicable state law in determining if you own something. If your state Supreme Court makes decision, Feds must oblige. If a lower court in your state makes a decision, the Feds take into consideration but will make their own decision by apply state law (not for who owns the property, but for whether or not it will be included in your estate for tax purposes). ii. Joint Interests a. Community Property is simply half owned outright by each party. The half owned by a decedent will be included in his estate. b. Tenants in Common is simply owned outright by an individual. The FMV of the interest owned will be in his estate at death. c. Joint Tenancy 1. Spousal --§ 2040(b) – If married person has a joint tenancy interest and dies, half of the FMV of the entire property will be included in his estate. NOTE: This will be cancelled out by the marital deduction 2. Non-Spousal --§ 2040(a) – For non-married joint tenant who dies: Include 100% of the FMV of the full property in the estate except to the extent that decedent can show that a surviving joint tenant furnished some or all of consideration for the property. i. Keep in mind the tracing principles. If surviving joint tenants contribution substantively came from the decedent (by way of gift), then really no contribution at all. Include entire value in decedent’s estate. iii. § 2038 Artificial Inclusion (Revocable Transfers) a. General Rule --§ 2038 --The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any power to alter, amend, revoke or terminate. • If grantor can obtain a prohibitive § 2038 power by the occurrence of contingency, then look to see if the contingency is within the grantor’s control or not. If the contingency is within his control, then the grantor is automatically assumed to have this prohibitive § 2038 power. If the contingency is out of his control, then the grantor is only considered to have the power, if the contingency occurs and he actually physically gets the power. If he dies without the contingency occurring, and he never actually gets the power, then § 2038 will not be implicated. b. Tulley’s Estate – Must have true power to alter or amend or revoke, in this case the decedent needed other stockholders consent to revoke. Ruled that this is not really a power to revoke. In this case the corp. had the power to change beneficiaries, taxpayer just happened to be a shareholder, not considered a power held by the taxpayer, the corp. is its own entity. c. How much is brought back into the estate? – The over which decedent retained control is brought back into the estate. d. Possible Powers 7 1. Power to revoke – Not a compete gift, include in estate 2. Power to alter and amend i. Beneficiaries A. Change beneficiaries outright --Not a compete gift, include in estate B. Allocate among named beneficiaries --Not a compete gift, include in estate ii. Time and Manner of Enjoyment – Is a complete gift, and is artificially included in the estate. 3. Administrative powers – Not prohibitive powers, doesn’t effect completeness of gift, nor lead to artificial inclusion in estate e. Powers subject to Ascertainable Standard 1. General Rule – When decedent dies holding a power to alter, amend, or revoke subject to a contingency occurring, then the property will not be artificially included in the estate if that contingency is considered to be an ascertainable standard. 2. What is an ascertainable standard? – Distributions for heath, education, welfare, medical, support, or maintenance/comfortable living is ascertainable. For the best interest or for the happiness is not ascertainable. For comfort has been seen to go both ways. f. Issues with Trustees 1. If grantor and trustee have no prohibitive powers, then there will not be an inclusion in the estate no matter how many times grantor replaces trustee or even if he becomes trustee 2. If the trustee has a prohibitive power, then as long as the grantor can never become trustee it will not be included in his estate. Can trustee shop all day. If grantor has ability to become trustee with prohibitive power, then it will be included in his estate. 3. If the trust says that “if the trustee dies, grantor can replace him with anyone,” and such trustee has prohibitive powers, then there is a possibility that grantor can become the trustee himself. This is prohibitive. g. Power exercisable with consent of 3rd party? 1. For estate tax purposes, it does not matter if grantor’s retained prohibitive powers are exercisable with the consent of 3rd parties or not, it also makes no difference as to whether the 3rd parties have adverse interest. Bottom line is, if prohibitive power is held it will be pulled back in estate, 3rd party or not. 2. In states where state law is such that any trust can be modified with the consent of all beneficiaries jointly, then such a power will not cause inclusion in the estate. State law already allows for it, and if the trust simply repeats state law there is no negative consequence. CA is one of these states. iv. § 2036(a)(1) Artificial Inclusion (Transfers with retained Life Interests) 8 a. General Rule – If GR makes a transfer during his lifetime and retains the right to enjoy property (expressly or impliedly) during his life (life interest), then include the FMV of the property which is he enjoying in his estate at death 1. Burden on the party trying to exclude from estate. 