Federal Taxation of Gratuitous Transfers Prof. Robinson – Spring 2006 1) Introdu tion a) Gift tax !

"2#01 $rate s %edule "2001) i) &o'puted on an annual basis ii) (nl) applies to indi*iduals $not orporations+ trusts or estates) iii) ,ot appli able to all gratuitous transfers – ex lusions appl) $1) -11. annual ex lusion per donee $'arried ouples an double t%e exe'ption) $2) /x lusion for transfers for 'edi al or edu ational expenses ! "2#00$e) $0) Transfers to %aritable organi1ations $2) Transfers for full and ade3uate onsideration i*) Gift tax is u'ulati*e $1) First add up all gifts 'ade in urrent )ear+ subtra t exe'ptions $2) T%en add all ot%er taxable gifts 'ade in prior )ears $0) T%en al ulate tax on t%at a'ount $2) Get redit for pre*ious gift tax paid $#) 4ll gifts 'ade during lifeti'e are added into t%e estate – get a redit for taxes paid $a) T%is 'ig%t still be ad*antageous be ause get a free1e in *alue for t%e F56 on t%e date of t%e gift $prote ts against future appre iation) $6) 7ifeti'e redit – for t%e first -1 'illion of gift taxes paid b) /state tax ! "2001 i) Taxable estate does not ne essaril) in lude t%e sa'e t%ings as t%e probate estate – "2000 – t%e gross estate in ludes all propert) in 8%i % t%e de edent %ad a benefi ial interest $1) &ertain t%ings are not part of t%e probate estate+ but are part of t%e taxable estate $a) 9oint titling arrange'ents $b) /ntrusted interests $ ) General po8ers of appoint'ent $d) &ontra tual arrange'ents $insuran e+ pro'issor) notes) $e) 6ested rig%ts to deat% benefits $f) Rig%ts to in o'e t%at a rued before deat% $2) &ertain t%ings are ,(T in luded in t%e taxable estate $a) Re'ainder interests $b) 7ife annuit) 8it%out sur*i*ors%ip feature ii) :edu tions fro' t%e gross estate $1) 5arital dedu tion $propert) transferred to spouse)+ funeral expenses+ %aritable gifts+ and asualt) losses $2) T%ere is also a redit for gift tax paid on an) ite's in luded in t%e estate ) Generation s;ipping transfer tax i) 4pplies to an) transfer bet8een generations $not <ust 8it%in t%e fa'il)) ii) &ongress did not 8ant TPs to be able to s;ip generations of transfer taxes – 2 pri'ar) 8a)s t%is is done $1) Gi*e dire tl) t8o generations do8n $2) 7ea*e in trust to 1st generation+ t%en re'ainder to next generation iii) =ant to 'a;e t%e' e3ual to t%e TP t%at lea*es it to 1st generation $taxable transfer)+ t%en t%at person lea*es it to t%e next $also taxable) i*) Sa'e -1 'illion exe'ption applies to t%e GSTT *) T%e GSTT 8ill be due for situation >1 at t%e ti'e of t%e gift+ for situation >2 one le*el of tax 8ill be paid at transfer to trust and t%e GSTT 8ill be paid 8%en t%e trust assets are distributed d) &onstitutional onsiderations

US $p. 110) i) T%is is not a ontra t $not bargained for) – t%is is a dis retionar) gift to t%e sur*i*ing spouse ii) T%e &ourt %olds t%at t%is is not a *ested rig%t e) 4nnuities and e'plo)ee benefits ! "200B i) T%e IRS %as to s%o8 t%at t%e e'plo)ee 8ould %a*e re ei*ed t%e benefit e*en if %e %ad not died $i. EE) $1) T%e de edent died intestate+ and t%e 8ife and guardians for t%eir 'inor %ildren tried to do so'e post!'orte' estate planning $a) =anted to dis lai' t%e %ildrenFs interests so t%e) 8ould pass to t%e 8ife $2) State ourt allo8ed t%is dis lai'er as in t%e best interests of t%e %ildren $0) &ourt found t%at t%ese 8ere *alid dis lai'ers under "2#1E $a) (nl) one le*el of taxation for dis lai'ers – treated as passing dire tl) to t%e person 8%o ta. 00A) .e o8ners%ip $propert) sub<e t to a GP4) it is not ne essaril) o8ned iii) T%e result 8as re*ersed b) statute ! "2021 no8 sa)s t%at propert) sub<e t to an unexer ised GP4 is in luded in t%e gross estate ) Interests arising at deat%@ Connecticut Bank & Trust Co.2#1E 2) T%e S ope of t%e /state Tax a) =%at goes into t%e estate for tax purposes ! ""2000! 2022 b) Helvering v.s li. v. $p.e. Carlton $p. Safe Deposit & Trust Co. C/xpe tan )D@ Estate of Barr v. 100) i) &ourt indi ates t%at t%e) are not going to read "2000 as broadl) as "61 ii) &ourt %old t%at <ust be ause so'et%ing loo. 10B) i) T%e 3uestion is 8%et%er t%e pro eeds fro' a 8rongful deat% a tion are in ludable in t%e estate of t%e de edent ii) &ourt %olds t%at t%e) are not+ as t%e interest in t%e pro eeds did not o ur until after t%e de edentFs deat% d) CPropert)D *s. #2)@ t%e retroa ti*e tax 8as allo8ed %ere be ause it 8as to orre t an abuse $1) 6alid purpose for retroa ti*it) i*) NationsBank v. US $p. Commissioner $p. if %e %ad li*ed+ %e 8ould olle t pa)'ent) $1) T%e rig%t to pa)'ent annot arise fro' t%e deat% f t%e e'plo)ee ii) Estate of Schel erg v. AB) $1) If t%ere 8as a GP4+ t%e trust assets 8ould 3ualif) for t%e 'arital dedu tion $2) T%e state ourt find t%at t%e po8er 8as a GP4 $0) &ourt %olds t%at 8%en t%e %ig%est ourt in t%e state %as ruled on t%e issue – deferen e %as been gi*en $a) ?o8e*er+ as to ot%er ourts+ onl) %a*e to gi*e Cproper regardD to t%e de isions iii) Estate of Goree v. Commissioner $p. Estate of Bosch $p. #A)@ t%e ne8 tax rate ould be applied retroa ti*el) to a pending estate e) Role of state la8 i) (ften t%e estate and gift tax 8ill lea*e ertain t%ings up to state la8 $1) T%e 3uestion is %o8 'u % deferen e s%ould t%e IRS gi*e to state ourt de isions as to issues t%at effe t t%e a'ount of re*enue olle ted $2) T%e IRS often does not %a*e an ad*ersarial role in t%ese pro eedings ii) Commissioner v.es after t%e dis lai'er if t%e dis lai'er is 3ualified $2) /xa'ples of *alid dis lai'ers in t%e Regs@ "2#.i) T%e &ourt %as ruled t%e estate tax onstitutional ii) ?o8e*er+ t%e 3uestion is generall) retroa ti*it) – situations 8%ere t%is is allo8ed $1) &orre ti*e – to pre*ent pre*alent abuses $2) Rate ad<ust'ent – not an entirel) ne8 pro*ision $0) 5ust be retroa ti*e for onl) a reasonable period $usuall) 8it%in alendar )ear be ause do not 8ant to %a*e to open old estates) iii) US v. Commissioner $p.

