You are on page 1of 55

Estate and Gift Tax Outline

I. Introduction
A. In General
1. Estate tax was designed to break up large estates. (Inherited
economical power is like inherited political power.)
2. Who pays the estate tax?
a. 24 billion was paid in estate tax, more than half of which came
from 3600 estates (smallest being 5 million). This is a tax being paid by the
wealthiest individuals.
b. The 3600 was .0015% of the people who died in 2000.
c. 52,000 were required to file estate taxes.
d. This truly applies to only a small amount of tax payers.
3. Promotes Charitable Giving
a. One of the good things about the estate tax is that it forces the
wealthy to decide if they are going to give their estate to the government or to a
charity.
b. When we repeal this tax will they still leave their money to
charities? Many who have done this in the past were motivated by this tax.
c. These charities may provide jobs for their families, but the IRS
watches these carefully to ensure that there are a requisite disbursements made
B. Nature of the Tax We Have
1. Estate Tax
a. this is imposed on the decedent’s estate (as opposed to an
inheritance tax imposed on the heir)
b. This must be paid before there can be a distribution
c. Before 1981, only 50% of what was left to a spouse was exempt.
This changed in two ways:
i It is unlimited
ii before you had to give it outright or you had to put it into a trust (power of
appointment) in which the spouse had the general power of appointment –
 We created the Q-Tip trust – property will
qualify for the marital exclusion if it is left in a trust such that the
surviving spouse receives all of the income from the estate and then
dictate where it goes at the time of the surviving spouses death. We can
make provisions to this such that the trustee can go into the principle of
the trust when it is needed for health, maintenance, etc.
d. Gross Estate
i Property owned at time of death passing through the will.
ii Testamentary Substitutes
 Life Insurance
 Pension/Retirement
iii Trusts – we will spend a lot of time on this (§§ 2036, 2037, 2038)
 Raise questions of a gift being given in the
lifetime of the decedent
 Raise questions of whether or not this is part of
the estate
 Will there be a double tax?
 When the Grantor gives the right of the
income of the trust it is a gift. § 2036 – estate will include the right that
is transferred in the trust (all of the property is included in the estate).
 This is not double taxation, it gives the
government the opportunity to tax the appreciated value of the
property. We back this out when we credit the Tentative Tax for all
gift tax payable.
 In the Estate Tax we are trying to tax the
transmittal of wealth at death – so we do not want to limit to what the
decedent leaves in his will. We will also tax the appreciation on the
property you gifted previously.
e. Estate Tax is due 9 months after death and you can get an
automatic 6 month extension (this does not extend the time for payment). There
are some things that let you extend the payments over years – an estate with a
closely held business. The interest rate on this payment schedule is as low as 2%.
2. Gift Tax
a. Necessary back up to the estate tax (wealthier individuals were
giving their assets away to avoid the estate tax)
b. This is imposed on the donor, the donee is secondarily liable if the
donor does not pay
c. Cumulative form of taxation – the calculation is a cumulative
process, you have to add all prior gifts when you calculate the current years tax
rate (you credit what you pay by what you paid in previous years)
d. How do we get to taxable gifts?
i What is subject to a gift tax?
ii When is the Gift Tax applicable? Concept of completed gift – the gift tax is
imposed when the gift is complete. When is the gift complete for gift tax
purposes? When has the transferor given up dominion and control over the
property?
 Ex. Grantor puts property into a trust and provides
that all of the income will go to Y for Life and then to X. This is fine.
(Note> there are two gifts in this situation: Gift of Income and Gift of
Remainder. Each of these gifts would be taxed separately and can be
completed and thus taxed at different stages.)
 There are problems when there is a power to
revoke. If there is a right to revoke, a gift will occur at the first distribution
to Y. Then if he gives up his power to revoke, then the gift is complete.
 What if the Grantor retains only the power to
change who receives the income? The gift of the remainder will be
complete, but the income gift will not be.
iii What is the value of the property transferred (we will spend very little time on
this in this course, but know that this is very important in practice)?

2
 Do we have a transfer that is for less than
adequate compensation? What was the FMV of the amount transferred and
what was given in exchange for this FMV?
 When we are dealing with third parties,
there will be a tendency to find that it is not a gift, but when it is a
family member, there it will be more likely to be found a gift.
iv Exclusions
 Charitable Donations
 Marital Deductions – no gifts given from one
spouse to another included
 Annual per Donee Exclusion - $11,000. This is
available to us in the computation of the taxable gift.
 ***You want to take this out when we
compute taxable gifts****
 If you use gift splitting between you and
your spouse, then you can get $22,000.
 Tuition or medical payments made on the behalf
of another directly to the institution providing the service. No Limit on
this!!! (Note> this cannot be an exclusion if the child does not go to
school there.)
v
e. Gift Tax is filed with your income tax return. You do have to file a return if you
make gifts hire than the per donee exemption. If you do not do this then the SOL
will not run.
Note> Audits in estate and gift often take place when you have limited
partnerships and what not in the estate
3. Generation Skipping Tax
a. Who pays this depends on the nature of the generation skipping
transfer
i Tax Termination
ii Taxable Distribution
iii Direct Skip
 Parent makes a gift directly to a grandchild or
when the parent creates a trust when the first beneficiary is the grandchild

 very costly because it causes 2 taxes – gift
tax and generation skipping tax
 That is why you want to have a trust that
does not have a direct skip.
 Added in 1986 because we did not want the
grandparent could go ahead and just give the gift to the grandchild so that
it would not be taxed twice
 You want the timing of the tax to be as many
years after the creation of the trust.

3
b. This first came along in 1976, but in 1986 it was substantially
revised and the old one was repealed retroactively to its origin
c. Why do we need this – trusts.
i A grandparent could place the property into a trust with the
child as the beneficiary. The child would get all of the income from the trust
and then have the property itself pass to the grandchild. There should be a gift
of right to income and gift of remainder.
ii We have adopted a system to ensure that some sort of
federal tax will be applied as the property moves from one generation to
another. In the trust example there is no opportunity for the property to be
taxed as it moves
d. Fills in where property is transferred and the estate and gift taxes
would not be applicable.
e. When the generation skipping tax applies, it is taxed at the highest
possible estate tax rate for that year.
f. When you develop an exempt trust – and it goes to the grand kids,
there is no GST.
i Create the trust with 1.12mil (or whatever the applicable exclusionary amount
is for that year) of corpus and the whole thing would be exempt from GST (it
would be subject to gift tax).
ii When you file the gift tax you make your GST exclusion allocation. This will
be exempt for the rest of its existence.
iii The exempt status will remain no matter what the appreciation of the property
is – it can grow an unlimited amount. BUT you have to make sure you do not
do anything that would disturb its exempt status.
iv Estate Planning with Exempt and Non-Exempt Trusts – you would want one
of each.
 Exempt Trust
 The exempt trust is the one that you really
want to preserve for your skip generations – you want this to grow – so
you want it invested in a way that would appreciate the assets.
 You would provide that the child would
receive distributions at the discretion of the trustee – that way the
grandchild is not the first beneficiary.
 The exempt trust is designed to maximize
distributions to skip persons.
 Non-Exempt Trust
 Then you can have a non-exempt trust – this
is where you give the child money.
 You can have this one distribute income and
principle to the child. Then you would want to give the child some sort
of interest in the trust so that it is included in his estate (because you
know it won’t be taxed at a rate higher than the highest).
 The non-exempt trust is going to be
designed to maximize distributions to non-skips.

4
 When you have a non-exempt trust, you
have a special exclusion
° tuition and medical expenses for skip
persons without being subject to GST
° If the distribution would be exempt if
paid by an individual by paying it directly to the institution
 Never create a trust that has an inclusion ratio of
anything besides 1 or 0. You are better off having one that is totally
exempt and another that is not at all exempt. You always want to have two
separate trusts – one for current income (non-exempt) and one for growth
(exempt).
Note> Each spouse gets the exemption. So you could have two totally
non-exempt trusts
g. Taxable termination is payable 9 months after death, Direct Skip
and Taxable Distribution are both files with the income tax
C. Estate and Gift tax have an important connection (needed for the calculation
of the estate tax)
1. Up until the Tax reform of 1976 there was no connection between these
two – but then we adopted a unified system for the purpose of estate and gif tax
2. If he makes any taxable gifts prior to 1976, we have to add to the estate
all taxable gifts. The tax paid on the gifts will be credited to the amount you pay, this
is just used to calculate the tax rate
3. Work off of the same rate schedule for gifts and estates
4. Unified credit against the estate tax and Unified credit against gift tax (§
2505) – this can be applied to either gift tax liability or to estate tax liability. The code
has kept the same credit for gifts taxes, but it has gone up on estate taxes.
5. Estate Planning involves both gifts made prior to death and
testamentary dispositions
a. Gift programs giving the exclusion of 11K per donee per year (this
can avoid the 41% tax rate of the first taxable rate)
b. Every person has an $1mil exemption – the husband and the wife.
So with spouses with at least $2mil you want to draft the will that will not waste
the $1mil exemption for. So you would will $1 mil to someone else and then the
rest going to the spouse.
i Bypass trust – keeps the first mil out of the first spouse who dies out of the
estate of the other. (have to make sure the spouses keep separate accounts)
c. Always preserve the exemptions of spouses in estate planning
6. The Unified Credit §§ 2010, 2505 – is available for either estate or
gift tax computation.
a. Why a credit instead of an exclusion – because the exclusion
benefits the highest tax brackets, the other takes it off at the lower
b. How is the credit computed? P. 93 of appendix. An estate has a
credit equal to the amount of the tentative tax from the applicable exclusion
amount based on the applicable tax rate for that year.
c. For Gift taxes this is frozen at the $1,000,000 applicable exclusion.
II. Estate Tax

5
A. § 2001 – Definition of the Gross Estate and Valuation
1. § 2031 – Definition of Gross Estate
a. Includes the value at the time of his death of all property, real or
personal, tangible or intangible, wherever situated.
b. Fair Market Value – the value spoken of in § 2031
i FMV – 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 having reasonable knowledge of relevant facts.
ii Liquid assets – FMV can be determined by reference to comparable sales in
the open market.
iii More problems when the item is not for sale in the open market:
 Only available on the black market – drugs have
been advised by the service to be valued at the price an ultimate consumer
would pay in the open market.
 Item is unique and irreplaceable in the market –
rights to produce one play and two motion pictures.
iv Factors to consider when determining fair market value:
 Income yield
 Appraisal –
 Should represent the price that would be
agreed upon between two hypothetical parties, not the price that the
actual parties to a transfer would agree upon.
 There must be a sound basis for the
appraisal and the performing expert should be able to thoroughly
explain it.
 Courts will discredit experts when they are
unfamiliar with aspects of the property or their analysis is poor or they
contradict their own opinions from different cases.
 Sales prices of similar property near the date of
death
 Bids made for the asset
 General economic conditions.
v § 2032A Valuation of certain farm, etc., real property
 a special rule that allows us to alter the rule of
2031, to value property not at its highest and best use, but to value it at its
current use.
 This was designed to help family farms.
 There are a lot of requirements to use this special
rule.
 This will ignore speculative value and
development value
vi Valuation is usually at the moment of decedent’s death, BUT
 § 2032 Alternate Valuation Date
 Allows us to elect to use a different date for
valuation – 6 months after death.

6
 This is an all or nothing thing – you cannot
pick and choose assets to apply this alternate date.
 This was enacted to prevent over taxation
when the value takes a dive right after death. You cannot use this
unless it lowers the tax
vii Valuation should not be effected by events that happen after death unless such
events were known or reasonably foreseeable at the moment of death.
 The value of an illiquid asset can be determined
with reference to an after death sale of the asset, however the longer the
period of time between the death and the sale, the less probative the sale is
of the asset’s value.
2. § 2033 – Property in Which the Decedent Had an Interest
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.
a. Beneficial Interest – The interest must be a beneficial interest; the
burden is on the estate to prove that it is not a beneficial interest.
i State Law
 State law creates legal interests and rights. The
federal revenue acts designate what interests or rights, so created, shall be
taxed.
 State law would govern the relationship of the
remainder person to the trust property; but whether the relationship fixed
by local law amounted to an interest in the property would present a
purely federal question.
ii State Decrees
 A federal court may decide whether the decedent
had title to a property only as a trustee or whether instead had a beneficial
interest in the property. BUT it will apply state statutory and common law
principles in the decision of that underlying issue.
 The beneficial interest question can be re-litigated
in federal court → The Supreme Court said it will not give finality to a
state court decision on an underlying state law issue, unless the local
decision is by the state’s highest court. The fear here is that the decision
will be made in non-adversarial conditions that are conducive to fraud and
collusion.
 Federal Courts are to give “proper regard” to state
decisions not coming from the highest state court (this can be no regard if
the decision was handed down in a non-adversarial suit).
b. Routine Inclusions
i Real property solely owned by the decedent
ii Tangible personal property solely owned by the decedent
(factual issue of whether the item was actually owned by the decedent can be
very troublesome)
iii Intangible items raising no questions such as:
 Currency in the decedent’s safe-deposit box