2. Needs to look like a bona-fide transaction, beneficiaries should pay for maintenance, upkeep, taxes, insurance. If grantor remains there, must pay FMV rent. b. Limitation of grantor’s right to enjoy 1. Term of years estate – If grantor can enjoy the property for a term of years, it is not considered a life estate. However, if grantor dies within the term of years then he has effectively enjoyed a life interest in the property and the property will be included in the estate (FMV at the time of death). If grantor outlives the term of years, thus relinquishing right to enjoy property, then none is included in estate. 2. Time period not ascertainable without reference to grantor’s death – If such a time period is the limitation, then property will be included in estate at death. c. Child support trusts – Grantor receives indirect benefit 1. If child is a minor at the time of grantor’s death then property in trust for the welfare of the child will be included in his estate. This is because his child is his legal obligation to support, therefore the trust is actually benefiting the grantor by discharging that legal obligation. Note: when child turns 18 it becomes a gift to child and no longer included in grantor’s estate. 2. Independent Trustee in place a. If trust says “must” support minor child, then included in estate b. If thrust says “may” support minor child, then not included in estate v. § 2036(a)(2) Artificial Inclusion (Vicarious Enjoyment) a. General Rule --This is where the grantor retains the right to designate who shall enjoy the property while the grantor is still alive b. When Grantor retains power to change beneficiaries of an income interest during his lifetime, he is vicariously enjoying the property himself. We treat this situation as if he retained a life interest and pull the entire interest into estate at death. NOTE: If grantor can only effect who enjoys a life interest, under § 2038 we would pull back the affected interest (the life interest), but under § 2036 we pull back the entire corpus 1. If right to change beneficiary is based on an ascertainable standard then grantor has no power at all, and not vicarious enjoyment. b1. When grantor retains power to change beneficiary of a remainder interest, § 2036 can be implicated. Look to see if the remainder interest can be collected/realized/enjoyed during the life of the grantor (To A for A’s life, reminder to B, grantor retains power to change B; or To A for 20 years, remainder to B, grantor retains power to change B). Compare with, To A for grantor’s life, remainder to B, grantor retains power to change B. Here the remainder interest 9 can not be enjoyed during the life of the grantor, therefore he does not have the power to designate who shall enjoy property while he is still alive. c. Power to determine how much is enjoyed by a beneficiary – If grantor retains power to determine how much is enjoyed by a beneficiary (trust where 80% income paid to B, and 20% income accumulated, but grantor has power to change those percentages), then that is generally not considered vicarious enjoyment. Determining when is not the same as who. Minority (Struthers) says it is the same thing and will be included in estate under § 2036. However, if accumulated income goes to different person (remainder interest goes to different person) then it is a power to determine who enjoys the money. 1. If right to change percentages is based on an ascertainable standard then grantor has no power at all, and not vicarious enjoyment. d. Administrative and Management Powers – Not prohibitive under § 2036 e. Power to affect time and manner of enjoyment – Most jurisdictions say this is not prohibitive under § 2036 (Note, it is prohibitive under § 2038), because affecting when is not the same as affecting who. However, one jurisdiction says it is prohibitive and the whole thing should be pulled back in the estate. Struthers f. Grantor retains power but only with consent of 3rd party, adverse or not – Doesn’t matter if 3rd party is needed, still possibility that he will effect who enjoys property. g. What about 3rd party TE 1. If grantor and trustee have no prohibitive powers, then there will not be an inclusion in the estate no matter how many times grantor replaces trustee or even if he becomes trustee 2. If the trustee has a prohibitive power, then as long as the grantor can never become trustee it will not be included in his estate. Can trustee shop all day. If grantor has ability to become trustee with prohibitive power, then it will be included in his estate. 3. If the trust says that “if the trustee dies, grantor can replace him with anyone,” and such trustee has prohibitive powers, then there is a possibility that grantor can become the trustee himself. This is prohibitive. vi. § 2042 – Life Insurance Policy a. Parties – Owner, Insured, Beneficiary, and Insurer (Company) b. Two ways it will be included in the estate 1. § 2042(1) – If the decedent/decedent’s estate is the beneficiary, then the face value will be included in the estate 2. § 2042(2) – If the decedent is the owner of a policy then it will be included in his estate. If the policy owned is on his own life, the full face value is included. If the policy owned is on another living person’s life, then the policy is treated as an asset with a value at the “interpolated terminal reserve value” (ITRV). c. What out for substance over form – If it is not called a life insurance policy, but effectively is the same thing, then it will be treated as life insurance subject to these rules d. Who is the legal owner? 10 1. It does not matter who pays the premiums, who ever is indicated as the legal owner on the policy is the owner. 