G .en $t%e exe utor 8or.ind of gi*ing+ 8rite a pledge to t%e %arit) – so it is li. of t%is .s to %arities s%ortl) before %is deat% – at deat% so'e of t%e %e .et rates) is onsidered a gift to t%e %ildren iii) So+ )ou an gi*e ser*i es for free – but allo8ing so'eone to use propert) interest free 8ill fall under "2#01 i*) §7872 8as passed in response to Dickman $1) T%e %ara ter of t%e gift 8ill turn on t%e relations%ip of t%e parties $a) Parent to %ild  gift tax treat'ent $b) /'plo)er to e'plo)ee  di*idend or o'pensation $ ) In*estor to entit)  ontribution of apital .I.s to businesses and relie*es t%e exe utor of t%e dut) to stop pa)'ent i*) P74. t%e e'plo)ee 8ould %a*e used all of %is benefits iii) 4nnuities $1) =%en an annuitant gets a pa)'ent – part is in luded in in o'e as interest+ and part is return of apital $2) T%e a'ount of apital t%at %as not been returned 8ill go into annuitantFs estate under "2000 $0) 9oint and sur*i*or annuities are o*ered under "200B – if )ou %a*e a rig%t to re ei*e a pa)out at t%e ti'e of deat%+ it is in luded regardless of 8%et%er )ou a tuall) re ei*ed t%e pa)out or not $a) Estate of !a"e#it$ $p. 120) i) Parent loaned %is %ildren 'one) interest!free ii) T%e *alue of t%e interest foregone $ al ulated at t%e 'ar. Hogle $p. Commissioner $p.e a debt 0) T%e S ope of t%e Gift Tax a) Commissioner v. 11B) i) : sent %e .s to ex lude t%ese gifts fro' t%e estate $1) T%e &ourt %olds t%at t%e -11. Commissioner $p.s 8ere sent to businesses+ it 8ould not 'atter as t%e estate 8ould get a dedu tions for t%e debts one 8a) or anot%er iii) T%e ourt %ere treats t%ese as %e . 10A)@ exe utorFs fees not ta.s for free) on a o'plex estate are not a gift – %o8e*er+ not a *alid 8ai*er unless t%e rig%t to fees is 8ai*ed prior to t%e fees being earned ) Dickman v.age $2) T%e 8ido8 8as re ei*ing benefits under t%e in o'e benefit plan $a) T%e IRS lai'ed t%at t%ese s%ould be in luded in t%e estate – be ause alt%oug% %e 8ouldnFt %a*e been able to olle t t%ese benefits+ %e 8ould %a*e gotten ot%ers %ad %e li*ed $0) &ourt re<e ts t%e IRSFs argu'ent %ere and sa)s t%at it is too re'ote to t%in.s %ad not )et been as%ed ii) T%e estate see.. 11A)@ deat% ter'inated t%e interest of t%e <oint and sur*i*or annuit) $t%is is 'oot no8) f) Estate of Belcher v.ed for %ad se*eral benefits as part of its e'plo)ee pa .(T/@ to lessen t%e ris.$1) T%e o'pan) t%at : 8or. ex lusion onl) applies during life – if not used during life+ it is lost – so if t%ese 8ere indi*iduals+ t%e) 8ould be s re8ed $2) &ourt also notes t%at if t%ese %e . 102) i) Fat%er pro*ides sto . trading ser*i es for %is daug%ters ii) T%e IRS 8ants to tax t%e *alue of t%ese ser*i es iii) T%e ourt refuses to extend "2#01 to rea % ser*i es as Cpropert)D ! "2#01 onl) taxes transfers of propert) b) Re*enue Ruling 66!16A $p.