7
 Balance in decedent’s checking or savings
account (this does not include joint accounts)
 Any credit from one’s brokerage account
 Stocks, Bonds, CD’s owned solely by the
decedent
 Amounts due to the decedent on notes arising out
of the decedent’s lifetime loans or deferred payment sales.
c. Income Items
Income rights of the decedent at death must be treated as property in which
decedent had an interest within the scope of § 2033.
i Salary due at death (Note this will be taxed as income to the decedent’s estate
under § 691 but it is still includible in the estate under § 2033.)
ii Bonuses payable to decedent at time of death
 Bonuses which the decedent had no interest in at
the time of death, but were awarded after death are not included in the
gross estate even if they are paid to the decedent’s estate.
iii Compensation due for services other than as an employee are treated the same
as salary
iv Rent accrued at death on real or personal property owned by decedent
v Accrued interest at death
vi Dividends on shares of stock that are payable to the decedent at the time of
death – right does not arise until the record date of the dividend.
d. Partial Interests in Property
i Shared Interest in Property – if the interest is one that the decedent can pass
on to others, it is generally an interest in the scope of § 2033.
 Tenancy in common
 Community property
Note> These are shared interests that do not terminate at death, unlike
joint tenancy with the right of survivorship.
ii Successive Interests in Property
 A owns Blackacre and leases it to B for 20 years.
Both have interests that may be taxed under § 2033.
 If B dies before the lease term is up he has
an interest in the property for the next 10 years and his gross estate
will include the value of the leasehold.
 If A dies before the lease term is up, he has a
reversionary interest that will be included in his estate.
 The interest in the property can be based upon the
happening of an event as well. Note> If the property is A’s for life and
then to B or B’s estate. There will be nothing includible in A’s gross estate
under § 2033, but if B were to die first, his estate would include the
remainder interest in the property.
iii Cautions

8
 The only question that has been considered here is
inclusion under § 2033 – these interests that may not be includible here,
may be includible in the gross estate under another provision in the Code.
 Be careful with life interest that are not includible
in the decedent’s estate – these may give rise to generation skipping taxes.
e. Insurance Proceeds Under § 2033
i An insurance policy is property and the value of the decedent’s interest is
includable in his gross estate under § 2033 – this applies to the ownership of a
policy on the life of another person.
Note> § 2042 has special rules for insurance policies owned by the decedent
on his own life.
ii If owner and insured die simultaneously:
 And the owner is the primary beneficiary, then the
Simultaneous Death Act applies.
 And the owner is not the primary beneficiary, then
nothing is includable in the gross estate under § 2033. (This does not mean
that it is not included under another provision of the Code)
iii If the proceeds are those received before the death of the decedent, then it
depends upon the nature of the proceeds as to whether or not they are included
in the decedent’s estate.
 Annuity for life – nothing is included
iv Area of controversy → situation in which decedent is entitled only to interest
on insurance proceeds for life and then they are to be paid to the decedent’s
estate upon his death. These are not includible under § 2033.
f. Business Interests
i Corporations and Proprietorships
 Corporations – gross estate includes the value of
decedent’s shares of stock
 Sole Proprietorship – ownership of all of the
various assets of the business is attributed to the decedent and included in
gross estate under § 2033.
ii Partnership Interests
 Decedent’s share in the partnership is included in
his gross estate under § 2033
 The decedent is not viewed as owning any
specific assets of the partnership, but rather his proportionate share of each
of the assets of the partnership.
 It may be difficult to determine what the value of
the partnership is if it is not terminated upon the death of the decedent.
 Different partnership agreements may dictate how
the partnership is to devise the partnership interest of a deceased partner to
his estate, but this may not be determinative of its value if the Service
thinks that it is below the market value of the partnership.
iii Limited Liability Companies – decedent’s share of the LLC is includible in
his gross estate under § 2033.
g. Compensation for Death

9
i “Survival” Statute – Recoveries under these acts for the decedent’s pain,
suffering, or related expenses during decedent’s lifetime are included in the
decedent’s estate.
Note> Survival statutes allow a claim brought by a decedent against a
tortfeasor to survive his death.
ii Wrongful Death Acts – rights to recover under these acts do not constitute an
interest in property owned by decedent to be included in his estate under §
2033.
3. §2034 – Dower or Curtesy Interests
a. Dower or Curtesy interests should be included in the estate of the
deceased.
b. Important thing here is that this provision forecloses the argument
that a decedent’s gross estate should be reduced by the surviving spouse’s dower
or curtesy or similar interest in the decedent’s property.
B. §2035 – Adjustments for Gifts Made Within Three Years of Decedent’s
Death
1. Introduction
a. The Commissioner had little luck under the “contemplation of gift
tax” so Congress expanded the rule to an automatic 3 year inclusion rule for all
transfers in years after 1976.
b. Result → if a transfer was made that would be subject to the gift
tax, it pushes increments of the estate into higher estate tax brackets, yielding a
result much like an estate tax on at least the lifetime value of the gift, reduced by
the credit for the earlier gift tax paid.
2. The First Prong
a. §2035(a) Inclusion –
i §2035(a)(1) – requires property to be pulled back into the
decedent’s gross estate if:
 there is a transfer if an interest in property or the
relinquishment of a power with respect to property inclusion AND
 the transfer or relinquishment is one that was
made by the decedent within 3 years of death for less than adequate and
full consideration in money or money’s worth.
 This section is not applicable to any
transfers made outside of the three years before death.
 The transfer date is the date when the gift is
complete – look to local law to determine.
ii § 2035(a)(2) – The scope of this section is narrowed to
apply only if the decedent transfers an interest or relinquishes a power over
either
 an insurance policy that, without the transfer or
relinquishment, would have been included in the decedent’s gross estate
under § 2042 OR
 The entire amount of the proceeds are
included in the gross estate because that is what would have been
included under § 2042

10
 If you own a policy on your own life, give it
away before you are close to death – give it away early.
 If you want to purchase more insurance,
then you want to take the money that you would buy the insurance
with and put it in a trust and have the trust buy the insurance.
° (An irrevocable life insurance trust)
– There is no way this will be included in your account, because
you never owned the policy.
 an interest in property or power over property
that, if not transferred or relinquished, would have required an amount to
be included in the decedent’s gross estate under §§ 2036, 2037, or 2038.
Note> This only applies to estates of decedents dying after 1981.
 Applies only if the interest transferred by the
decedent was one that, had it been retained by the decedent, would
have enlarged the decedent’s gross estate under the above listed
sections.
 A transfer of property that, had it been
retained until death, would have been included in decedent’s gross
estate merely by reason of § 2033 escapes inclusion under § 2035.
 We are targeting that their gift value is much
lower than the value at the time of death.
b. Exceptions to the §2035 (a) Inclusion
i §2035(d): bona fide sales
 If, in connection with a transfer, the decedent
receives full consideration in money or money’s worth, then the transfer
amounts only to a substitution or exchange of assets, the gross estate is not
reduced, and no estate tax is avoided.
 The statute does not specify what constitutes
“adequate” consideration – the statute also does not say for what the
decedent must receive full consideration.
 When confronted with the problem of the
interest transferred being ofa different value than the estate tax
inclusion amount, a court created an estate tax ownership concept
requiring consideration equal in value to the potential estate tax
inclusion.
 Partial Consideration – when there is partial
consideration that amount will reduce the value that is included under §
2035.
 With life insurance policies, if the transferee
pays the premiums after the transfer we would exclude the
proportionate amount of those premiums to the total amount of
premiums made from the proceeds when including them in the gross
estate.
ii §2035(e): certain transfers from revocable trusts

11
 §2035 (and §2038) is inapplicable to “any transfer
from any portion of a trust during any period that such portion was treated
under § 676 [the revocable grantor trust rule] as owned by the decedent by
reason of a power in the grantor.”
c. Special Applications of the §2035(a) Rule
i §2035(c)(1) sometimes makes §2035(a)(2) inoperative – it requires all
transfers within 3 years of death to be included in the gross estate under
§2035(a) for purposes of applying § 303(b) (relating to stock exemptions),
§2032A (relating to special use valuation), and §§ 6321-6326 (relating to liens
for taxes).
ii §2035(c)(2) – imposes a dual test for purposes of meeting the 35% of the
adjusted gross estate test of §6166(a)(1)
3. The Second Prong – §2035(b)
a. The Gift Tax Gross Up Rule
i This provision requires the federal gift tax paid by the decedent or decedent’s
estate on any transfers made after 1976 by the decedent or the decedent’s
gross estate – this is a “gross up” of the gift tax.
 So – if a decedent makes a gift of 300K in cash,
then pays a gift tax of 125K, the 125K will be pulled into his gross estate
under this rule. This is because gift tax is exclusive and estate tax is
inclusive – when a gift of 300K is made, the decedent is reducing the size
of his estate by the full 425K (the gift plus the tax), but when a decedent
has an estate of 2Mil then the estate is reduced by the estate tax amount
before distribution to the beneficiaries.
 It is still better to give the gift, because had we not
the entire 425K would be included in the estate instead of just the 125K.
ii This section is operative whether the gift is subject to § 2035(a) or not.
iii Gift Splitting –
 if the spouse makes a gift and the spouses elect
gift splitting, then the portion of the tax paid by the decedent will be
included in his gross estate
 If the decedent pays all of the gift tax on the gift
split transfer made by the spouse, no gift to the decedent’s spouse results
and the full gift tax is included in the decedent’s estate
 If decedent makes a transfer and gift splitting is
elected and decedent pays full amount of tax on the transfer, the full tax is
again pulled into the decedent’s estate.
b. Gifts Made within 3 Years of Death – the transfer occurs when the
gift is complete for gift tax purposes.
4. §2043 – Transfers for Partial Consideration
a. The Affirmative Rule – the value of the consideration received by
the decedent can be subtracted from the applicable valuation date value of the
property included in the gross estate.
b. Note – this has to be consideration for money or money’s worth!!
C. §2036 – Transfers with Retained Life Estate
1. Excluded Transfers

12
a. Sales for Full Consideration – this section is inapplicable to any
transfers for adequate and full consideration.
i In the case of a remainder interest, then it will be valued using the actuarial
tables in the back of the book.
ii This can be paid with a note, but it has to be true debt:
b. Pre-March 4, 1931 Transfers
2. Period for which Interest is Retained
a. In order for § 2036 to apply, the decedent must have retained an
interest in the property for a specified period.
b. Three-fold Test
i For the decedent’s life
ii For a period not ascertainable without reference to the decedent’s death
 Decedent is entitled to the income quarterly with
the right to income ending in the quarter of decedent’s death → stays in
the decedent’s estate
 X for life, then to D for life, then to C → even if
D predeceases X this will be included in his estate less the value of X’s
outstanding life estate because the period for which D has a retained
interest cannot be described without reference to D’s death.
iii For a period that does not in fact end before the decedent’s death
 A retained interest for a term of years – A has a
retained interest for 10 years then to B. If A dies in that 10 year period, it
remains in his estate.
 Have to reference § 2702 – grantor retained trust –
where a grantor retains the right to income for a term of years. This
applies to grantor retained trusts to family members.
 If you have this kind of trust we do not
apply the normal valuation rules for this remainder interest.
 The remainder interest is valued at 100% of
the value of the property at the time of the gift. If it does not constitute
ones family, then it is valued like normal.
° If we have a GRIT (fixed number of
years) we pay gift tax at the time we create the trust
 The good thing about doing this is that you
at least get the appreciation out of the estate, but you will pay more
gift tax at origination.
 This is also applicable if there is a retained
interest for life (but this rarely happens because this will be included in
the gift estate and we are trying to get stuff out of the gross estate.
3. Nature of Interest Retained
a. 2036(a)(1) – retained beneficial interests
i Invoked if the decedent retains “the possession or enjoyment of” or “the right
to income from” the transferred property or property interest
ii Requires a retention of an interest in the very thing being transferred

13
iii The decedent’s right to other property, such as an annuity, in return for the
transferred property does not trigger application of § 2036. (adequate and full
consideration)
b. 2036(a)(2) – retained control over other’s interests
i Retention of the right for life to say who may enjoy transferred property or
income therefrom
ii Does not have to be a power in which he can claim the enjoyment or interest
for himself
4. Beneficial Interests in the Decedent
a. Possession or Enjoyment – ex. When one makes a gift of a
valuable painting but reserves the right to keep it for life or a residence but retains
the right to live in it for life.
b. Right to Income
i Has to be more than a mere expectation – decedent has to have a right to it
ii Does not have to be received directly by the decedent to be a right to income.
If it is a trust with income to minor child, this is a discharge of a legal
obligation. The legal obligation must still exist at the time of his death if it is
to be included in the estate – so if Child reaches the age of majority, then this
is no longer indirect income to the decedent and the property will not be
included in the gross estate under § 2036 (like a trust for a term of years)
c. Enjoyment “Retained” – actual retention can turn into a rather
pragmatic problem:
i Implied Understanding – mere fact that the decedent continues to occupy the
house:
 Where the family member transferee does not co-
occupy, it looks like there has been retention by the transferor.
 Where the family member transferee does co-
occupy, it looks less like it was retained.
ii Implied Agreement found where the transferor creates a FLP and transfers
interests in the partnership to other family members and, under the PA, the
partnership or other family members have right to income, but the transferor
diverts all of the partnership income for the transferor’s personal use.
iii Decedent has created a trust with income to X, but the trustee (not the
transferor) has complete discretion to make income payments to the decedent.
5. Control Over Other’s Interest
a. Right to Designate Retained Indirectly
i Transferor grants power to trustee to designate who shall enjoy the income
and retains the right to discharge the trustee and name himself as the trustee
with the same power
 When the grantor retains the right to remove the
trustee (at any time and without cause) and name himself trustee we have
more concern – the powers held by the trustee will be attributed to the
grantor. So we have to be careful about retention of powers removing the
trustee.
ii Transferor’s reservation of the right to change trustees with a provision that it
will not be the transferor will not be an indirect retention.

