Chapter 13 Solutions

5. Assume that the properties included in Alex’s gross estate have appreciated during the six-month
period immediately after his death. May Alex’s executor elect the alternate valuation date and
thereby achieve a larger step-up in basis? Explain.
Solution: No. The executor may not use the alternate valuation date if the total value has
risen. The executor cannot elect it unless it will result in (1) a lower gross estate
amount and (2) a smaller amount of estate tax payable.

8. From a tax standpoint, which of the following alternatives is more favorable for a client’s estate?
a. Buying a new insurance policy on his life and soon thereafter giving it to another person.
b. Encouraging the other person to buy the policy with funds previously received from the
client. Explain your answer.
Solution: It would be more favorable for the estate if the other person purchased the policy.
Under this approach, even though the other person purchased the policy with funds
received from the insured/client, the client will not potentially be affected by the
transfers-within-three-years-of-death rule because the client did not make a gift of
the insurance policy. The three-year rule potentially would apply if the client
bought the policy and then gave it to someone.

32. Beth dies on May 3, 2020. Her executor elects date-of-death valuation. Beth’s gross estate
includes the items listed below. What is the estate tax value of each item?
a. 4,000 shares of Highline Corporation stock traded on a stock exchange on May 3, 2020 at
a high of 30, a low of 25, and a close of 26.
b. Life insurance policy on the life of Beth having a face value of $600,000. The cost of a
comparable policy immediately before Beth’s death is $187,430.
c. (not assigned)
d. Beach cottage appraised at a FMV of $175,000 and valued for property tax purposes at
$152,000
Solution: a. $110,000 = 4,000 shares x [0.50 x ($30 + $25)]
b. $600,000, the FMV
c. Not assigned
d. $175,000, the FMV

45. Joy died on November 5, 2020. Soon after Joy’s death, the executor discovered the following
insurance policies on Joy’s life.
Policy Number Owner Beneficiary Face Value
123 Joy Joy’s husband $400,000
757 Joy’s son Joy’s estate 225,000
848 Joy’s son Joy’s son 300,000
414 Joy’s daughter Joy’s husband 175,000
Joy transferred ownership of policies 757 and 848 to her son in 2010. She gave ownership of
policy 414 to her daughter in 2018. Indicate the amount includible in Joy’s gross estate for
each policy.
 Solution:
Policy Number Amount Included
123 $400,000 because Joy is the owner
757 $225,000 because Joy’s estate is the beneficiary
848 $0 because the estate was not the owner or beneficiary and
because Joy gave away the policy more than three years before
death
414 $175,000 because Joy gave the policy to her daughter within
three years of her death

50. Sam Snider died February 14, 2019, survived by his spouse Janet and several children. Sam
had not made any taxable gifts. Sam’s gross estate was $7 million. In each of the following
independent situations, indicate the amount of Sam’s exemption equivalent that is portable to
Janet and that can be used by Janet’s estate if Sam’s executor makes the appropriate election.
a. Sam’s deductions, including the marital deduction, total $3.7 million; Janet dies in 2020.
b. Sam’s deductions, including the marital deduction, total $1.1 million; Janet dies in 2020.
c. Sam’s deductions, including the marital deduction, total $5.5 million; Janet remarries late
in 2019. Her new spouse dies early in 2020 with a $13 million taxable estate, and Janet dies
in late 2020.
Solution: Sam’s basic exclusion amount was $11.4 million as he died in 2019. For
portability purposes, the amount, once elected, is not indexed.
a. $8.1 million. Sam’s tax base is Sam’s tax base is $3.3 million ($7,000,000 -
$3,700,000). His unused basic exclusion amount, the amount portable to Janet, is
$8.1 million ($11,400,000 - $3,300,000). The amount portable to Janet, once
calculated, is not adjusted for inflation in later years.
b. $5.5 million. Sam’s tax base is $5.9 million ($7,000,000 - $1,100,000). His
unused basic exclusion amount, the amount portable to Janet, is $5.5 million
($11,400,000 - $5,900,000).
c. None. Sam’s tax base is $1.5 million ($7,000,000 - $5,500,000). His unused
basic exclusion amount, the amount tentatively portable to Janet, is $9.9 million
($11,400,000 - $1,500,000). However, portability applies for a surviving spouse
only with respect to her last deceased spouse, in this case, her new spouse. Her
new spouse has no unused amount because his taxable estate is $13 million, in
comparison with an $11.58 million tax-free amount for 2020. Janet cannot use
Sam’s unused basic exclusion amount because he is not her last deceased spouse.
Chapter 14 Solutions

1. Explain to a client in laymen’s language what portion of the income of an estate or trust is
subject to taxation at the fiduciary level.
Solution: The estate or trust pays tax only on amounts retained, less the exemption. The
taxable income of an estate or trust is reduced by the distribution deduction for
amounts distributed, and the beneficiary reports these amounts as gross income.

11. A client inquires about the significance of distributable net income (DNI). Explain.
Solution: DNI sets the ceiling on (1) the fiduciary’s distribution deduction and (2) the amount
of income taxed to the beneficiaries.

19. a. Describe to a client what income in respect of a decedent (IRD) is.

b. Describe to the client one tax disadvantage and one tax advantage that occur because of the
classification of a receipt as IRD.
Solution: a. Income in respect of a decedent (IRD) is composed of items of gross income
that the decedent had earned prior to death, but which were not properly reportable
on the decedent's final individual income tax return because they had not been
collected and the decedent's accounting method was the cash or installment
method.
b. A disadvantage of IRD items is that they do not receive a step-up in basis. On
the other hand, IRD items have the advantage of triggering a Sec. 691(c) deduction
for the Federal estate taxes attributable to the inclusion of the IRD items in the
gross estate.

20. Describe three situations that cause trusts to be subject to the grantor trust rules.
Solution: The grantor trust rules cause grantors who do not give up enough control or
economic benefits when they create a trust to pay a price by being taxed on part or
all of the trust’s income.
The grantor trust rules can apply if (1) the trust is revocable, (2) grantor retains
economic benefits (e.g., the trust income is used to pay premiums on a life
insurance policy on the grantor’s life, or income can be distributed to the grantor
or spouse or (3) the grantor can control others’ beneficial enjoyment (such as being
trustee and deciding how much income to distribute) The grantor trust rules also
can apply in other situations described in the text (such as the grantor has “too
large” a reversionary interest in the trust assets because the property reverts “too
soon,” or retains certain administrative powers).