$1) T%e entire -6A. 8ill be taxable no8 sin e t%e pro'ise is binding $2) T( a*oid t%is it is better to 'a. 1A#) $1) 4tte'pt to a*oid gift tax b) transferring t%e ex lusion a'ount t%roug% se*eral inter'ediaries $8rote 6 %e .e pla e until 8ell after t%e agree'ent is signed $and t%e ouple is alread) 'arried) $b) T%e gift tax 8as ena ted bet8een t%e ti'e of t%e agree'ent and t%e ti'e t%e transfers a tuall) too. US $p. pla e $i) T%e IRS lai's t%e transfer 8as not o'plete until t%e pa)'ent 8as 'ade $t%us falling under t%e ne8l) ena ted gift tax $ii) T%e TP lai's t%at t%e transfer 8as C o'pleteD t%e da) t%e agree'ent 8as signed $2) &ourt finds for t%e TP+ sin e under state la8 t%e agree'ent 8as binding and = ould olle t at an) ti'e $0) . 16E) $a) =%ile e'plo)ee 8as ali*e it 8as i'possible to tell t%e *alue of t%ese benefits t%at 8ould be olle ted+ or if t%e) 8ould e*er be olle ted at $relied on : being an e'plo)ee of t%e o'pan) at %is deat%) $b) For "2#01 purposes+ t%ere is no o'pleted gift be ause it is i'possible to *alue and : %ad no interest in it $dead people anFt lea*e gifts) $ ) T%ese pa)'ents 8ill be in luded in t%e sur*i*ing spouseFs in o'e as t%e) are re ei*ed $t%e) are substitution for 8ages+ not insuran e) *i) Indire t transfers@ He%en v. 1#2) $1) 4nte!nuptial agree'ent bet8een ? and =+ = is to re ei*e -#00.e ontra ts – t%e sur*i*ing souse is bound b) t%e pro*isions in t%e <oint and 'utual 8ill $2) Possible estate tax proble' sin e t%e spouse is bound to transfer t%e assets to a spe ifi person alread) – it is onsidered a o'pleted gift t%en $0) Jetter ideas@ $a) Trusts for t%e benefit of t%e sur*i*ing spouse ! "20#6 KTIP $3ualified ter'inable interest propert)) trusts 3ualif) for t%e 'arital dedu tion $i) SP4 8ill also 3ualif) *) 6aluation $1) Estate of Di&arco v.$2) "AEA2 8ill appl) for e*er) )ear t%e loan is outstanding d) =%en is t%e transfer o'pletedG Hntil t%ere is a o'pleted transfer+ t%ere is no gift tax liabilit) i) Commissioner v.s for ex lusion a'ount+ and t%ose people passed t%e 'one) onto a designated person) $2) T%e ourt %olds t%at 8ere t%ese transfers are 'ade to a*oid tax $and 8ere 'ade 8it% t%e intent t%at all of t%e donees pass t%e 'one) on to a designated person)+ t%en t%e gift tax 8ill appl) $a) T%e ourt 8ill restru ture t%e transfer – for' o*er substan e %ere *ii) =%at is a giftG .o8 $2006) t%is 8ould be a taxable transfer be ause t%e release of 'arital rig%ts is not onsidered full and ade3uate onsideration ii) ?IP(@ P pro'ises & ten annual pa)'ents of -11. Commissioner $p. for releasing %er 'arital rig%ts on %er %usbandFs estate $a) T%e a tual transfer of t%e 'one) does not ta. at 8%at t%e parties are bargaining for – 8%en a spe ifi a t is bargained for+ t%e transfers 8ill be o'plete 8%en t%e a t is done $2) Ti'ing is riti al %ere i*) 9oint and 5utual 8ills $1) See' li. – t%e present *alue is -6A.e t%e pro'ise non!binding $put a ontingen ) on it) iii) /xe utor) agree'ents $1) 7oo. Estate of Cople% $p.

transferred $and donee ta. If it 8ere a straig%t gift+ gift tax 8ould %a*e been paid on t%e full F56 2) Gift Tax 4nnual /x lusion ! "2#00 a) &ode allo8s a -10.s about lai's against t%e estate – dedu tion for lai's for transa tions engaged in for 'one) or 'one)Fs 8ort% 2. "20#0 tal.(T future interests b) Present interests *s.(T/@ interesting gift taxLin o'e tax 'ix!up 1. 1AA) $i) T%e donee 8ould lose an in o'e interest upon re'arriage+ so t%e donor offered %er sto . T%e gift tax is onl) paid on t%e basis t%at t%e donor %ad a. :is %arge of obligations of support 0.e. $ad<usted for inflation) annual ex lusion per donee i) 5arried people an double up – i. 2AE)@ t%ree part tests to deter'ine 8%et%er t%e rig%ts to in o'e produ e a present interest $1) T%e trust 8ill re ei*e in o'e $2) T%at so'e portion of t%e in o'e 8ill flo8 steadil) to t%e benefi iar) $0) T%at t%e portion of t%e in o'e t%at flo8s out to t%e benefi iar) an be as ertained . future interests i) =%en t%ere is a gift of in o'e and a gift of t%e re'ainder – t%ere 8ill be an ex lusion for t%e present *alue of t%e interest in o'e+ but no ex lusion for t%e re'ainder interest $and t%ere 8ill be no ex lusion in t%e )ear t%at t%e re'ainder'an gets t%e re'ainder $1) T%e in o'e interest is onl) onsidered a present interest if t%e pa)'ents o''en e i''ediatel) ii) &ar%lan" National Bank v. "2020 treats 'arital rig%ts as t%e . ex lude -20. per donee ii) &an onl) ex lude gifts of a present interest – . in ex %ange for 'arriage $to 'a.es t%e F56 as %er basis) 2. (t%er non!gratuitous transfers@ a. "2#.$1) :onati*e intent and Cfull and ade3uate onsiderationD $a) Full and ade3uate onsideration does not follo8 state la8 – t%at 8%i % is onsidered onsideration for state la8 purposes 'ig%t not be for federal tax purposes $i) "2#12 for gifts $"2#16 for propert) settle'ents) 1. Sale or ex %ange of propert) b. T%is ex %ange is onsidered ade3uate onsideration for in o'e tax purposes+ so donor pa)s for t%e gain on t%e sto . US $p.ind of rig%ts t%at are not full and ade3uate onsideration $b) Commissioner v. at t%e onsideration fro' t%e donorFs perspe ti*e $i*).2#12!E@ gi*es t%e rules for transfers for inade3uate onsideration $ii) (n estate tax side+ t%ere is also t%e issue of full and ade3uate onsideration 1. !em%ss $p.e up for t%e loss) $ii) T%ere 8as a detri'ent to t%e donee+ %o8e*er+ t%e donor got not%ing but a pro'ise of 'arriage $iii) T%e ourt %old t%at 'ust loo. Pur %ase of ser*i es . Commissioner $p. 2A2) $1) Gift of non!in o'e produ ing propert) $2) /*en t%oug% t%e a tuarial tables gi*e a *alue for t%e in o'e interest+ t%ere is not%ing to t%e interest $a) T%is is not a present interest and t%erefore t%ere an be no ex lusion – t%ere is no present benefit iii) T%e 'a<or 3uestion is 8%et%er t%ere is a rig%t to de'and 'one) presentl) – not at so'e point in t%e future i*) Cal"er v.