14
 When the grantor has the power to remove the
trustee but can only do so when they appoint another trustee – for years
they said that just having this power was enough to include the property.
BUT this was changed and the service now says that you can do this
because there is no power given to the grantor to decide who gets
income.
 There is an exception to this – when the list of
trustees that could be chosen to replace the original trustee includes a
related party (the service will raise this issue). No one thinks this is the
right result because § 2036 allows the grantor to select this person in the
first place.
b. Illusory “Control” – he will still retain the control sufficient to pull
the property into the gross estate under this section when his right to designate an
income beneficiary must be consented to by another person (under this section it
does not matter if the person consenting has an adverse interest or not)
c. Right to Designate Who Benefits –
i Mere right to direct the accumulation of trust income.
 O’Malley – If the accumulation will eventually
pass to a third person remainder person, then this is a retained right to
designate who benefits.
 Struthers – If the accumulation will eventually
pass to the beneficiary or her estate, this court held that this is a retained
right to designate who benefits. But really, this should only trigger the §
2038 power to alter the time of enjoyment.
ii Right to invade the corpus for another third party beneficiary
 G → X or X’s estate for G’s Life → remainder to
Y or Y’s estate
 Retains power to invade corpus for Z – power that
effects the enjoyment all of the income of the property during his
lifetime. We will include in the gross estate the entire trust.
 If he had limited this power, the amount included
in the gross estate would be limited as well (if he can only invade 50% of
the corpus, then only 50% is included in the estate)
iii Right to invade corpus for the income beneficiary
 G → X or X’s estate for G’s Life → remainder to Y or Y’s estate
 The grantor retains the power to invade the corpus
of the trust for X – The corpus of the trust can be distributed to the income
beneficiary of the trust.
 Is this a 2036 power? No this is not a 2036 power
→ Reg. 20.2036 – only concerned with a power that will alter who
receives the income or the benefit of the property.
 When G has the power to give the corpus to
the income beneficiary it does not change who gets the income. It
changes how he gets it, but it does not alter the identity of who
receives the property. Not included in the decedents gross estate under
§ 2036.

15
 Caution> this will be included in his estate
(though remainder interest only) under §2038.
 If §2036 were to apply, the entire value of
the trust would be included in the estate – but § 2038 would only
include the remainder interest in the gross estate. You have to examine
whose beneficiary interest would be altered and value of that interest is
included in the estate.
6. Indirect Interests or Controls
a. Settlor Trustee
i It is possible for the settlor (transferor) to name himself trustee without
invoking § 2036.
ii The settlor must restrict his powers to compliance with a reasonable standard.
The idea being that the trustee is not the innovator – he is simply carrying out
directions from the trust instrument.
 Beneficiary’s accustomed manner of living
 For the beneficiary’s educational needs
 In case of sickness
 When you say “the comfort of the beneficiary”
you are going to have questions about this.
iii Can the settlor freeze his tax liability to the value of the property at the time of
gift and yet work to enlarge his estate for life without estate tax attrition at the
end?
 While this seems to be against the purpose of this
section, read literally it could work – the power to control investments is
merely fiduciary and a restricted power over enjoyment meets the
ascertainable standard.
iv G → X or X’s estate for G’s Life → remainder to Y or Y’s estate
 G names himself trustee (this always leads to
problems – it could lead to all kinds of violations – and we would only
want to do this with the greatest of caution) but puts limitations on his
power. He is required (note> this is not a right, but a requirement) every
year to give Z the amount needed for his support and maintenance and
the remainder of the income to go to X.
 There is no discretion in this power as trustee –
this is an enforceable distribution. This is not a § 2036 power and will not
cause inclusion in the grantor’s gross estate. There must be ascertainable
standards.
b. Enjoyment Retained in Commercial Transactions – where donor
transfers property to another, but they agree that the donor will use the land rent
free for his life, there is a retention of the enjoyment of the property.
c. Rent Paid by Transferor – a gratuitous transfer of real property
coupled with a leaseback agreement under which the transferor pays rent for
continued possession.
i Business Setting – § 2036(a)(1) is inapplicable where the property is business
property that is leased back for its fair rental value.

16
ii Non-business Setting – The service says they are not going to follow this rule
where it is a residence (this is a meaningless distinction and the service should
not accept it)
iii Sale and Lease Back – will be included in the gross estate if it does not look
like it is true debt and the lease back provisions appear to pay the note.
 You would want a loan with a fixed end date,
amortizing over the life of the debt, you would want to cut out any
provision in the will forgiving the debt. You will have to enforce payment
of the loan.
 A loan that has payments of interest only, the
parent paying rent close in value to the interest, the parent forgiving a
portion of the principal each year equal to the annual exclusion amount
and forgiving the balance as a provision in the will most likely will be
seen as a gift – which is what it is.
 Installment sales are good estate freeze devices –
but you have to make sure it is pure debt.
d. §2036(b) Transfer of Stock
i Under 2036(b) the direct or indirect retention of voting rights in a “controlled
corporation” is “considered” a retention of the “enjoyment” of transferred
property so as to trigger application of 2036(a)(1).
ii “Controlled Corporation” – one in which the decedent owns, either directly or
by attribution under § 318, stock possessing at least 20% of the combined
voting power of all classes of stock in the corporation. (This includes the mere
ownership of the voting rights)
7. Transfer by the Decedent – 2036 does not apply to transfers by others
creating rights in the decedent, except for others’ transfers imputed to the decedent,
such as by way of reciprocal trust doctrine.
a. Indirect Transfers
i D pays $10K to X to transfer real estate of like value into a trust – it is not
unrealistic to treat D as the one who transferred the real estate into the trust
even though he never owned it.
ii Where the beneficiaries in an executed will agreed in a settlement to a
distribution plan specified in an unexecuted – the beneficiaries will be treated
as having transferred the property.
b. Transfers by Election – ex. When you make an election on your
insurance to not receive the proceeds but to have them accumulate for your life
then pass to your children at death – this is a transfer.
c. Reciprocal Trusts
i You have siblings who each create trusts for the other giving income for life
and remainder to his children. When S dies, he has no interest in the trust he
created and the right to income he was not originally his property it just goes
on to his children. The problem is that if either of the siblings had created the
trust for themselves then they would have been subject to § 2036. So we treat
him as if he created a life estate.
ii Application of the reciprocal trust doctrine requires only that the trusts be
interrelated, and that the arrangement, to the extent of mutual value, leaves

17
the settlors in approximately the same economic position as they would have
been in had they created the trusts naming themselves as life beneficiaries.
iii If the amounts are different Rev. Ruling 74 – 533 → the amount that can be
included in either grantor’s estate under § 2036 is no more than the smaller
trust at the applicable estate valuation date.
8. Amount to be Included – the date of death value of the property
interest transferred in the proscribed manner (the trust corpus)
a. Accumulated Income – treated as if it was owned and transferred
by the decedent for purposes of measuring tax liability under 2036
b. Lifetime Relinquishment of Prescribed Interests – if the decedent
relinquishes his retained interest then it will not be included in his estate –
NOTE> 2035 does apply here, so if he relinquished his retained interest within 3
years of death then it will be pulled back in under that provision.
D. § 2037 – Transfers Taking Effect at Death
1. Introduction
a. § 2037 draws into the gross estate the value of some interests in
property that the decedent has transferred conditionally during life.
b. The section applies only if:
i The possession of enjoyment of the property is conditional upon surviving
the decedent AND
ii The decedent has retained an interest in the property that may bring the
property back to the decedent or to the decedent’s estate or back into the
decedent’s power of disposition. (Reversionary Interest)
2. Excluded Transfers
a. Inapplicable to bona fide sale for an adequate and full
consideration in money or money’s worth
b. Does not apply to transfers made before September 7, 1916.
3. The Survivorship Requirement
a. Can possession be obtained without surviving the decedent?
i If yes, then 2037 will not apply
ii If no, then it will apply
b. If there is an alternative contingency by which the interest can be
obtained, then it will not be included under 2037, but if the alternative
contingency is unreal – will never happen – then it will be knocked back into
2037.
c. When there is more than one interest in the property transferred, as
there often is in these situations, we need to be careful to find the interest that is
contingent on decedent’s death and only that interest is falling under 2037/
4. Retention of Reversionary Interest
a. Definition of “Reversionary Interest”
i The term is defined to include the possibility that the property may return to
the decedent transferor, as well as the possibility that it may return to the
decedent’s estate.
ii Even if the possibility ends with the decedent’s death, the decedent has
retained the requisite interest long enough within the statutory concept

18
iii Does not include a possibility merely that the income from property or the
power to designate who shall have the income may return to the decedent
(these would fall under 2036)
b. How the Interest is Retained
i Pre 1949 – only reversionary interests that arise “out of the express terms of
the instrument of the transfer”
ii Post 1949 – both the reversionary interests arising out of express terms and by
operation of law
c. Negligible Reversionary Interests – the reversionary interest must
exceed 5% of the value of the transferred property (its value immediately
preceding death.
d. Mortality Tables and Actuarial Principles – the fact of the
decedent’s death is to be disregarded and the usual valuation methods are to be
employed, including the use of gender-neutral mortality tables and actuarial
principles.
e. Decedent’s Physical Condition – taking this into account would
largely nullify this provision, so it is not taken into account.
f. Application of the 5% Test – this becomes primarily a
determination of the decedent’s mathematical chances, on the basis of age just
prior to death, of surviving some contingency(ies).
g. Base for the 5% Test – in determining whether the value of the
reversionary interest exceeds 5%, it is to be compared with the entire value of the
transferred property, including the interests that are not dependent upon
survivorship of the decedent.
5. Pre-Death Termination of Reversion – if the reversion is terminated
before death then its value would be zero and would not be included in the gross
estate under 2037. Note> it can still be pulled in under 2035.
6. Amount to be Included – the gross estate shall include the value at the
date of death of any interest in property that has been transferred in such a way as to
take effect in possession or enjoyment at or after the decedent’s death
E. §2038 – Revocable Trusts
1. Introduction
a. It might be better named “alterable transfers” because all it takes is
the power to change the enjoyment of transferred interests to invoke the section
b. The transfer sections overlap quite a bit (esp. 2036 & 2038) –
When two or more of the transfer sections are applicable, obviously the
Commissioner quite properly will apply that section or combination of sections
requiring the maximum inclusion in the decedent’s gross estate.
2. Excluded Transfers
a. A bona fide sale for an adequate and full consideration in money or
money’s worth.
b. Transfers made before June 22, 1936
3. Any Change in Enjoyment
a. Whether the enjoyment of an interest in property transferred by the
decedent during life is subject to “any change” at the decedent’s death.

19
i If the decedent kept a hand on the property until death, even by a right to
accelerate the interest, it is so much akin to a testamentary disposition that the
affected interest should be subject to estate tax.
ii Ex – Where income beneficiary and remainder-man are the same person, the
right to terminate the trust and turn corpus over to him immediately.
b. Whether the possible change may be brought about by the
decedent through the decedent’s exercise of power.
i This would include any right to invasion of the corpus for the benefit of
another.
ii This also includes any right that would merely change the timing of when a
beneficiary received their interest.
4. Power in the Decedent – any of these powers will invoke 2038
a. Power to Revoke
i If decedent retains the right to get the property back
ii If state law provides that a particular transfer is revocable if not specifically
made irrevocable, then unless the transferor expressly makes the trust
irrevocable, 2038 will apply
iii If creditors of the transferor, under local law, can reach the corpus of the trust,
then it is revocable and caught in 2038
b. Power to Alter or Amend
i Power generally to name new beneficiaries of a trust
ii Mere Power to change beneficial interests among a limited group of persons
already enjoying rights as beneficiaries
iii Sufficient even if the power can only be exercised by will and there is no right
during life to make the adjustment.
c. Administrative Powers
i Mere administrative or managerial powers over trust assets do not constitute
powers to alter beneficial interests in the trust within 2038.
ii What is considered to be an administrative or managerial power?
 Trustee Grantor has discretion to allocate stock
dividends to principal or income – administrative power
 Non-Trustee – Grantor has reserved complete
allocation discretion with no judicial restraint – not an administrative
power (looking at unbridled discretion)
 Allocation powers as trustee, if they are validly
expressed in such a way as to foreclose restraint by a court of equity, they
go beyond the needed flexibility, involve affirmative authority to tamper
with beneficial interests – not an administrative power.
iii 2038 does little more than require attention to be focused on any power to
determine whether under its terms and applicable law, it is properly
considered a fiduciary power or whether it really amounts to a power to
change beneficial interests.
d. Powers of Investment – any uncontrolled power over trust
investments such that the remainder person’s interests could be changed at
decedent’s will or lifetime interest beneficiary’s interest could be changed at his
will, then it is a power within 2038

20
e. Power to Terminate – expressly proscribed in 2038 and taxed as to
the interest that is subject to termination.
f. Gifts to Minors – a transfer to a minor with the decedent named as
custodian will result in inclusion under 2038 if decedent dies before child reaches
majority.
g. Power in “Whatever Capacity” – this brings in the power to
remove or discharge a trustee at any time and to appoint the decedent as trustee
5. Powers Restricted by Standards
a. A power to change enjoyment only in stated circumstances does
not invoke 2038.
b. Ascertainable Standard – a power that is restricted by an objective
standard is not a power within the meaning of 2038.
i Decedent’s power as trustee to give income to child “in accordance with the
station in life to which he belongs.”
ii Medical expenses, support, education,
c. The rationale is that such a power involves the authority to execute
rather than to determine or to change the terms of the transfer.
6. Power Exercisable Only With Another
a. It does not matter who the other person is, the decedent’s power to
alter or revoke will still invoke 2038 when it must be consented to by another
person (even if the other person has an interest adverse to the exercise of that
authority)
b. One exceptional case – if the decedent holds a power that is
exercisable only with the consent of all persons having an interest, vested or
contingent, in the property subject to the power and if the power adds nothing to
the rights of the parties under local law (i.e., a provision of local law that would
allow such person to alter the terms of the trust in any event), the power is
ignored.
7. Source of the Power
a. It makes no difference “when or from what source” the decedent
acquired the power. However, there should be some linkage between the required
transfer by the decedent and the decedent’s power.
b. 2038 should be held inapplicable in situations where the decedent
makes a complete, absolute transfer and, by totally unrelated conveyance, the
decedent has some fiduciary power or control at death.
8. When Power Must Exist
a. At date of death
b. Will be considered to be there at date of death even when there is a
requirement of notice before the exercise, despite no notice
c. Deferred effective date for the amendment, revocation, or
termination from the date of exercise
d. However, if there are other contingencies, 2038 will not apply
e. Relinquishment of the Power – if within 3 years of death then it
will be included in the gross estate (2038(a)(1) & 2035)