2. Possession does not change ownership 3. If a mistake is made and you indicate the wrong party as owner on the policy, you can change to the correct owner if done within a reasonable time. (days ok; years not). e. The owner has the legal obligation to pay the premiums, if another makes those payments (either through legal owner, or directly to insurance company) then those payments are completed gifts at the time made 1. Apportionment – If a policy is transferred and § 2035 artificially pulls it back into your estate (see notes on § 2035 below), then the entire value may not be pulled back. Look at what percentage of the premiums you have paid in relation to the total premiums paid, and apportion the value. Example, policy is worth $100,000, you paid 6 premiums then transferred and someone else pays 4 premiums, then 6/10 of the policy value will be pulled back, $60,000. f. PROBLEM SET 13 #3(c) vii. § 2037 Artificial Inclusion (Grantor retains reversionary interest) a. General Rule – When grantor makes a transfer during his life and retains a reversionary interest, there are two ways the value of the transferred property will be included in the estate. 1. The reversion goes into effect and the property reverts back to the grantor per the instructions of the trust instrument. 2. The reversion never takes effect but § 2037 will artificially include the value of the transferred property in the grantor’s estate at his death if the following three conditions are met: i. The beneficiary can obtain possession or enjoyment only by surviving the decedent grantor. IOW: Must the beneficiary survive the decedent grantor in order to obtain possession or enjoyment? ii. The decedent grantor must have retained a reversionary interest in the property. IOW: Is there some possibility that the grantor or grantor’s estate will get this back. iii. The value of the decedent grantor’s reversionary interest (as measured immediately before his death) must be more than 5% of the value of the property (as measured immediately before his death). viii. § 2035 Artificial Inclusion (Gifts made within 3 years of death) a. When a gift is made within 3 years of decedent’s death, any gift tax paid will be artificially included in the decedent’s gross estate pursuant to § 2035(b) b. § 2035(a) – When you die within 3 years of giving up a prohibitive power under §§ 2036, 2037, 2038, 2042, then at your death we treat your estate as if you never gave up that power, if otherwise you would have retained the power until death. (look to term of years expiring in the meantime). Also if you die with 3 years of giving up a life interest that implicated § 2036. 11 c. When a life insurance policy is transferred within 3 years of death. Then entire face value of the policy is brought back into the estate subject to apportionment. c. Trust with life interest to A remainder to B. Grantor retains power to change beneficiary of the life interest anyone. Then grantor changes A out for C. Is B’s interest based on C’s life or A’s life? Out of our realm. Must be specific as to who’s life the remainder interest is based on. Don’t worry for our class. ix. § 2041 Artificial Inclusion [General Powers of Appointment (GPA)] a. Terminology 1. DR: Party giving up power to someone else. This person is usually the grantor who is setting up a trust instrument and giving someone power over that trust. If that power is retained by the grantor, is that still considered a GPA? Should we talk about that on the test? NO 2. DE: Person getting a power over a trust. 3. Permissive appointee: Anyone who the power holder can direct property to (potential beneficiaries). 4. Takers in default: Anyone who will take the property if the power holder does not exercise any powers (people named in the trust documents). 5. General Power of Appointment: The power is considered “general” if the permissive appointees include any of the following: the power holder or the estate of the power holder or the creditor’s of the power holder, or the estate of the creditor’s of the power holder. 6. Special or Limited Power of Appointment: If the permissive appointees do not include any of: the power holder, his estate, his creditors, or their estates. b. General Rule – If a person dies with a general power of appointment (either inter-vivos or testamentary) then they will be treated as the owner of any property they have power over, thus causing inclusion of such property in his estate. 1. If you don’t find a general power of appointment, then you can stop. There are no estate or gift tax consequences for the holder of a special power of appointment. c. If what looks like a GPA is limited by an ascertainable standard, then it will not be treated as a GPA for estate tax purposes. For example, if the power holder can appoint to himself only if necessary for health, maintenance, education, or support, then it will not be considered a GPA. Important to look for actual limiting language in the trust documents. d. Disclaimer – Within 9 months of getting a GPA, a person or his estate can disclaim that power and as long has he did not get any benefit from it, it will be treated as if he never had that power. e. Exercising the power to appoint – When a holder of GPA exercises that power during their life and redirects property, then pursuant to § 2514 the power holder is treated as the owner of the property and is deemed to have made a gift. Pursuant to § 2041(a)(2) all other sections apply (annual exclusions, retained life interests (§ 2036), retained power to alter and amend (§ 2038), etc.). More specifically, § 2041(a)(2) states that in a situation where one exercises a GPA and had they been the true owner of the