2#00!2$b)$1)@ a transfer under "2#00$ ) 8ill not be dis3ualified 'erel) be ause t%e trustee %as t%e dis retion to deter'ine t%e a'ount of in o'e or propert) to be expended for t%e 'inor $a) T%e go*erning instru'ent annot pla e Csubstantial restri tionsD on t%e trusteeFs dis retion %ere $#) Crumme% v.e t%e' as )ou 8ould gifts to adults) $1) &an gi*e it to t%e legal guardian for t%e %ild $and still %a*e t%e ex lusion appl)) if t%e funds are still a*ailable for t%e %ildFs support ii) Hnifor' Gifts to 5inors 4 t or t%e Hnifor' Transfers to 5inors 4 t $1) :onor an transfer 'one) to %ildFs guardian+ 8%o %olds it $8it% ourt super*ision) until t%e %ild rea %es 21 $a) T%e guardian is also aut%ori1ed to use t%e gift for t%e 'inorFs support iii) Gifts in trust to 'inors@ "2#00$ ) $1) If t%e trust onfor's to t%e language of "2#00$ )+ t%en t%e pa)'ents to t%e trust 8ill be onsidered present interests and 8ill 3ualif) for t%e ex lusion $2) Commissioner v. 2AB) $1) Trustee 8as gi*en broad ad'inistrati*e po8ers to bu) and sell in*est'ents – t%erefore+ t 8as diffi ult to deter'ine 8%at t%e in o'e 8ould be $in order to *alue t%e estate) $2) &ourt %eld t%at t%ere 8as no ex lusion for t%e interest be ause it 8as in apable of *aluation $a) T%e broad po8ers a'ounted to t%e po8er to di*ert in o'e a8a) fro' t%e benefi iaries ii) Po8er to in*ade orpus $1) If t%e trustee an in*ade orpus for t%e benefit of t%e in o'e benefi iar) – t%en t%ere is no effe t on t%e present interest $2) If t%e po8er to in*ade orpus is for so'eone ot%er t%an t%e in o'e benefi iar) – t%en t%is 8ill effe t t%e ex lusion – t%is is no longer seen as a present interest sin e t%ere is no assuran e t%at t%e in o'e benefi iar) 8ill re ei*e in o'e iii) &lass gifts to after born %ildren – see p. " 2#. #02) $a) Post!21 in o'e interests are future interests and t%erefore not ex ludable $2) Reg. Herr $p. Commissioner $p.e gifts to 'inors $'a. Commissioner $p. 2E0 d) Gifts to 'inors i) T%ere is no li'it on t%e abilit) to 'a. #00) $a) Ter's of t%e trust %ad in o'e going to t%e %ild at 21+ prin iple to be distributed at age 00 $b) T%e gift of t%e prin ipal is a future interest under "2#00$ ) and is t%erefore not ex ludible $t%e in o'e interest is ex ludable $0) Estate of (evine v. 2E#) $a) :onor reates trusts 8it% a de'and po8er $at t%e ti'e t%e 'one) is transferred to t%e trust) for a li'ited ti'e $b) T%e trusts 8ill not ter'inate until t%e donees rea % age 00 $ ) :oes t%e pa)'ents to t%e trust 3ualif) as present interests $and t%erefore for t%e ex lusion)G $d) Ies – t%e ex lusion 8ill be a*ailable no 'atter 8%et%er t%e %ild de'ands t%e 'one) or not $i) T%e trustee 'ust send noti e t%at t%ere is an absolute de'and po8er $ii) If t%e %ild fails to exer ise t%is de'and po8er t%e 'one) goes into t%e trust 8%ere t%e donee 8ill not get it until 00 $6) Estate of )ohlsaat v. Commissioner $p.) 4d'inistrati*e po8ers in t%e trustee i) 'ischer v. 2B6) . Commissioner $p.