21
9. Amount to be Included – Any interest in the property transferred by the
decedent if the enjoyment of such interest was subject at the date of decedent’s death
to change through one of the proscribed powers.
a. Interests Subject to Change
i Only the interests that the power effects will be included in
the gross estate
ii Requirement of giving notice makes this subject to
adjustment – the adjustment excludes the value of the interest that could not
have been effected by an exercise of the power if the decedent had lived.
b. §§ 2036 and 2038 Compared
i § 2036 – includes the value of the entire property
ii § 2038 – only includes the value of the effected interest
F. §2039 – Annuities
1. General Rule
a. The value of amounts received by beneficiaries by reason of their
surviving the decedent is to be included in the decedent’s estate.
b. Three Requirements:
i Under any form of contract or agreement
ii If under such contract
 An annuity or other payment was payable to the
decedent
 Decedent possessed a right to receive such
annuity or payment for
 His life
 Any period of time not ascertainable without
reference to his death or
 For any period of time which does not in
fact end before his death
iii Receivable by the beneficiary by reason of surviving the decedent
2. Exceptions Expressed in §2039(a)
a. Life Insurance Policies – expressly inapplicable to life insurance
policies (2042 controls). In the combination policies, the regulations say that “if
the decedent dies after the reserve value equals the death benefit, there is no
longer an insurance element under the contract” and 2039 will control.
b. Pre-1931 Contracts – limited to estates where decedent dies after
August 16, 1954 and then only to contracts entered into after March 3, 1931.
3. Qualifications
a. Contract or Agreement
i There must be a contract or agreement → includes understandings,
arrangements or plans or combinations of arrangements, understandings, or
plans arising by reason of decedent’s employment
ii Does not include → benefit payments paid under public laws where decedent
has no voice in the designation of beneficiaries; where beneficiaries have only
a mere expectancy; salary payments to which decedent had a right to (these
are included on the decedent’s final income tax return)

22
b. Period for which Interest is Retained – the question is whether the
decedent had a specified right or interest
i For his life
ii For a period not ascertainable without reference to his death
iii For a period that did not in fact end before his death.
c. Nature of Decedent’s Interest
i Payable to the decedent – where the decedent at death was actually receiving
payments without regard to the question whether the decedent could require
their continuation
ii Possessed the right to receive – if the decedent had an enforceable right to
receive payments at some point in the future, whether or not, at the time of his
death, he had a present right to retain payments, i.e., it is not necessary that
he have met the conditions at the time of his death
iii If the payments to the decedent have not commenced at the decedent’s death,
2039 will not apply unless, at death, the decedent’s rights to future payments
are non-forfeitable.
d. Nature of Beneficiary’s Interest
i same as the decedent’s
ii Right to payment is by reason of surviving the decedent
4. Amount to be Included – the value of the amounts receivable by
beneficiaries “by reason of surviving the decedent.”
a. Valuation
i Annuities under contracts issued by companies regularly engaged in their
issuance – cost of comparable contracts issued by the company
 What it would cost at the date of death to acquire
a policy for the survivor with benefits such as exist under the contract in
question.
ii When it is not issued by a company engaged in issuing these contracts – value
is determined in accordance with appropriate valuation tables.
b. Percentage Restriction –
i the amount actually includable in the decedent’s gross estate under 2039 is to
be determined by reference to the following 2 factors:
 The value of what is payable to the survivors
 The portion of the purchase price of the annuity or
other contracts that was paid by the decedent
ii The amount to be included is only such part of the value of the annuity or
other payment receivable by beneficiary as is proportionate to the part of the
purchase price contributed by the decedent.
 Portions paid by the decedent’s employer will be
considered as paid by the decedent.
5. Private Annuities
a. Not an annuity in the context of employment or bought from a
company in the business of selling annuities. This is a related party selling the
property in exchange for an annuity.
b. The FMV of the annuity must equal the FMV of the property.

23
i Usually when you are trying to make sure that this is adequate consideration it
is unworkable because the payment is too large.
ii A lot of times there are not other sources of income with which to make the
annuity payments so you have to rely on the income of the property that was
exchanged for the annuity.
c. A better plan would be to give away portions of the property on a
year by year basis. These are discounted in their value. So you give a 20% interest
to your child and it will be discounted because it is not worth as much as just a
portion – you could work it so that each gift equal in value to the annual
exclusion.
6. Exempt Annuities – the exclusions under this section were repealed
under Tax Return Act of 1984 for all estates of decedents dying after 1984.
G. §2040 – Joint Interests
1. Introduction
a. There are four possible rules
i If decedent’s interest and that of the other co-owners was acquired
gratuitously – each co-owner will be taxed at death for his ratable share
ii If the decedent’s wealth created all of the joint interests – the entire value of
the property is included in the decedent’s gross estate
iii If the decedent’s interest was created gratuitously by the other co-owner –
there is nothing from this property included in the gross estate of the decedent
iv If the both the decedent and the co-owner contributed to the acquisition of the
property – the portion of the property equal to the decedent’s share of the cost
of acquisition is included in his estate
b. Special Rule in 2040(b) for joint tenancies in which the co-owners
are spouses
2. Forms of Ownership Covered
a. Joint Tenancies – property is held by decedent and another or
others with a right of survivorship
b. Tenancies by the Entirety – joint tenancy where the only tenants
are husband and wife
c. Joint Bank Accounts – specifically included in the statute where
the deposit is payable to either co-owner or the survivor
3. Some §2040 Misconceptions must be set aside:
a. It is immaterial that jointly owned property is not part if a
decedent’s estate for purposes of probate or administration.
b. The value of the decedent’s interest in the jointly held property
prior to the decedent’s death is by no means the measure of what is to be included
in the decedent’s gross estate.
c. The estate tax treatment of property owned by the decedent and
another as joint tenants is not affected by the fact that the creation of the tenancy
was treated as a gift for gift tax purposes, except with regard to the possible
availability of a credit for gift tax paid.
4. Amount to be Included – the value of the jointly held property, except
to the extent that the surviving tenant(s) contributed to the cost of the property.
5. Survivor’s Contribution –

24
a. the amount to be excluded as the survivor’s contribution bears the
same ratio to the entire value of the property as the consideration furnished by the
survivor bears to the entire consideration paid for the property
b. Amount Excluded = (survivor’s consideration/entire
consideration paid) * entire value of the property
6. Property Acquired by Gift From Others – upon the death of one of
the owners, the property is treated for estate tax purposes just as if each owner had
contributed an equal part of the purchase price (value included = value of property/#
of owners)
7. Property Paid for by Co-owners
a. The Tracing Requirement
i Only contributions from separate funds of the survivor are taken into account
under the exclusionary rules.
ii A contribution originating as income from property acquired gratuitously
from the decedent constitutes contribution from the survivors separate funds.
What is income for these purposes?
 Dividends from stock, rent from property –
clearly income when contributing to the acquisition of a separate property
 Gains from the sale of property used to purchase
jointly held property – income constituting separate funds
 Appreciated property used as contribution – not
income and will be considered contributed wholly by the decedent
b. Additions and Improvements –
i The regulations state that the total cost of acquisition included the cost of
“capital additions.”
ii Three approaches
 Application of the regulations literally – the exact
dollar amount actually contributed
 Allocation to each of the co-owners a part of the
appreciation commensurate with the co-owners contributions prior to the
appreciation.
 Reduction of the cash contribution made by the
surviving owner from the total value of the property to arrive at the value
to be included in decedent’s gross estate
iii The first and third approaches should both be rejected and the second one
should be applied.
8. Burden of Proof
a. The burden of showing original ownership or contribution to the
purchase price by the survivor falls upon the estate.
b. In the case of a bank account – you have to show contribution by
the survivor and no subsequent withdrawals.
9. Termination Prior to Death
a. Creation of a tenancy in common near death – only half of the
property would be included in the decedent’s estate.
b. If the decedent and the surviving co-owner transfer the entire
property to a 3rd party, then none of it will be included in the gross estate –

25
regardless of whether or not he lives for 3 years after (gift of property not an
interest in property so not includable under 2035, but the gift tax associated with
decedent’s portion of the gift will be included)
c. If decedent and co-owner transfer to trust and retain a life interest –
half of the property will be included in his gross estate. Rationale – at the time of
the transfer the decedent had only one half interest in the property under local
law, which is all the decedent could have transferred.
10. The § 2040(b) Exception
a. General Rule
i (b)(1) provides a flat rule that ½ of the property jointly owned is included in
the estate of the predeceasing tenant in the case of a “qualified joint interest”
ii (b)(2) “qualified joint interest” – the co-owners are husband and wife
b. Exceptions:
i Inapplicable to qualified joint interests created prior to 1977
ii Inapplicable where the surviving spouse is not a U.S. citizen
 If non-citizen becomes a citizen prior to the filing
of the decedent’s tax return and is a U.S. resident at all times after
decedent’s death and prior to becoming a citizen then (b)(1) will apply
 To the extent it is included in the estate the spouse
can transfer the property to a QDOT and it will qualify for the marital
deduction and QDOT treatment resulting in the postponement of decedent
spouse’s estate tax.
c. One thing to be concerned with here is that you do not want to
have too much property to be held jointly because then there may not be enough
to fund the credit shelter trust – all jointly held property will go to the spouse
qualifying for the marital deduction. You want to make sure that each spouse
owns enough property individually to fund the credit shelter trust.
H. §2041 – Powers of Appointment
1. Introduction
a. Never applies to a retained power – this is reserved for 2036, 2038
b. Only applies to a power conferred to the owner by another person
or group of persons.
c. There is a comparable provision in the gift tax area – see §2516
2. Powers within §2041 – a right that may be exercised either during life
or by will, not necessarily both, to direct who shall become owner of the property
subject to the power. Includes:
- right to consume the
principal of the trust
- unrestricted right to
substitute oneself for the existing trustee of a trust, if the trustee has a power of
appointment
b. Relationship to Other Sections
i §2041 never operates to exclude from a decedent’s gross estate the value of
property that is includable under other sections
ii Does not apply to powers “reserved by the decedent to himself” which are
within the scope of other sections

26
c. Powers that Overlap Interests – If decedent had an actual
ownership interest in the property it will be included in the gross estate under
2033.
3. Definition of a General Power – a power is general if it “is exercisable
in favor of the decedent, his estate, his creditors, or the creditors of his estate.” (one
that can be exercised directly or indirectly in favor of one’s own benefit)
4. Exceptions to General Definition
a. Power Limited by a Standard
i 2041(b)(1)(A) – if a power may be exercised only in accordance with an
ascertainable standard relating to the decedent’s health, education, support, or
maintenance, it is not treated as a general power of appointment.
 If it is an ascertainable standard not related to one
of the above, then it is not sufficient to limit the power
ii Critical Question – whether the power is limited by an ascertainable standard.
b. Post 1942 Powers with Another Person
i Power held with the creator of the power – the property will be brought into
the creator’s estate under 2036 or 2038
ii Power held with an adverse party – someone who has a substantial interest in
the appointive property, which interest will be adversely affected by an
exercise of the power in favor of the decedent
iii Power held with an equally interested party – if a decedent’s power to
appoint for his benefit can be exercised only in conjunction with one other
person in whose favor the power may also be exercised, only ½ of the
property will be treated as subject to a general power of appointment in the
decedent.
c. Judicious Use of Powers – congress has left considerable room for
the judicious use of powers of appointment in planning at substantial tax savings.
5. Treatment of Pre-1942 Powers – gives rise to estate tax inclusion only
if the power is a general power and the decedent exercises the power.
a. Exercise of Power
i Non-exercise of a pre-1942 power is not taxable
ii The power must be exercised by will or in some other manner akin to
testamentary disposition in order to cause estate tax liability
iii If a pre-1942 power is exercised by a disposition of a type that would be
caught by 2035-2038 if an actual transfer of property were involved, estate tax
liability results.
b. Failure to Exercise – the statute explicitly states that failure to
exercise shall not be deemed an exercise
c. Complete Release
i A complete release shall not be deemed an exercise
ii What constitutes a complete release?
 There are no good guidelines in the regulations so
inaction seems to be the safest route
d. Partial Release of Pre-1942 Powers – when a general power is
partially released such that it is now a limited power, the exercise of the limited
power will be considered an exercise of a general power

27
6. Treatment of Post-1942 Powers – several tests determine whether the
value of property subject to post-1942 general power of appointment in the decedent
must be included in his gross estate:
a. Possession
i Did he have possession of the power at the time of his death?
ii It is irrelevant that he was under legal disability to exercise it at all times after
the power was created – mere possession.
iii Conditional power of appointment – triggering event:
 Decedent has no power over the triggering event –
no possession of the power at death
 Decedent has power over the occurrence of the
triggering event – possession of the power at death
iv Giving Notice as a Requirement of Exercise – value of the property to be
included in the gross estate will be discounted for the period required to elapse
between the time of the decedent’s death and the time the power could have
been exercised.
b. Exercise
i A pre-death exercise of the general power in a testamentary fashion requires
inclusion of the value of the property subject to the power in the gross estate
ii If the power is exercised through the will – inclusion of the value of the
property subject to the power
iii Exercise that involves a disposition that would be covered by 2035-2038 if it
were transferred in the traditional way
c. Release – a lifetime release of the power will be equivalent to an
exercise of the power
d. Disclaimer or Renunciation – 2518 provides a rule for disclaimers
that allows an individual who is given a post-1942 general power of appointment
to avoid any tax consequences with respect to the power.
e. Lapse – release of a general power includes the lapse of the power
during the donee’s lifetime, subject to some important exceptions
f. The Five or Five Rule – the exception to the general rule that a
lapse = release
i The general rule is inapplicable if the power that lapsed was such that during
any calendar year its exercise was limited to $5K or to 5% of the value of the
property out of which the exercise of the power could have been satisfied,
whichever is greater.
 If the lapse exceeds these amounts, it is to be
treated as a release only to the extent of the excess
 5% of the value at the time of the lapse
 If the decedent’s power is limited to only part of
the property, then only that part is used to measure the 5% exclusion.
ii The failure to exercise the power that fits within this exception would have no
resulting estate tax consequence.
iii You would want to make sure that the power expires in a short time because if
the decedent died while the power was unexercised and the lapse had not
occurred then it would be included in his estate.