property §§ 2035, 2036, 2037, 2038 would 12 apply, then we treat the power holder as the owner. If during death a person exercises the power, they are deemed to have devised it. f. Crummy Powers and GPAs – Every time a crummy power is created a GPA is also created. Person with a crummy power can appoint property to themselves. If that crummy power is not exercised then see above. B. Deductions i. § 2053 – Deduction for claims, debts, and expenses a. Deduct these expenses from the value of the gross estate b. Funeral Expenses such as casket, plot, cremation fees, disposal fees, retention fees, ceremonies with respect to someone’s death, transportation of the body, transportation costs for someone accompanying the body, be careful with issues of reasonableness of ceremonies. c. Administrative expenses – These are expenses between the period of time between death and when the property is distributed. Could be costs of administering trusts, or probate (in CA there are statutory attorney’s fees based on size of estate), executor fees, etc. d. Debts – These are claims against the estate. Be careful because all debts or legal claims against the estate do not deplete the estate, must be one for adequate consideration in money or monies worth. ii. § 2054 – Casualty Losses – These are losses during the settlement of the estate from fire, shipwreck, or theft. Make sure the losses are not covered by insurance. iii. § 2055 – Charitable Deductions – If the estate gives money to a qualified charity then that amount will be deducted from the estate. iv. § 2056(a) – Marital Deduction – There shall be a deduction for property that passes to a spouse. a. Any property that is included in the estate, that is passing to the spouse, will be deducted from the gross estate. b. Could be life insurance proceeds, could be property that is artificially included, anything. v. § 2056(b) – Limitation on a life estate or other terminable interest a. If you meet the following three elements, thus fitting within the terminable interest rule, you will not get a marital deduction: 1. The interest in the property passed from the decedent to both the surviving spouse and another person; and 2. The surviving spouse’s interest may terminate on the lapse of time or the occurrence of a contingency; and 3. Possession or enjoyment of the property will there upon shift to the other person b. The two big exceptions to the terminable interest rule: 1. § 2056(b)(5) – GPA Trust. To get this exception must meet the following: i. Spouse must be entitled to all the income from the property for life (can’t have it terminate upon her marriage, etc.) ii. Income must be paid at least annually (Use of the property qualifies) 13 iii. Surviving spouse must have the power to appoint the entire interest to either herself or her estate (doesn’t mention creditors or creditors of her estate, if she only had power to appoint to her creditors then it would not qualify) iv. Power in the surviving spouse must be exercisable alone (can not require the consent of anyone else) and in all events (can’t be a contingency like as long as you don’t remarry or as long as you live in the same house) v. Entire interest must not be subject to a power in any other person to appoint any part to any person unless it is the surviving spouse. This is also called a reluctant Mom provision. Mom does not want to use the trust for herself even if she needs it, so give power to the kids or to someone else to invade the trust and give it to the Mom. That is ok. 2. § 2056(b)(7) – QTIP. To get this exception must meet the following: i. Surviving spouse must be entitled to all the income for her life and it must be payable at least annually ii. During the surviving spouse’s lifetime, no person has the power to appoint any part of the trust to any person other than to the surviving spouse (watch for right to transfer testamentarily, that is ok) iii. Decedent’s executor must make an affirmative QTIP election on the estate tax return of the decedent vi. § 2044 – If the husband’s estate elected and received a marital deduction under the QTIP provision, then when the wife dies, § 2044 will artificially include (into the wife’s estate) all of the property that is in the trust from which she had an income interest. Is the whole corpus included or just the life interest part? The entire amount is included in the marital deduction and entire amount is included in wife’s estate. 1. § 2207(a) – This section says that anything that has been artificially included under § 2044, the estate tax from that property will be paid out of the property itself. 14 CALCULATING GIFT TAX 1) Need to know the taxable gifts for the current year = 500K 2) Need to know taxable gifts for all prior years = 1 million 3) Need to know the tax on the sum of 1 + 2 (tax on all lifetime taxable gifts) = tax on 1.5 million is $555,800 4) Need to know the tax on step 2 (tax on taxable gifts for all prior years) = tax on 1 million is $345,800 5) Take step 3 and subtract step 4. 555,800 – 345,800 = $210,000 (this is the tax before any credits, or the tentative tax) 6) Take step 5 (tentative tax for current year) and subtract any remaining unified credit. CALCULATING ESTATE TAX 1) Determine the taxable estate 2) Figure out adjusted taxable gifts – This is all prior taxable gifts that are not being brought back in to the estate 3) Compute tax on the sum of 1 + 2 4) Compute the tax on all prior taxable gifts 5) Take 3 – 4 = This will give you the tax before credit 6) Reduce tax by remaining credits

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