e in re'ote ir u'stan es $b) T%e ourt %eld t%at t%is 8as (. grandparent to grand %ild)  GSTT 8ill be paid at ti'e of gift or be3uest ii) Taxable ter'ination $i. 1B0) i) = ga*e up %er 'arital rig%ts in ex %ange for a trust in %er na'e ii) T%e IRS lai'ed t%at t%is transfer 8as sub<e t to gift tax be ause 'arital rig%ts are not onsideration iii) T%e &ourt agreed 8it% t%e IRS – t%is is not Cfull and ade3uate onsiderationD ) Transfers in ident to separation or di*or e i) If t%ere is a legal obligation of one spouse to support t%e ot%er for a period of ti'e – t%ese are not gifts be ause it is deter'ined to be full and ade3uate onsideration $1) To t%e extent t%at it is for support+ it is not taxable $if it is for t%e release of 'arital rig%ts+ t%en it is taxable) $2) T%e ourtFs inter*ention in a di*or e 'a.+ 'edi al and edu ational expenses+ et ) appl) for t%e GSTT d) T%e GSTT 8ill not appl) in t%e follo8ing situations i) :ire t s.e.$a) :onor na'ed ontingent benefi iaries $all 8it% de'and po8ers for t%eir s%are of t%e funds for t%e trust) t%at 8ould onl) ta. Commissioner $p. grandparent puts 'one) in trust+ in o'e to %ild+ re'ainder to grand %ild)  T%e initial transfer to t%e trust 8ill be sub<e t to gift tax+ and 8%en t%e trust ter'inates+ t%e GSTT 8ill appl) $t%e GSTT 8ill be paid b) t%e trustee) iii) Taxable distribution $sa'e trust arrange'ent+ trustee %as t%e dis retion to distribute to t%e grand %ild) . 1B6) . A16!1B e) &al ulation of t%e GSTT i) GSTT M taxable a'ount N t%e tax $1) Tax O M t%e appli able rate $set b) statutue) N $1! $allo ated exe'ptionL*alue of propert) transferred)) ii) :ire t s.e t%e obligation to pa) a gift tax disappear ii) Harris v. be ause 8%at 'atters for t%e 3uestion of presents interests is t%e de'and po8er+ not t%e re'oteness of t%e trust interest #) Generation S.e a ontra t 8%i % 8ould 'a.ipping Transfer Tax ! "2611 a) T)pes of arrange'ents o*ered b) t%e GSTT ! "2612 i) :ire t s.ip person defined $not ne essaril) fa'il)) ) T%e sa'e ex lusions for gift tax $-11.ips o*er 'ore t%an one generation 8ill onl) %a*e one GSTT applied $0) 4nnual ex lusion under "2#00$b) ii) Taxable ter'inations $1) Ter'inations sub<e t to estate or gift tax $2) Partial ter'inations – 8ill be treated as a distribution iii) For ot%ers see pp. A20!22 6) Transfers of Propert) in Satisfa tion of 5arital rig%ts a) =%en transfers are 'ade to satisf) a legal obligation of support+ t%e) are not going to be sub<e t to gift tax b) &errill v.ips $1) : pa)s gift tax P t%e appli able rate N t%e GSTT paid P t%e GSTT iii) (t%ers see pp. 'ahs $p.GSTT 8ill appl) to an) distribution to G& $G& 8ill pa) t%e GSTT %ere) b) "2610 – s.ip $i.s 'ore li.e.es it a legall) binding obligation – loo.ips $1) Prede eased an estor ex eption – if GP 'a.es a dire t gift to G&+ but t%e parent of G& is dead+ t%en t%ere 8ill be no GSTT $2) S.

200!02 d) Retention of possession or en<o)'ent of t%e propert) ! "2006$a)$1) and "2006$b) i) Estate of (in"erme v. 201) $1) : sold sto .6 and t%e transfers 8ere 'ade pursuant to t%e di*or e de ree $0) T%e parties 8ere able to s%o8 t%at "2#16 ontrols – t%is is a safe %arbor pro*ision $a) If t%e di*or e is granted 8it%in a 0!)ear period $starting one )ear before t%e agree'ent is signed) t%en t%e propert) an be transferred 8it%out tax $e*en if t%ere is no ourt de ree for t%e propert) transfer) iii) /state tax onsideration@ t%e obligation to support a 8ife does not end at deat%+ but t%e obligation to support a %ild does $1) T%erefore – transfers out of t%e estate for ali'on) 8ill be dedu ted fro' t%e gross estate+ but transfers for %ild support 8ill be i*) T%e a'ount t%at is onsidered CsupportD for %ildren and spouses in support arrange'ents is deter'ined b) a Cstation in life anal)sisD $1) T%e a'ount t%at is sub<e t to gift tax 8ill be an) a'ounts t%at are abo*e t%e a'ounts needed to . Commissioner $p.+ and t%e : did not retain possession or en<o)'ent $0) For exa'ples of 8%at is onsidered retention of t%e rig%t to in o'e – see pp. 20#) $1) : transferred residen e to %is sons+ but ontinued to li*e in t%e %ouse $t%is 8as %is intent upon t%e transfer) . Estate of Grace $p.s at t%e <urisdi tion of t%e . Commissioner $p.eep t%e %ild in t%e station of life to 8%i % %e is a usto'ed d) 5arried ouples are allo8ed to 'a. – ter's of t%e sale 8ere : 8ould re ei*e 'ont%l) pa)'ents $8%i % 8ould ter'inate upon %er deat% $2) T%e ourt %eld t%at t%ere 8as no retention of in o'e %ere – t%is 8as not in o'e fro' t%e sto . Commissioner $p.e unli'ited transfers bet8een t%e'sel*es during t%e ourse of t%e 'arriage A) Transfers =it% Retained Po8ers and Rig%ts a) If t%e transferor retains ertain rig%ts after t%e propert) is transferred+ t%en t%e *alue of t%e propert) $at full F56 on t%e date of deat% – no estate free1e) 8ill be in luded in t%e transferorFs estate i) Transfers 8it% retained life estates ! "2006 $1) 0 onditions for t%is to appl) $a) T%e propert) 'ust %a*e been transferred $b) T%e transferor 'ust %a*e retained an interest $ ) T%e interest 'ust be retained for life $2) Estate of Nicol v. 21A)@ rig%t to rent fro' propert) transferred 8as a retained rig%t under "2006 ii) Transfers 8it% re*ersionar) interests ! "200A $1) Propert) t%at 'ig%t re*ert to t%e transferorFs estate at or after %is deat% iii) Po8er to alter+ a'end or re*o.$1) T%e &ourt loo. 222) i) ? and = reated identi al trusts – 8it% in o'e to ea % ot%er for life and re'ainder to t%e %ildren ii) 4tte'pting to %a*e an estate free1e to a*oid estate tax on t%e appre iation iii) T%e ourt does not let t%e' get a8a) 8it% it – t%e) are retaining benefi ial en<o)'ent of t%e propert)+ t%erefore+ it is in luded in t%eir estates under "2006 ) Retention of rig%t to in o'e ! "2006$a)$1) i) Cain v.e ! "200E b) Re ipro al Trusts@ US v.e*ada ourt in deter'ine 8%o got 8%at in a propert) settle'ent $e*en t%oug% t%e) did not resort to litigation in t%is a tion) $2) :i*or e 8as granted b) t%e ourt in .