28
iv One way to set up one of these trusts:
 We have a list of beneficiaries who may make
annual non-cumulative withdrawals of the greater of 5K or 5%, BUT we
never expect them to make any of these withdrawals.
 This way we are passing wealth using the annual
exclusion, and building up the trust to pass to future generations. You can
make the gift up to the amount of the annual exclusion for each of the
beneficiaries
7. Amount to be Included – it is the value of the property that the
decedent could or did appoint that is brought into the decedent’s gross estate
I. §2042 – Insurance
1. Introduction
a. Two Basic Inclusionary Rules → The proceeds of insurance
policies on a decedent’s life are to be included in the insured’s gross estate if they
are:
i Receivable by the executor OR
ii Receivable by other beneficiaries and the decedent had any incidents of
ownership in the policy at death.
b. This section only applies to decedent’s ownership of a life
insurance policy on his own life.
c. This section is not necessarily exclusive.
2. What is Insurance?
a. In order to be insurance the policy must include the distribution or
shifting of the risk of premature death.
b. Conventional policies which guard against death (accidental or
not) and a double indemnity of a life contract.
c. Death benefits paid by fraternal beneficial societies operating
under a lodge system.
3. Amounts Receivable by or for the Estate
a. Meaning of Executor
i “receivable by the executor” – they are part of decedent’s gross estate for tax
purposes.
 “receivable by or for the benefit of the estate”
 when nominally payable to another beneficiary
who is legally bound to use the proceeds to discharge the estate’s
obligations, such as taxes, debt, or other charges.
ii “executor” – the executor or administer of the estate or, if none is appointed,
“then any person in actual or constructive possession of any property of the
decedent.”
b. Simultaneous Death – If the primary beneficiary dies at the same
time, then it will go to the secondary beneficiary and whether or not it is included
will depend upon who is the secondary beneficiary.
c. Is Insured’s Wealth Transmitted – yes, it is something that is
owned by the decedent that happens to increase in value on the date of his death
4. Amounts Receivable by Other Beneficiaries
a. Incidents of ownership

29
i Full ownership is not required
ii House Ways & Means listed some incidents (not exhaustive):
 The right of the insured or his estate to the
economic benefit of the insurance
 The power to change the beneficiary
 The power to surrender or cancel the policy
 The power to assign it
 The power to revoke an assignment
 The power to pledge the policy for a loan
 The power to gain from the insurer a loan against
the surrender value of the policy
b. Reversionary Interest – this is an incident of ownership only if the
value of the reversionary interest exceeds 5% of the value of the policy
immediately before the decedent’s death
i Includes “a possibility that the policy, or the proceeds of the policy, may
return to the decedent or his estate, or may be subject to a power of disposition
by him.
ii Be careful of ultimate and indefeasible rights conferred by the policy on the
decedent and any remainder interest in the policy.
c. Effect of Policy Terms
i The express terms of the policy generally determine the incidents of
ownership, but where these are unclear, the courts will look to the substance
of the transaction.
ii The burden of proof is on the estate of the decedent to show that there are no
incidents of ownership when the terms indicate that there are.
d. Buy-and-Sell Agreements – usually these collateral agreements
will provide a surrender of all rights by the decedent and thus no inclusion under
2042
i When a transfer for value is made, the buyer loses the exemption for income
tax purposes – for example if X had an insurance policy on his life with ‘s
estate as the beneficiary and Y bought the policy such that he would become
the beneficiary, he would not have the income tax exemption.
ii 4 Exceptions:
 transfers to the insured
 transfers to a partner of the insured
 transfers to a partnership of which the insured is a
member
 transfers to a corporation in which the insured is a
key shareholder.
iii Note> in order to purchase life insurance on a person you must have a
relationship with that person rendering an insurable interest.
e. “Incidents” in Context
i if the origin of the insurance is such that some form of wealth transfer by the
decedent is evident, very slender 2036-2038 rights should be regarded as
incidents of ownership, but

30
ii if the policy is not generated at all by the decedent’s wealth or is disassociated
from the decedent by a prior outright gift, then the stronger 2041 type rights
should be recognized as incidents of ownership.
f. Economic Benefit – courts use this to narrow the meaning of
“incidents of ownership”
5. Incidents Incidentally Held
a. Shareholder in a Corporation
i Where corporation is the beneficiary and the decedent is a controlling
shareholder, then the incidents of ownership will be attributed to the
corporation
ii Where the Corporation is not the beneficiary and the decedent as legal or
equitable ownership of more than 50% of the combined voting power of the
stock of the corporation, the corporation’s ownership attributes will be
attributed to the decedent.
b. Partnership’s Insurance on Partner
i Incidents attributable to the Partnership
 When the proceeds are payable to the partnership
ii Incidents attributable to the Partner
 When the proceeds are payable to a third person
(partner’s spouse)
 If under the policy the decedent has the right to
change beneficiaries
6. Assignment of Group Term Insurance
a. An employee may effectively assign a nonconvertible group policy
if the employee assigns all of his rights.
b. No incident of ownership in the employee’s conversion privilege at
employment termination.
7. Amount to be Included
a. In General – the full amount receivable under the policy
b. Inclusion of Only a Portion of Proceeds – to the portion of the
policy over which incidents of ownership extend
8. Policy Purchased with Community Property Funds
a. Only ½ of the proceeds are to be included in the decedent’s estate
(the surviving spouse owns the other half.
b. Where the surviving spouse is not the beneficiary, ½ will be in the
decedent’s estate and the surviving spouse will have made a gift of ½
9. Relation of §2042 to Other Sections Defining “Gross Estate”
a. The Transfer Sections Generally
i §2037 – might be applicable if there is a lifetime interest in the policy
transferred, but it is difficult to see how this would produce a more onerous
tax result than 2042, so the government usually does not resort to this
ii §2036 – not likely to be resorted to because rarely will decedent even want a
lifetime interest in life insurance
iii §2038 – this would satisfy the incidents of ownership requirement
iv §2039 – this is expressly inoperable to insurance
v §2041 – this will be treated as an incident of ownership

31
b. Near-Death Transfers
i §2035(a) applies only where decedent actually held an transferred 2042
incidents of ownership.
ii 4 possibilities:
 Transfers more than 3 years
 Beneficiary pays all premiums post transfer
– nothing included in decedent’s estate
 Decedent continues to pay all premiums –
nothing included in decedent’s estate
 Transfers within 3 years
 Beneficiary pays all post transfer premiums
– the pro rata amount of the proceeds attributable by the decedent’s
payments
 Decedent pays all post transfer premiums –
all of it would be included
10. Planning Aspects:
a. This is an asset that we typically want to divest our client of
incidents of ownership. We should be able to do this without any federal estate
taxes. It has a much higher value on the date of his death than it does when he is
alive. You can give it as a gift at a lower value when he is alive, but upon death, if
it is still owned, then it is included in his estate at face value.
b. Irrevocable Life Insurance Trust – we will use this trust to keep it
out of the estate of the insured, the insured’s spouse, and maybe the children of
the insured.
i He would transfer any life insurance policies that he owns to the trust – whole
life, term, even group.
ii He makes the policies payable to the trust – but there are still risks of
inclusion under §2035 – the 3 year time frame we are concerned with. If the
transfer was within three years of his death, then if they would have been
included under §2042.
iii There will be a gift tax on the transfer of the policy – policy valued at CSV
J. Valuation
1. General Methods
a. Income Approach
b. Market Approach
c. Asset-based Approach
d. Combinations
2. Valuation Determined by Agreement – §2703
a. We do not take account of buy sell agreements when we value the
business for estate tax purposes – they will be binding on the members only.
b. Courts will usually give deference to the agreement if – bona fide
business transfer agreement AND the terms of this agreement are comparable to
other arrangements between 3rd parties.
c. The failure to use a formula will lead to the belief that this will not
be an excepted agreement.
3. Adjustments for Discount

32
a. Discount for Minority Interest
b. Discount for Lack of Marketability – This can be argued whether
or not you have control of the company. If you have 51% there still may be a
discount because there is no market for the percentage share
Note> There is a wide range for the discounts to be applied.
There is a requirement of an appraisal of the interest of the entity – we need a
valuation of the partnership interest in the business.
- This takes account of any
and all restrictions that may be in the partnership agreement.
- The service does not like
these discounts – and they have tried to get legislation to limit the discounts.
c. Other Significant Discounts
i Fractional interest discount – this can be in percentage shares of commercial
property, timberland, etc. This works well the practice of asset protection
ii Blockage and market absorption discounts
iii Capital gains discount
iv Securities law discount
v Environmental hazards discount
vi Key person discount
vii Litigation discount
d. Combination of Premiums and Discounts
e. Nonbusiness Assets held in FLPS and FLLC’s
i A FLLP or FLLC can be used to shelter some of the property that would not
necessarily fall into discounts by forcing them to be discounted. These entities
will restrict the rights regarding the property.
ii Use of this can reduce the size of the estate by about 40%. Some people raise
the question of whether or not the formation of the partnership itself creates a
gift to someone – but who???
iii When you put this property into one of these entities, then you have to value
the entity, not the particular property. You have to be careful on how you do
this – you have to respect the partnership form.
 All of the assets need to be titled to the
partnership and the income should go to the partnership as opposed to the
partner.
iv The service does not like these and has made it clear that certain FLLP’s had
to go to the national office for auditing:
 Substantial amount of marketable securities (we
all know what these are worth, by putting them in these entities the
decedent is just trying the avoid estate tax),
 Partnerships created within a short time before
death
 makes it look like this is just a device to
mitigate the estate tax
 they are trying to argue that the partnership
agreement itself is a buy sell agreement that should not be used in the
valuation of the property,

33
 Powers of attorney
v Any of these will generate more difficulty in an IRS audit. The service has not
had a lot of luck with arguing these cases. (Case in Texas about a partnership
formed VERY close to death – the court found that this was okay)
4. §2701 – Certain kinds of interests in partnerships and corporations
a. Corporations
i A person who owns 100% of corporation – you would recapitalize with
common and preferred and we would create a class of preferred stock that has
a value of 100,000. Then we would give away the common stock to the
younger family members. The older family member would retain the frozen
capital and give away the growth portion of the corporation.
ii These transactions are no longer worthwhile under this code section.
iii The valuation principle that is applied is that
 The common stock will never be worth less than
10% of the corporation and
 The preferred will not be worth the entire amount.
iv The statute makes you guarantee a regular right to payment.
v These are not worth doing any more – too costly.
vi Only apply this section if the transferor retains the frozen interest and gives
away the part that grows.
b. So what we set up is a partnership that has a corp as a GP and all
of the members of the LP have the same interest in the partnership. And this rule
has no application.
5. §2704 – Treatment of Certain Lapsing Rights and Restrictions
a. Ex: Contributed 50M of oil and gas property in an LP and took
back an LP interest with certain restrictions. The LP rights allowed him to force
the LP to give back the property, but upon death this right terminated. What was
included in the estate – the LP interest, but how should it be valued? And should
be look at the moment before death or the value at the moment of death. The court
said that the value that passes is that value right before death.
b. In valuing partnership interests, we ignore restrictions that lapse
upon the death. This increases the value of the property at the time of the gift of
the property.
6. §2032. Alternate Valuation Date
a. We are given an alternate valuation date – this is an elective
provision
b. Provides for an alternative valuation date of 6 months after the date
of death
c. We can only do this to reduce estate tax liability – this cannot be
used to try to get a higher basis in the property.
7. §2032A. Valuation of Certain Farm, Etc., Real Property
a. Introduction
i Normal valuation says that we use the best use for the value of the property.
But, this provision allows us to value the property at its current use instead of
its highest and best use.