ennings v. to "200E first+ t%en to "2006 to see if 'ore an be in luded) ii) "200E applies to all po8ers o*er in o'e and orpus iii) "2006 re3uires t%at : retain t%e po8er at t%e ti'e of transfer ! "200E does not re3uire t%is+ t%e po8er an o'e fro' an)8%ere i*) "200E applies to t%e a eleration of t%e re'ainder interest *) "200E does not appl) to ontingen ies be)ond :Fs ontrol B) Transfers 8it% Retained re*ersionar) interests ! "200A a) Transfer tax 8ill be i'posed on t%e propert) if@ i) T%e transfer 8as 'ade after :e . is not in luded in :Fs estate iii) &ongress passed "2006$b) to 'odif) t%e out o'e %ere – sa)s t%at for ertain t)pes of transfers+ t%e retention of *oting rig%ts 8ill lead to in lusion in t%e estate $1) In lusion for sto . B%rum* E+ecutri+ $p.e ! "200E a) :oes not appl) if t%ere is onsideration for t%e transfer b) (o er v. 2A2) i) : set up trusts for %is %ildren – retained ad'inistrati*e po8ers o*er t%e trusts+ also retained t%e po8er to a elerate %is %ildrenFs possession of t%e trust orpus $or to %old it until t%e) rea %ed 2#) ii) &ourt %eld t%at t%is fell under "200E sin e t%e a eleration 8as tanta'ount to re*o. in a ontrolled orporation $20O or 'ore of t%e sto .$2) &ourt %eld t%at t%is 8as learl) a retained possession or en<o)'ent of t%e propert) and t%erefore it 8as in luded in t%e estate at deat% $at full F56) e) Retention of 6oting Rig%ts@ US v.e pa)'ents $0) T%e ourt found t%at t%is ounted as a retained po8er to deter'ine benefi ial en<o)'ent of t%e propert) – t%erefore+ t%e trust propert) 8as in luded in t%e estate $2) If t%ere %as been an independent trustee or a 'andator) trust+ t%ere 8ouldnFt %a*e been a proble' %ere $#) . 22B) $1) : put propert) into trust for %is fa'il) 8it% %i'self as trustee $2) T%e trustee %ad t%e absolute dis retion to 'a. 220) i) : retained t%e rig%t to *ote on t%e sto . o8ned) f) Retention of t%e po8er to designate 8%o s%all possess or en<o) t%e propert) ! "2006$a)$2) i) US v. Smith $p. 26#!26A g) T%e po8er to deter'ine %o8 t%e trusts assets 8ill be in*ested is not a *iolation of "2006 E) Transfers 8it% Retained Po8er to 4lter 4'end or Re*o. 2E0 i) "200E onl) re3uires in lusion of t%e spe ifi interest sub<e t to t%e po8er $not t%e entire propert)) – so if onl) t%e in o'e interest is effe ted+ onl) t%at 8ill be in luded $al8a)s loo.-&alle% $p. 260)@ if t%ere is an as ertainable standard guiding t%e trustee in 'a.(T/@ 8it% a dis retionar) trust+ annot get t%e gift tax exe'ption be ause t%ere is no guaranteed i''ediate pa)'ent to t%e benefi iaries ii) .+ %e o8ned a 'a<orit) of all of t%e orporations) ii) T%e &ourt %eld t%at t%e retention of *oting rig%ts 8as not t%e sa'e as t%e retention of en<o)'ent fro' t%e propert) and t%erefore t%e *alue of t%e sto .s %e put in a trust for %is %ildren $8it% t%e trust sto .e in "2006+ if t%e po8er is li'ited b) an as ertainable standard+ t%en "200E does not appl) e) For differen es bet8een "200E and "2006 see p. US $p. 1B2B ii) T%e en<o)'ent of t%e transferee is ontingent on t%e transferee sur*i*ing t%e transferor . .ing t%e trust iii) "2006 does not appl) sin e it does not appl) to a eleration of trusts ) In order for "200E to appl)+ : need not %a*e retained t%e po8er – it ould o'e fro' so'e ot%er sour e – t%e in lusion 8ill be based on 8%et%er t%e po8er existed+ fro' 8%ate*er sour e d) 7i.ing pa)'ents to t%e benefi iar) t%en t%ere is no "2006 *iolation $1) For 8%at ounts $and doesnFt ount) as an as ertainable standard see pp.