34
ii This provision was brought in the 70’s to help the estates of persons who own
family farms (there was a lot of speculation in land during this time and the
values were sky-rocketing)
b. Qualifications for Special Use Valuation in General
i an active business – the decedent was a material participant in at least five of
eight years prior to his death
ii it is passing on to a qualified heir and that party is going to be a material
participant in the active business.
iii Only allowed to use this if it is a substantial portion of the estate:
 50% of the value of the gross estate
 real property itself has to constitute at least 25%
of the gross estate
iv This is limited to a reduction of 850K. So, when you value the property at its
highest and best use and then its current use is valued more than 850K less
than that, you are limited to the 850.
c. Election and Agreement
i This is an elective provision – you have to remember to make this election.
ii You have to comply with all of the requirements for the valuation, now it is
more like substantial compliance.
 There are certain statute authorized methods of
valuation.
d. Recapture
i The Ten Year Period
 You are at risk (for 10 yr period) that the tax will
be recaptured if certain things occur and the service will impose the
valuation that would have been applied if this election was not applied.
ii Measuring the Recapture Tax
iii Liability for Additional Tax
iv Basis Adjustment for Additional Tax
8. §6166 Deferment of Estate Taxes
a. You can elect § 6166(only estate tax attributable to business value
included in the estate) to defer the payment of estate tax for about 15 years – then
you will only pay interest on the estate tax, then you pay the estate tax in
installments for the next 10 years. The interest rate is fixed at 2% plus 45% of the
current market rates
b. The purpose of this is to not put too much burden on the estate
when the decedent dies.
c. This section also has provisions that if you dispose of the property
then the tax payable will be accelerated. This applies to the entire value of the
business – not just the real estate portion.
K. §2053 Expenses, Indebtedness and Taxes
1. Introduction
a. We take these deductions to get down to the value of the estate that
is really available for distribution. This gets us down to the taxable estate. (also §§
2055, 2056)

35
b. § 2053 this is about the expenses necessary in carrying out the
distribution of the estate.
c. We would look at all of the debts that he owed at the time of his
death wanting those to be appropriately taken care of. Ultimately we will be
distributing assets.
d. We want to identify claims of the estate and total amount of debt.
e. Technically allows the expenses outlined under (a). The language
after that talks about expenses allowable under state law.
i Critical Question: Is the executor authorized to pay these things out of the
estate? He can only use the probate estate to pay these expenses.
ii All of the items that pass out of the probate estate will have some
administrative expenses – it may be necessary that some of these expenses be
paid from other parts of the gross estate.
f. But, (b) makes it clear that if we have similar kinds of expenses
that would be deductible if they related to probate assets, we will be able to take
the deductions for the expenses relating to the non-probate assets.
g. Limitation – Amounts actually expended
i There will often be expenses well beyond the filing – we can estimate these
executor fees, accounting fees, attorney fees, etc.
ii If you never paid the estimated amounts you are obligated to go back and
amend.
2. Funeral Expenses - very liberally, includes sending someone and the
body to the burial plot. It does have a reasonableness limitation for some items –
silver casket example from the book.
3. Administrative Expenses – The collection of the decedent’s assets,
determining what other claims exists, paying off those claims, and distributing the
assets of the estate. This raises several questions as to the scope of what is necessary.
a. We have to draw the line with what is necessary and what is not –
if the will is ambiguous there may be more expenses that are deductible. There is
a prohibition of paying attorney fees for the benefit of the beneficiary, but when
there is a disagreement or ambiguity in the will, then this might be necessary and
thus included.
b. The service says that cannot deduct all the administrative expenses
arbitrarily because they are in effect increasing the value of the marital deduction
with property acquired after death.
i The deductible administrative expenses are limited to the value of the
“property subject to claims.”
 That part of the gross estate that under local law
will bear the burden of such expenses, claims, and charges, reduced,
however, by any casualty loss deduction allowed under 2054.
ii The administrative expenses relate to the assets of the estate such that it
should be deductible on the income tax purposes.
c. Expenses associated with selling certain assets of the estate – is
this necessary for the proper distribution of the estate.
d. Interest for borrowing for the estate – is this necessary for the
proper distribution of the estates –

36
i Where we have highly liquid assets available, then you probably should not
borrow and the interest expense would not be deductible.
ii Where you have a business interest included in the estate or illiquid assets –
then borrowing might be necessary.
iii The payment of the interest is a proper payment for the estate to make and can
be deducted. BUT remember – this is an interest expense deduction as well.
 You have to make a choice as to which deduction
you want – estate tax or income tax.
 The logical thing to do when you have an estate
that will not have any estate tax – you have a reduced to zero estate tax
plan, then you will want to use these deductions for income tax purposes.
 .
iv
e. Investment Expenses – there are arguments for and against these
being deductible expenses.
f. Expenses to maintain property – maintenance of the property for
preservation until the date of distribution is deductible – but you could not deduct
development expenses.
4. Debts and Claims Against the Property –
a. It must be a filed claim in order for there to be a §2053 deduction.
b. The Service’ position is that this is not something that the executor
should pay – it can only be claims for which a proper claim has been filed.
c. Revenue Ruling 60-47 – you cannot deduct a claim that will not
be paid because the creditor failed to file.
d. 2053(c)(1)(a) – Consideration for claims - Any claim must be
supported by consideration for money or money’s worth.
i A separation agreement with a spouse – the giving up of rights of support is
adequate consideration or if it is based on judgment or order of the court then
it is sufficient.
ii
e. When a claim is uncertain you can probably get an extension for
the estate tax filing because the amount could be significant – for example a
litigation claim that has not yet been settled.
5. Mortgages - can be deducted without filing to the extent of the value of
the property that is included in the gross estate.The accrued interest is something
owed at death – so there is no question that this is a §2053(a) deduction.
6. Subsequent Events
a. There is a moment that we value all of the property in the
decedent’s estate (DOD) and that same moment is when claims are valued.
b. But there is an extent that we will take into account subsequent
events that effect the claims against the estate.
i The example of the former spouse who has an right to payments until her death or
remarriage and she dies within the 9 month filing time – should we take her death
into account for valuing this obligation?
ii Courts are split on these issues when we know there is an obligation to pay – the
only question is the value of the asset

37
c. Subsequent events should not be taken into account in the
valuation of the debt EXCEPT when the validity of the debt is questionable at the
date of debt.
d. The courts struggle with these issues – there can be a lot of money
involved. Gives an example of a 5th Circuit case – In re Smith(???) It is the value of
the claim at death.
L. §2054 Losses
1. §2054 is very much like the income tax casualty loss deduction.
a. Prior to filing the estate tax return we might have an event that
causes a casualty loss.
b. We are looking for events of a catastrophic nature.
c. This also includes theft.
d. We look to the income tax rules to determine what the casualty is.
We also look to the income tax rules to determine what the loss is.
e. A taxpayer can only take one of the two provisions – if his estate
claimed the 165 deduction on his final income tax form, then he cannot take this
deduction.
2. FMV before the event – FMV after the event = casualty loss. This is
limited to the FMV before the event.
3. Alternative valuation will take into account the reduced value so that
you will not be able to take this deduction if you have chosen the alternative valuation
date which was after the catastrophic event.
M. §2055 Charitable Deductions – this is limited to the value of the property
transferred to charity, but it is unlimited in the sense that it is not subject to percentage
restrictions such as are applicable to the income tax deduction for contributions to
charity.
1. Qualified Recipients
a. In General
i The charitable contribution must get to the charity by way of bequest, legacy,
devise, or transfer by the decedent.
ii There will not be a deduction when the decedent’s will fails to identify a
particular qualified recipient.
iii Policy
 Charitable organizations perform services that are
useful to the nation, services that might otherwise have to be paid for out
of tax revenues.
 Generally take one of two forms:
 Exemption of the organization from tax
 A deduction for taxpayer contributions to
the organizations
b. §2055(a) Organizations
i The US, the several states and their political subdivisions, and the District of
Columbia
ii Corporations “organized and operated exclusively for religious, charitable,
scientific, literary, or educational purposes”

38
iii Trusts and certain fraternal organizations – bequests only deductible if they
are to be used solely for charitable and related purposes.
iv Veterans’ Organizations incorporated by an act of Congress and their local
chapters and posts
c. We see more donors creating their own private foundations that are
qualified charities.
i This carries with it some expense – you would want at least 1mil in order for
this to be worth it.
ii There is a lot of compliance that is required with these.
 If the private foundation is not in compliance
there will be a penalty.
 These are heavily regulated – there is a lot of
filing that is required.
iii These can help family members if you name an adult child to run the
foundation – they will be entitled to a salary and any necessary travel benefits.
Private Foundations have to distribute a certain amount of the assets every
year.
2. Transfers to Charity
a. Outright Transfers – decedent leaves cash or other property →
reasonably confident that estate will get the expected deduction
b. Indirect Transfers – when the transfer occurs as a result of a will
contest, an assertion of an elective share, or a reformation of a will, in a manner
that otherwise qualifies for a charitable deduction and if it is condoned by the
local courts. (if it looks like it is simply a collusive effort to qualify property for
the deduction it will not be allowed.)
c. Disclaimers – if you have the lifetime interest in a property whose
remainder is to go to charity, you can make a qualified disclaimer of the interest
and get the charitable deduction.
d. Property Over Which Decedent Had a Power – there is a deduction
for property that is brought into the estate by means of 2041 when the power is
exercised in favor of a qualified organization.
e. Lifetime Transfers – property that is brought into the trust under
2036 will qualify for the charitable deduction if the property goes to a qualified
organization (ex – lifetime transfer of residence to the Red Cross, reserving the
right to its use for life, the property is included in the gross estate but 2055 can be
used to offset it)
3. The Amount of Deduction
a. In General – date of death value of the property is the amount to be
deducted
b. Expenses of an Estate Affecting the Deduction
i Death Taxes – you have to take out whatever taxes were paid out of these
bequests in order to determine the charitable deduction. The deduction has to
be the amount that the charity actually received.
ii Administrative Expenses and Claims – amount of deduction is reduced to the
extent that any of these payments were made out of the property passing to the
charity. Note> Transmission expenses v. Management Expenses –

39
Management Expenses would have to be paid even if the decedent was still
alive and thus would not reduce the amount of the deduction.
4. Split Interests: Mixed Private and Charitable Bequests
a. Background
i These allow the decedent to take care of his survivors and take advantage of
the charitable deduction
ii The concern had been that there would be manipulation of the investment
policy – you want to make sure that everything was properly valued.
b. Present Law – only allowed in circumstances in which the
valuation uncertainties arising out of the beneficiaries’ income rights and the
trustee’s investment discretion are minimal or nonexistent.
5. Qualified Remainder Interests
Note> In order for a remainder trust to qualify, it must meet all of the requirements of
one trust and not mix and match.
a. The Charitable Remainder Annuity Trust
i Annuity Trust Requirements –
 A fixed amount at least annually that cannot be
less than 5% nor more than 50% of the initial FMV of the assets that go
into the trust.
 Annuity must be for the life of the annuitant or for
a term of years not to exceed 20 years.
 The remainder must go in whole or in part to a
qualified organization or held in trust for the organization’s use.
 The value of the remainder must be at least 10%
of the initial FMV of the property placed in the trust.
ii The Amount of the Deduction – the net FMV of the corpus of the trust less the
value of the non-charitable interest in the trust.
b. The Charitable Remainder Unitrust
i Unitrust Requirements
 a fixed % of the annual FMV of the assets in the
trust that cannot be less than 5% of the annual FMV of the assets
 May have multiple named non-charitable
beneficiaries
 Each non-charitable interest must not extend
beyond that beneficiary’s life or a term of years not to exceed 20 years
 No other non-charitable interests
 The remainder must go in whole or in part to a
qualified organization or held in trust for the organization’s use
 The value of the remainder must be at least 10%
of the initial FMV of the property placed in the trust
ii The Amount of the Deduction – the net FMV of the corpus of the trust less the
value of the non-charitable interest in the trust
c. The Pooled Income Fund – donor contributes money to the fund
which is commingled with money from other donors and the charity invests the
money.
i Pooled Income Fund Requirements

40
 Annual Fixed Payout - % determined by the
charity
 When the donee dies, the money goes to the
charity
 The value of the remainder interest is what
qualifies this fund.
ii The Amount of the Deduction – the value of the entire interest contributed
less the value of the income interests
6. Charitable Lead Trusts – the qualified organization gets the first
interest with the remainder interest going to a non-charitable party
a. There is no imposition of the minimum 5% interest
b. Must be either Annuity or Unitrust
c. Not limited to 20 years
d. There is no income tax reduction – because the charitable donee
will be exempt from income tax and the income is for the trust and will not be
included in the donor’s income.
e. These can be used to take advantage of certain GST provisions – it
will not become applicable until the lead terminates (so you never know –
Congress may repeal the GST by the time the annuity interest for charity
terminates).
f. These are used mostly by very wealthy individuals – if in life it is
probably because they give a lot to charity and are running into percentage
limitations and if in death it is probably to take advantage of GST provisions.
g. The lead interest is what qualifies these trusts
7. Exceptions to the Split Interest Rules
a. Remainders in Residencies and Farms
b. An Undivided Portion of the Property
c. A Qualified Conservation Contribution
i These are most beneficial during life – there is an immediate income tax
reduction § 170
ii At death you get a charitable deduction for the value of the easement and you
can make an election about how this property will be valued § 2031(c) – this
election will reduce the value to be included. This allows you to exclude a
portion of the property as well as take the charitable deduction This is kind of
like a double benefit.
d. Works of Art and Their Copyright
e. Charitable Gift Annuity
N. § 2056 Marital Deductions
1. Introduction
a. The marital deduction is unlimited – it has not always been this
way, but it is now. It started when Congress was trying to equalize the community
property states and the others.
b. The marital deduction is meant to be a tax deferral tool. So, we
want to allow a deduction for items that will be included in the Surviving
Spouse’s estate.

41
c. The marital deduction is generally mandatory – but it is hard to
imagine when someone would not want to use this.
2. General Description – Two Basic Features
a. Deduction allowed for any interest that passes at death or that
passed during life from a decedent spouse to a surviving spouse
b. Must be a deductible interest:
i It is included in the decedent’s gross estate
ii It is not otherwise deductible under some other estate tax deduction provision.
iii It is not a terminable interest.
3. Interests Passing to a Surviving Spouse – An interest shall be
considered as passing if it goes to the surviving spouse in the following manners:
a. By will or inheritance (2055(c)(1&2)) – this includes a deductible
interest that goes to the surviving spouse after a settlement.
b. Dower (2055(c)(3) – the statutory share must be claimed by a
timely filing under state law to qualify
c. Transfers (2055(c)(4)) – any transfer during life will be considered
as having passed to the surviving spouse – it does not matter is the SS was the
decedent’s spouse at the time of the transfer, but it does matter is SS was spouse
at the time of death.
d. Jointly held property (2055(c)(5)) – the deduction will be allowed
for the value of the property that would have been included in the decedent’s
estate at the time of death – tenancy by the entirety.
e. Property Subject to a Power (2055(c)(6)) – if decedent had a power
over an interest and as result of exercising, releasing, or non-exercise of the
power, the SS receives the interest. The giving of the power does not in itself
constitute an interest in the property passing to the spouse.
f. Insurance (2055(c)(7)) – insurance proceeds that are paid out to SS
at he death of the decedent. The deduction hinges upon whether or not the
proceeds were includable in the decedent’s estate.
g. Other “Passing” Problems – support payments will meet the
passing requirements if it passes the terminable interest rule.
h. Disclaimers – marital deduction is foreclosed for an interest that
the SS disclaims causing it to pass to someone other than SS
4. The Gross Estate Requirement - Can enter the calculation of the
marital deduction only to the extent that it is included in determining the value of the
gross estate.
5. The Valuation of Interests Passing – must be undertaken with the
valuation method and the valuation date adopted for valuing the gross estate.
a. Taxes on Surviving Spouse’s Interest – if interests passing to a SS
share the economic burden of any death taxes, state or federal, the value of such
interests must be diminished accordingly in computing the marital deduction.
b. Encumbrances on Surviving Spouse’s Interest – 2056(b)(4)(B)
i Mortgages –
 If decedent is personally liable for a charge
against a property, the entire value of the property is included in

42
decedent’s gross estate, but only the value of the decedent’s equity in the
property will be includable as a deduction.
 This is because it would otherwise cause a double
deduction – §2053 operates to reduce the value of the property for
indebtedness whether or not the decedent was personally liable.
ii Administrative expenses
 The marital deduction is reduced if administrative
expenses are deducted under §2053.
 The marital deduction is also reduced by the
amount of administrative expenses that are deducted under the income tax
as a result of a §642(g) election and are paid out of the marital share but
are related to non-marital property.
iii Assumption of an obligation – a bequest to a spouse conditioned on the
spouse’s assuming an obligation operates to reduce the value of the property
passing to the spouse for purposes of the marital deduction.
6. Formula Clauses
a. Types of Clauses determining the funding for the Credit Shelter
Trust and Marital Trust:
i Fractional Bequest – a specific fraction is given to each trust – ½ and ½.
ii Pecuniary Bequest – a specific $ amount is left to one trust with the other to
receive the residuary
iii Formula Fractional Bequest – The fraction is a fixed formula with the
numerator as the amount you want to fund the particular trust and the
denominator as the residuary value of the estate.
iv Formula Pecuniary Bequest – The pecuniary bequest is determined by saying
that the amount going to the trust is the smallest amount necessary to take full
advantage of the unified credit when the formula is for the marital trust or
maximum amount to take full advantage of the unified credit when the
formula is for the credit shelter trust.
b. Special Problem with a Pecuniary Bequest to a Surviving Spouse
i A pecuniary marital deduction bequest using date of distribution value shifts
post death appreciation from the surviving spouse to the residuary legatees,
who are also called on to absorb post death shrinkage.
 The estate must recognize the gain for the
appreciated value of property.
 Alternatively, if the estate goes down in value the
marital trust portion will be disproportionately large.
ii If the pre-residuary trust is the credit shelter trust using the date of distribution
values – then the credit shelter will get only the 1mil (or stated amount) and
then your marital trust will have all of the appreciation. A lot of lawyers use
this method because it is easiest.
iii If the pecuniary bequest is satisfied using the estate tax value of the property,
then you could fund the martial bequest with the assets that have depreciated
in value – this way the credit shelter trust could take advantage of any
appreciated assets.

43
 Rev. Ruling 64-19 - If you have a Pre-residuary
marital bequest that is a pecuniary formula and the executor is authorized
to fund the trust with property at estate tax value, then you have to modify
your funding method
 Minimum worth – you can fund at estate tax
value, however you must also look at the value of the property funding
the marital trust at the date of distribution and they have to be at least
the same amount as the marital deduction taken on the estate tax return
 Aggregate sharing – fairly representative of
the aggregate appreciation of the estate.
You have to adopt one of these funding options or you lose the marital
deduction – most states have adopted a saving statute so that people will
not lose their marital deduction if they do not state how they want it
funded in the will.
 This is designed to prevent the funding of the pre-
residuary pecuniary bequest with all depreciated assets and will still
eliminate the recognition of gains and losses.
c. Outdated Formula Clauses
7. Terminable Interest Rule
a. General Rule and Purpose
i Non-deductible if:
 The interest is terminable;
 The decedent has also given an interest in the
property to another; and
 On the termination or failure of the spouse’s
interest, the other person may come into possession or enjoyment of the
property by way of that person’s interest.
ii Seeks to assure that there is a transmission tax when the property is
transferred to others by allowing a marital deduction only where the nature of
the interest passing to the spouse is such that, if retained until death, it
unquestionably will be taxed in the spouse’s estate.
b. Identifying Terminable Interests
i A legal life estate or life interest is a trust.
ii An interest is terminable if it will fail or terminate upon a “lapse of time,” the
occurrence of a contingency, or on the failure of an event or contingency to
occur.
 “widow’s allowance” – must vest at the date of
decedent’s death to be considered non-terminable
 Survival Clause – renders the interest terminable
even if the spouse survives because the interest is determined based on the
failure of an event to occur.
c. Other Elements of the Terminable Interest Rule
i No interest in the property has passed gratuitously to another
ii No other person will acquire the property on termination of the surviving
spouse’s interest by reason of any interest that person may have.

44
 Must have passed to the other person from the
decedent for less than adequate and full consideration in money or
money’s worth.
iii The marital deduction is lost only if all three elements of the terminable
interest rule are present.
d. The Executor Purchaser Provision – if the decedent directs the
executor to purchase a terminable interest for SS, this is a terminable interest that
is non-deductible. However, SS can voluntarily purchase a terminable interest
with money left outright to her.
e. The “Tainted” Asset Rule
i To the extent a bequest can be satisfied out of assets that would not qualify for
the marital deduction, it is so satisfied – it is enough that the bequest could be
satisfied out of the proceeds of such assets in order to run afoul of the rule.
ii This problem can be avoided by stipulating in the will that the SS’s bequest
cannot be satisfied with a non-deductible interest or the proceeds therefrom.
8. Terminal Interests that do qualify
a. Common Disaster and Related Provisions
The statutory provision is that an interest passing to a SS is not to be considered a
terminable interest if it will fail only upon
i The SS’s death within 6 months after the decedent’s death
ii The SS’s death as a result of common disaster, causing the death of the
decedent as well
iii The occurrence of either of such events if, in any event, such failure does not
in fact occur.
b. Life Interests with Powers – 2056(b)(5)
i 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 income from the entire interest
 Income is determined using trust accounting
 The regulations have been modified so that we
can use the total return for the payout to SS
ii The income payable to the surviving spouse must be payable annually or at
more frequent intervals
 Income must be currently distributable to SS –
any mandatory delay in receipt of the income will render the income non-
current
iii The surviving spouse must have the power to appoint the entire interest or
the specific portion to either surviving spouse or spouse’s estate
 Where SS has only the power to appoint to her
creditor’s this will not satisfy this requirement
 If SS can appoint also to another person, the
exercise of her power in this way will result in estate or gift tax and will
thus not render the trust invalid.
iv The power in the surviving spouse must be exercisable by the surviving
spouse alone and (whether exercisable by will or during life) must be
exercisable in all events

45
 Any requirement that another person join with SS
in exercise of the power will defeat the exception.
 To meet the “all events” test the power must arise
upon the death of the decedent and be exercisable, for example, before the
estate makes distribution of the property subject to the power; but it is
permissible that actual distribution to the appointee be delayed.
v The entire interest or specific portion must not be subject to a power in any
other person to appoint any part to any person other than the surviving
spouse
c. Insurance with Powers - 2056(b)(6)
i The proceeds, or a specific portion of the proceeds, must be held by the
insurer subject to an agreement either to pay the entire proceeds or a specific
portion thereof in installments, or to pay the interest thereon; and all or a
specific portion of the installments or interest payable during the life of SS
must be payable only to SS
ii The installments or interest payable to the surviving spouse must be payable
annually, or more frequently, commencing not later than 13 months after
the decedent’s death
iii SS must have the power to appoint all or a specific portion of the amounts so
held by the insurer to either the spouse or the spouse’s estate
iv The power in SS must be exercisable by the spouse alone and (whether
exercisable by a will or during life) must be exercisable in all events
v The amounts or the specific portion of the amounts payable under such
contract must not be subject to a power in any other person to appoint any
part thereof to any person other than SS
d. Election with Respect to Life Estate for Surviving Spouse –
2056(b)(7)
This disposition of the property passes to the SS only a terminable interest that,
when coupled with the interests given to others, would not qualify for the marital
deduction absent some authority permitting us to pretend that the spouse is the
owner of the property for transfer tax purposes. QTIP
i The passing requirement – it must be included in the decedent’s gross estate
and pass from the decedent.
ii The qualifying income interest requirement
 Income Interest
 Must have a right to all income payable
annually or more frequently commencing at the decedent’s death
 Spendthrift clauses may be allowable
 An annuity interest is not a qualifying
income interest except:
° An annuity that is included in
decedent’s gross estate under 2039 or is community property
included under 2033, and is payable only to SS during her life.
° An annuity that is not included under
2039 for decedent’s dying before 1992.
 Powers over Property During SS’s lifetime

46
 No restriction on SS or anyone else having a
power to invade except that it be only for SS’s benefit
 Anyone can have a non-general power over
the remainder “exercisable only at or after” SS’s death.
 We want to make sure that the property will
be included in the gross estate of SS.
iii The election
 This is operative only if an election is made by the
executor on the Estate Tax Return
 If you are only electing this for a specific portion
of the property – the portion must be expressed as a percentage or
fractional share of identifiable property passing from the decedent.
iv Joint and mutual wills
e. Special Rules for Charitable Remainder Trusts - The terminable
interest rule does not apply to an interest in a CRAT or CRUT that passes or has
passed to SS from decedent, if SS is the only non-charitable beneficiary.
f. Interrelationship of the Terminable Interest Exceptions – there may
be an overlap between the (b)(5) and (b)(7) trusts making you think that both
would work – just remember, you cannot take double deductions.
9. The Non-Citizen Surviving Spouse – must use a QDOT for any
deduction to be allowed for a non-citizen spouse.
O. Credits
1. §2010 – Unified Estate Tax Credit
2. §2011 – Credit for State Death Tax – this is going away and it was rarely
a full credit anyway unless it was just a pickup tax. This can be included in the credit
shelter trust.
3. §2012 – credit for gift tax paid on gift tax paid on gifts paid prior to
1977. Gift tax paid on gifts since 1976 are taken out when calculating the estate tax
payable – included in the computation of the estate tax.
4. §2013 – available in estates of persons dying that is included in the
estate of someone dying in the past 10 years. Also available if it is included in an
estate of someone dying 2 years after D. These will be remainder interests and
retained life estates, etc.
5. §2014 – credit for foreign tax
6. §2015 – postponement on the payment of estate tax on certain remainder
interest.
III.Gift Tax
A. §2501: Imposition of a Tax
B. §2511: Transfers in General
1. Direct Gifts – outright gift of property – cash, car, stock, etc.
2. Indirect Gifts - Ex – gift to a closely held company. If you have a
closely held company and you contribute property to the corporation, it will be treated
as a gift to the extent of the interest in the company of the other shareholders. This
will not qualify for the annual exclusion because it is not a present interest – a
shareholder cannot get to it right away. Also includes gifts in trust, gifts made through

47
straw persons, discharge of indebtedness, below-market interest rate loans (or the free
use of money), gratuitous services, gifts made by incompetents
3. Property Interests Covered
a. Remainders
i When the donor gives the remainder interest to a person then the value of the
gift is the value of the interest
ii If the person is related then the value of the remainder interest is determined
under §2702.
iii Contingencies go only to the value of the remainder – there is still a gift, it
will just have a lower value than one that does not have a contingency.
iv You can make a gift of a contingent remainder or contingent reversionary
interest that you own. Again – value will be low depending on the likelihood
of the contingency.
b. Uncertain Interests – just because it is uncertain does not make it
any less a gift – it will just have a lower value.
c. Insurance and Annuities –
i A purchase of a policy for the benefit of another, the transfer of an existing
policy to another, or the payment of premiums on an existing policy owned by
another, may all constitute gifts if the one making the purchase transfer or
payment retains no control over the policy.
ii If he has any indicia of ownership at the time of his death, the proceeds will
also be included in his gross estate.
4. When a Transfer is Complete – when the donor has relinquished all
dominion and control over the transferred property
5. Revocable Transfers – this is the greatest control a donor can retain
over transferred property. You must look to each interest in property to ascertain if
the donor has retained any power to revoke – each interest is determined on its own.
Once the donor terminates his right to revoke, then the gift is complete.
6. Power to Change Beneficiaries – any power held by the donor over the
property, even if it does not include the ability to transfer the property for the benefit
of the donor, leaves the gift incomplete. The gift will not be complete until to donor
relinquishes this power.
7. Power to Alter Time or Manner –
a. If the donor has the power to accumulate income in a trust in
which the income beneficiary and the remainder man are the same person, then
the gift is complete when the transfer is made.
b. If the donor has the power to accumulate income in a trust in
which A is the income beneficiary and B is the remainder man, the gift of the
remainder is complete upon issuance, but because income interest is alterable it is
not complete.
8. Donor’s Power Exercisable Only with Third Persons
a. If the one who must consent has no economic interest in the
property interest subject to the power, then it is not a complete gift.
b. If the one who must consent has an adverse interest in the exercise
of the power, then it is a complete gift.
9. Powers Held Only by Third Person