Commissioner $p.$1) T%is does not 'ean t%at t%e transferee 'ust 8ait to en<o) t%e propert) – t%e en<o)'ent an be urrent iii) T%e : 'ust %a*e a re*ersionar) interest i*) T%e re*ersionar) interest 'ust be 'ore t%an #O of t%e *alue of t%e entire propert) at t%e :Fs deat% $1) "2000 8ill appl) to interests t%at are less t%an #O $2) T%e *alue of t%e re*ersionar) interest 8ill depend on t%e *alue of t%e interest t%at is ontingent on t%e :Fs pre!de easing t%e benefi iar) b) Estate of Thacher v. 2B6) i) : split t%e interest in t%e propert) into a life interest and a re'ainder interest – t%en sold t%e re'ainder interest for an annuit) ii) : died before olle ting t%e full a'ount iii) T%e ourt %eld t%at t%ere 8as ade3uate and full onsideration for t%e re'ainder and t%erefore t%e *alue 8ould not be broug%t ba .e as long as %is brot%er agreed $%is brot%er %ad no interest in t%e trust) . "20. Commissioner $p. 2EA) i) T%e ourt %eld t%at t%e =Fs life interest in t%e propert) 8as ontingent upon t%e :Fs deat% as s%e lost t%e rig%t to t%e in o'e if t%e) di*or ed or separated ii) :+ t%erefore+ ne*er ga*e up full interest during %is life ) Reg. 012) i) Reser*ed t%e po8er to 'odif) t%e trust %e set up+ later relin3uis%ed t%is po8er $after t%e gift tax 8as ena ted+ so t%e IRS argued t%at t%e gift 8as not o'plete until after t%e gift tax 8as o'plete) ii) T%e &ourt %olds t%at t%e retention of po8ers to 'odif) $e*en if t%ere 8as no po8er to re*o. Commissioner $p. 01E) i) :onor reated a trust 8%ere %e %ad t%e po8er to re*o. into t%e estate i*) ""2A01!2A02 %anges t%is a bit for transfers bet8een fa'il) 'e'bers – t%e life interest and appre iation in t%e propert) 8ill be seen as a taxable gift 11) 6aluation a) General 'et%ods of *aluation i) For estate tax+ t%e *alue of t%e asset is deter'ined as of t%e date of deat% ii) For gift tax+ t%e *alue of t%e asset is deter'ined at t%e date of t%e gift iii) For 'et%ods – see notes pp.200A!1$b)@ =%en t%e en<o)'ent of t%e transferred propert) is ontingent on t%e :Fs deat% (R so'e e*ent t%at ould o ur before :Fs deat%@ i) If t%e :Fs deat% o urs first+ t%en t%e en<o)'ent is onsidered to be ontingent on :Fs deat% and is t%erefore in luded in t%e estate ii) If t%e ot%er e*ent is CunrealD+ t%e propert) 8ill be in luded in t%e estate of : iii) If t%e ot%er e*ent o urs first+ t%e propert) is not in luded in t%e estate d) Fairl) eas) to draft around "200A – <ust donFt 'a.e) still is not a o'pleted gift $until %is deat%) and t%erefore t%is gift 8as not o'plete until after t%e gift tax 8as ena ted b) Camp v. Commissioner $p. 0#!06 b) For notes on t%e debate about t%e estate tax – see noted pp. 06!0A 12) Gift Tax /ffe t of Transfers 8it% Retained Interests or Po8ers a) Transfers 8it% retained po8ers@ Estate of Sanfor" v.e an) interest ontingent on outli*ing transferor 10) T%e CFull and 4de3uate &onsiderationD /x eption to ""2006!200E a) ""2006+ 200A and 200E 8ill not appl) if t%e : re ei*es full and ade3uate onsideration for t%e propert) i) "2020 allo8s a redu tion for an) onsideration re ei*ed for 8%en onl) partial onsideration is gi*en b) Estate of D-/m rosio v.

Commissioner $p.ii) 4fter t%e ena t'ent of t%e gift tax+ t%e trust 8as a'ended to re3uire t%e per'ission of donorFs 8ife $8%o %ad t%e life interest in t%e trust) iii) T%e ourt %eld t%at t%e brot%er did not %a*e an ad*erse interest in t%e trust and t%erefore re3uiring %is per'ission for re*o ation 8as not enoug% to 'a. 21!22 b) Gift tax onse3uen e i) :epends on state la8 – but if one person puts 'one) into an a ount as <oint tenant 8it% so'eone else and t%e tenan ) is i''ediatel) se*erable under state la8+ t%en t%ere is a taxable gift for R t%e propert) ontributed ) &an dis lai' a <oint interest – 'ust do so 8it%in nine 'ont%s of its reation 12) Po8ers of appoint'ent a) /state taxation ! "2021 i) Hnexer ised general po8ers of appoint'ent $GP4s) 8ill be in luded in t%e estate of t%e donee $1) "2020$b) lists 8%at 8ill 'a. 02E) i*) Retaining t%e po8er to re*o.e t%is a o'pleted gift – t%e gift did not be o'e o'plete until t%e 8ifeFs per'ission 8as needed for re*o ation ) T%ree situations 8%ere t%e gift 54I not be o'plete for transfer tax purpose i) =%ere t%e grantor %as retained t%e po8er to re*o.e a non!general po8er of appoint'ent $a) 7i'itation of t%e po8er to in*ade or appropriate propert) b) an as ertainable standard – C%appinessD is .e 'a.(T an as ertainable standard $b) Re3uires t%e onsent to exer ise of a person 8it% an ad*erse interest $2) 4 release of t%e po8er is dee'ed to be an exer ise of t%e po8er under "2021$b)$2) – 'a) be taxed as a gift at t%e ti'e of release .e t%e transfer or %ange benefi iaries ii) =%en a trustee $ot%er t%an grantor) %olds po8ers 8%i % 'a) be exer ised in fa*or of t%e grantor iii) =%ere t%e grantor %as retained po8ers t%at 'a) be exer isable onl) 8it% t%e per'ission of anot%er person+ 8%o does not %a*e a substantial ad*erse interest $1) &ontingent benefi iaries 'a) be onsidered to %a*e substantial enoug% ad*erse interests – see Estate of Gillette v.es t%e gift of prin iple in o'plete – but distributions of in o'e 8ill be taxed as gifts at t%e ti'e of distribution $1) Hnder "2006+ t%e prin iple 8ill be in luded in t%e estate of t%e donor $2) ?o8e*er+ if donor relin3uis%es t%e po8er at so'e point in %is life+ it 8ill be taxed as a gift t%en $unless it is 8it%in 0 )ears of t%e donorFs deat%) $0) In o'e of t%e propert) 8ill be onsidered in o'e of t%e donor under "6A# $t%is isnFt al8a)s a bad t%ing – so'eti'es t%is is done intentionall) – t%e onl) 8a) to a*oid estate tax under ""2006!200E and still *iolate "6A# is to retain 'anagerial po8ers) *) If t%e retained po8er is onl) o*er one of t%e interests $in o'e or re'ainder)+ t%en t%e interest t%at is o'plete is taxed urrentl) 10) 9oint Interests in Propert) a) "2020 is bifur ated i) 9oint interests of ? Q = ! "2020$b) $1) R of t%e propert) %eld in <oint tenan ) 8ill be in luded in t%e estate of t%e first spouse to die $2) "2020 is not appli able to o''unit) propert) states ii) 9oint interests in non!'arital ouples ! "2020$a) $1) T%e full *alue of t%e propert) is in luded in t%e estate of t%e first person to die $2) T%ere is a set off $a) If t%e propert) 8as an in%eritan e or if t%e sur*i*or supplied all of t%e onsideration for t%e propert) $b) T%e a'ount of t%e set off is t%e a'ount of onsideration pro*ided b) t%e sur*i*or iii) For exa'ples+ see notes pp.

eeps t%e in o'e interest) $0) 4 lapse of t%e po8er $a) If t%e lapse falls 8it%in t%e # b) # pro*isions of "2021$b)$2) – not tax onse3uen es $or no onse3uen es on t%e portion 8%i % falls 8it%in t%e pro*ision) $b) T%e po8er to exer ise t%e # b) # po8er %as to be in t%e trust instru'ent $2) T%e po8er to dispose of propert) b) 8ill 'a.es it a general po8er ii) If t%ere is a 3uestion about a lapse of a po8er+ see notes pp. too $1) T%e i'ple'entation of a s%ort period of sur*i*al $6 'ont%s or so) $2) 7ife estate 8it% a GP4 $0) "20#6$b)$6) – t%e pro eeds of a life insuran e ontra t $2) KTIP $3ualified ter'inable interest propert)) – ele tion under "20#6$b)$A) $a) T%e exe utor of t%e estate an ele t to %a*e a life estate in t%e sur*i*ing spouse t%at 3ualifies for t%e 'arital dedu tion if@ $i) T%e sur*i*ing spouse gets all of t%e in o'e fro' t%e trust $ii) T%e trustee $or an)one else) %as no po8er to appoint t%e propert) to an)one ot%er t%an t%e sur*i*ing spouse during t%e sur*i*ing spouseFs life .(T/@ t%e IRS %as said t%e) are .(T/@ e*en if donee releases t%e po8er+ it 8ill still be in luded in %is estate if ""2006!200E are *iolated $sa)+ %e .(T going to follo8 t%is opinion ) 5ust dis lai' a po8er of appoint'ent 8it%in nine 'ont%s of t%e po8erFs reation i) If re ei*e appointed propert)+ 'ust dis lai' t%e propert) 8it%in B 'ont%s of t%e exer ise of t%e po8er 1#) T%e 5arital :edu tion ! "20#6 a) /n o'passes t%e *alue of all propert) t%at passes to :Fs spouse at deat%+ or did pass to :Fs spouse during life i) Results in total deferral for t%e first spouse to die ii) T%e status of 'arriage is t%e S(7/ deter'ining fa tor %ere b) T%ree re3uire'ents for t%e dedu tion i) Propert) 'ust pass dire tl) fro' : to spouse $not t%roug% an inter'ediar)) ii) 5ust pass to :Fs sur*i*ing spouse iii) 5ust be an interest t%at 8ould be in luded in :Fs estate s ) Ter'inable interest rule i) If t%e interest is ter'inable+ t%en "20#6 is not a*ailable $1) 4 ter'inable interest 8ould not be in luded in t%e sur*i*ing spouseFs estate – t%e idea is to reate a deferral+ not a total ex lusion $a) /xa'ples of a ter'inable interest $i) Trusts t%at end upon deat% or re'arriage of t%e sur*i*ing spouse ii) (utrig%t transfers al8a)s 3ualif) iii) &ertain ot%er ex eption are (. Commissioner $p. 20!22 for an exa'ple of %o8 t%e # b) # rule 8or. 0B2)@ /xer ise of a spe ial po8er of appoint'ent 8ill result in gift tax onse3uen es $2) Estate of Self v.s in a lapse b) Gift taxation ! "2#12 i) T%e reation of a po8er of appoint'ent is a taxable gift – t%e donor of t%e po8er is liable for gift tax $1) :onee 8ill also %a*e gift tax liabilit) 8%en t%e propert) is appointed ii) # b) # rules applies to laspes %ere as 8ell – so if allo8 a po8er to lapse+ 8ill onl) %a*e gift tax on B#O of t%e propert) iii) Gift tax on exer ise of a spe ial po8er of appoint'ent $1) Estate of 0egester v. Commissioner $p.$a) . 0B2)@ :ifferent result t%an abo*e – ourt %eld t%at t%e exer ise of a spe ial po8er of appoint'ent 8ill not %a*e gift tax onse3uen es $a) .

$#) Interest in a 3ualified %aritable re'ainder trusts ! "20#6$b)$E) d) For propert)+ su % as a op)rig%t+ 8%i % %as a li'ited life – t%e 'arital dedu tion is still a*ailable as long as t%e sur*i*ing spouseFs interest lasts as long as t%e propert) lasts e) T%e 'arital dedu tion an appl) to all or part of t%e :Fs propert) – an)t%ing left to t%e sur*i*ing spouse is dedu tible .

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