48
a. Generally, as long as the donor has not retained any control over
the property, this is a completed gift.
b. If the third party is required to distribute income to the donor as
necessary for his support, this is an ascertainable standard and we have a
completed gift only to the extent the value o the corpus exceeds the value of the
donor’s right to support and maintenance.
c. If the trustee has the power to distribute at his discretion, then as
long as the donor has no control, then we have a completed gift. But, if the
donor’s creditors have access to the corpus or income of the trust, then it is not a
complete gift.
d. If the donor has any control over the distributions what so ever,
then it is not a completed gift.
C. §2702: Valuation for Transfers of Interests in Trust
1. The General Rule
a. §2702 merely effects the valuation of remainder interests – this
only applies when the trust or remainder interest is to benefit family members and
a retained interest in the donor.
b. §2702(a)(2) Valuation of retained interest:
i in general, any unqualified interest will be valued at zero
ii value of any retained interest will be valued under §7250
2. Exceptions:
a. In general
i If such a transfer is an incomplete gift
ii If such a transfer is a transfer of an interest in trust, all of the property within
the trust is a personal residence
iii To the extent the regulations provide that such a transfer is not inconsistent
with the purpose of this section.
b. Qualified Interest
i Consists of a right to receive fixed amounts payable not less frequently than
annually → GRAT
ii Consists of a right to receive fixed percentage of the FMV of the property
→ GRUT
iii Non-contingent remainder if the other interest are either a GRAT or a GRUT
These prevent the portion retained by the grantor being overvalued.
3. The Joint Purchase Rule – 2702(c)(2)
a. If two or more persons purchase property such that one person
purchases the income interest and the other purchases the remainder interest, then
it will be considered as if the person buying the income interest is buying the
entire property and giving the remainder interest to the other with the remainder
bing valued at 100% of the property. The amount paid in by the donee will be
consideration like a part sale part gift.
b. The purchase of a remainder interest from a related person will be
treated the same way.
c. The remainder interests in these two situations will not be caught
by 2036.
D. §2512: Valuation of Gifts

49
1. Timing – the value of the gift is determined at the date of the gift (the
date of completion)
2. Premiums and Discounts for Interests in Property
a. Premiums for Control Interests – this applies when the donor
transfers a controlling interest, but it does not apply when the donor transfers a
minority interest that will give the donee control when it is added to his other
shares of the company
b. Discounts for Family Limited Partnerships – When we look at the
gift property value, we will not look to the fact that the rest of the interests in the
partnership are family.
c. Discounts – we take discounts for minority, marketability, and no
control. This can be a huge estate planning tool to get the property out of your
estate without using all of your unified credit. The discount will be higher if it is
an actual business or real estate.
3. Consideration for a Transfer – the amount by which the value of the
property exceeded the value of the consideration
a. Must look to see if it was a bona fide business transaction without
donative intent.
b. The burden is on the transferor to show that there is no donative
intent. The donative intent is presumed under gift tax.
4. Other Receipts for Money’s Worth – the donee pays the gift tax
a. Net Gift – the gift is made on the condition that the donee pay the
gift tax. The gift is the value of the property less the gift tax paid.
b. This is a part gift part sale and there will be a gain realized by the
donor to the extent that the gift tax exceeds the donor’s basis in the property. He
is allowed to look at his entire basis unless it is a gift to a charitable organization,
in which case he has to allocate.
E. §2514: Powers of Appointment
1. General Power
a. The basic rule is that the general power is one that can be exercised
in favor of the possessor of the power, the possessor’s estate, the possessor’s
creditors, or creditor’s of the possessor’s estate.
b. Exceptions:
i Ascertainable standard – a power that is exercisable in favor of the possessor
as needed for his support, medical expenses, educational expenses
ii Pre-1942 Powers – if they are exercisable with another person
iii Post-1942 Powers – if they are exercisable with another person if that person
is
 The creator of the power
 A person with an adverse interest in the power
being exercised.
 A person with an adverse interest in a portion of
the property subject to the power only in respect to that portion of the
property
2. Release or Disclaimer

50
a. A release of a power is considered as a transfer, but a qualified
disclaimer is not.
b. A qualified disclaimer must meet the requirements of §2518 must
be met.
i Cannot be disclaimed after it has been accepted
ii Generally must be within 9 months of creation of the power
3. Lapse of Power –
a. in general treated as a release
b. 5 or 5 Power applies to lapse here as well and if the power meets
the 5 or 5 rule then it will not be considered a release.
F. Disclaimers and Transfers Between Former Spouses
1. §2516 Certain Property Settlements
a. If you enter into an agreement and divorce occurs within a 3 year
period starting one year prior to the agreement, the following transfers made
pursuant to the agreement will be treated as a for adequate and full consideration:
i In settlement of marital or property rights
ii To provide reasonable support of issue of the marriage during minority (Child
Support)
b. §2043 tells us that the giving up of marital rights is not full and
adequate consideration
i Exceptions (the following are for adequate and full consideration):
 Giving up of right to support
 If it is a transfer made pursuant to a decree of the
court
ii §2516, on the other hand, allows a giving up of marital rights that is subject to
the agreement – so what happens if one of the other parties dies before the
transfer has occurred? In order to get the marital deduction it has to fall under
one of the following:
 It was a transfer in discharge of support
obligations
 It was ordered to be transferred by the court
 It fits under the provision of §2516
2. §2518 Disclaimers
a. Purpose – to allow a person to disclaim a gift – no one should have
a gift forced upon them.
b. This gives us uniformity for determining disclaimers for estate and
gift tax purposes
i Otherwise each state would be different according to their property laws – so
it is possible for you to have effectively disclaimed the gift according to state
law, but not for estate or gift tax
ii If you do not disclaim in accordance with 2518 and it passes to the third
person, it will be treated as a gift from him to another person. If the disclaimer
is effective for state property law, look under the will to see how the property
would have passed had the initial beneficiary predeceased the decedent and
this is who gets the property – you have given a gift to that person. So, you
may have a disclaimer under state law, but not under tax law

51
c. Elements of an Effective Disclaimer:
i irrevocable and unqualified refusal to accept
ii in writing
iii writing must be received within 9 months of creation
iv person has not accepted any interest of the property or any of its benefits
v passes without any direction on the part of the person making the disclaimer
and passes either to the spouse of the decedent or to someone other than the
disclaiming person (it is okay if the spouse is the disclaimer and by reason of
the disclaimer some interest in the property would go to the spouse – it will
still be effective – no one else can do this, just the spouse)
d. The spouse rule helps us with estate planning:
i H and W own the bulk of their property as joint tenants. We planned their
wills with the credit shelter trust and a QTIP, but H dies with 90% of property
in joint tenancy. The spouse needs to disclaim an amount necessary to fund
the trust – this can be done using a formula.
ii This may also be used to increase the amount of the marital deduction – if you
have a joint tenancy with the son, you would have the son disclaim so that the
marital trust (QTIP) will be sufficiently funded. Note> child can only disclaim
what they are inheriting (so you have to consider the amount that is included
in the gross estate of the decedent v. the amount attributable to the son.
G. §2503: Taxable Gifts
1. Annual Exclusion - $11,000 per year, per donee
a. Purpose of the Annual Exclusion – so that there would not be a need to keep track
of all the small gifts that are made during the year – this amount is large enough
so that it should take care of Christmas and wedding and other gifts.
b. Identification of Donees
i Gifts in trust – transfers in trust constitute gifts to the beneficiaries; a single
transfer to a trust may qualify for several annual exclusions limited only by
the number of beneficiaries and the future interest rule.
ii Gifts to other entities – gift to corporations is a gift to the shareholders, but it
runs afoul with the no future interest rule. Partnerships and LLC’s – indirect
gifts to the members.
iii Gift by an entity – deemed to be from each of the shareholders and goes
toward their annual exclusion for that person
iv Gifts to charitable organizations – a single gift to the entity
v Straw person – if you make a gift to A and a gift to a straw person who then
makes a gift to A – one gift and only 11,000 will be excluded
vi Joint donees – generally a gift to two people so you get two annual exclusions.
The problem arises in tenancies by the entirety when the spouses have
different life expectancies such that the proportionate value of the property
will be different – you have to find the value for each donee and they each
only get the 11,000 exclusion.
2. Future Interests Disqualified for Exclusion – remote or contingent
future interests in property may be very difficult to value and the ultimate donees may
be difficult to identify.

52
3. Definition of Future Interests – one that is limited to commence in use,
possession or enjoyment at some future date or time. Immediate right to use,
possession or enjoyment is the test.
a. Separate Interests Tested – when you have a gift that is made up of
several interests, they are each their own gift and you have to separate all of the
interests and test each of them on their own to determine if it is a future interest
b. Non-Income-Producing Property – if a gift has no value, then it
will have no value for the exclusion – if valuation is prevented, then exclusion is
precluded.
c. Powers Affecting Present Interests – if there is a power to invade
the present interest for the benefit of someone other than that beneficiary, then
there is no annual exclusion because the gift cannot be valued.
d. Brief Postponement of Enjoyment – any postponement of
enjoyment defeats the exclusion. If there is a gift of income, the income must be
assured and not the mere authority of the trustee to distribute income.
e. Right to Enjoyment Suffices – all we need is the right to the
possession or enjoyment, there dos not have to be actual possession or enjoyment
– gift of a trust with general provision to accumulate income, but beneficiary has
the right to draw down the income or corpus as they wish.
f. Crummey Powers – an interest will have the status of present
interest if the donee is also given Crummey Powers.
i Powers given to beneficiaries to demand outright ownership of property held
in trust – this is premised on the theory that the present right to possess is
equal to possession.
ii Crummey powers say that each beneficiary can withdraw his pro rata share of
the gift made to the trust, but we usually do not want them to exercise these
powers when they are granted. This presents the problem of lapse – so we
restrict the power to 5 or 5 Rule so that there will be no gift tax liability on the
part of the beneficiary.
iii Irrevocable Life Insurance Trust (ILIT)
 In the creation of a life insurance trust, we use
withdrawal powers for distributions so that there is an immediate right – a
present interest for the annual exclusion.
 A life insurance trust will not have anything to
distribute for a while, but if the beneficiaries have the power to invade
then it is okay – thus we give them Crummey Powers.
 We do not want the beneficiaries to exercise their
power so we add the 5 or 5 restriction, but there is a further problem here
when the policy premiums are being paid – the donor will not get to take
full advantage of the annual exclusion to the extent it is more than the 5 or
5 restriction of their power. So we create Hanging Powers.
 Hanging Powers - only allows the power to lapse
for the 5 or 5 and the other accumulates.
 The more power holders you have, the better –
because it reduces the pro rata share. These powers go only to the people
who are beneficiaries of the trust. We do not want to give this power to

53
persons who have no other interest in the trust – the courts have not ruled
on this, but the service has said that these powers will be presumed to be
illusory.
iv The service has tried (unsuccessfully) to limit these powers:
 Cannot be illusory because of lack of knowledge
or unreasonable time within to exercise the right,
 Holder of the power must have a substantial
economic interest in the property – courts have not let this fly
 Should not be recognized where it is shown that
there has been a prearranged understanding that the right to withdrawal
will not be recognized
g. Qualified Tuition Programs and Education Savings Accounts
i Qualified Tuition Programs – you can get up to 5 times your annual exclusion
per beneficiary and then you spread it out over the next 5 years. It is treated as
a present interest and there is no taxable gift when it is distributed to the
beneficiary
ii Education Savings Accounts – you are only allowed to contribute 2,000 per
year per beneficiary, so you do not have problems with the annual exclusion.
It is treated as a present interest and there is no taxable gift when it is
distributed to the beneficiary.
iii Note> Any transfer of beneficiaries that is not a family member or is in a
generation below the old beneficiary, it will be a taxable transfer.
4. Gifts to Minors – if it is a direct gift it will qualify for the exclusion, if
it is an indirect gift look to 2503(c)
5. Special Statutory Rule for Minor Donees
a. First Requirement – the property and the income therefrom may be
expended by or for the donee before the donee reaches 21
i the transfer terms are such that the property and its income
are properly expendable for the minor donee
b. Second Requirement – the property and income not so expended
will pass to the donee when the donee reaches age 21, or to the donee’s estate or
pursuant to the donee’s exercise of a general power of appointment if the donee
dies before reaching that age.
6. Medical Expenses and Tuition – unlimited amounts of tuition and
medical expenses for any number of donees is allowed – but it does have to be paid
directly to the institution.
7. Waiver of Survivorship Benefits – not treated as a gift when waived
before the participant’s death.
8. Loans of Qualified Artwork – not treated as a transfer if loaned to a
qualifying organization.
9. Gift Tax Returns – generally must be filed in the year the gift was
made.
IV. Generation Skipping Tax
A. §2611. Generation Skipping Transfer Defined
1. Three Types of Generation Skipping Events: Taxable Termination,
Taxable Distribution, Direct Skip

54
2. Certain Transfers Excluded:
a. Medical and Tuition Expenses that are not treated as a taxable gift
under §2503(e)
b. Transfers that have already been taxed
B. §2612. Taxable Termination, Taxable Distribution, Direct Skip
1. Taxable Termination – the termination of an interest in property held
in trust such that the property goes to a skip person.
2. Taxable Distribution – any distribution from a trust to a skip person
3. Direct Skip – a transfer of an interest in property to a skip person
C. §2613 Skip Person and Non-Skip Person Defined
1. A natural person who is assigned a generation which is two or more
below the generation assignment of the transferor
2. A trust, if all of the interests in the trust are held by skip-persons and
there are no non skip-persons who hold an interest (interest being a present interest)
in the trust or who will have a distribution from the trust.
D. §2651 Generation Assignment
1. Transferor – you, spouse, brothers, sisters, for non-family:12 ½ older
and 12 ½ younger
2. 1st Generation – children, nieces and nephews + spouses, for non-
family: more than 12 ½ to 37 ½ younger
3. 2nd Generation – grandchild, great nieces and nephews + spouses, for
non-family: more than 37 ½ to 62 ½ younger (25 year increments)
4. 3rd Generation – great-grandchild, etc.
E. When you have a Generation Skipping transfer, you will be taxed on that
transfer in addition to your gift tax for the transfer. You are taxed on the property interest
that you transfer to that person.

55