INTRODUCTION  Constitutionality and Taxation: the federal transfer taxes (estate and gift and generation-skipping transfer

tax) are excise taxes on the transfer of property and are not direct taxes (on the property itself which must be apportioned). They must be ―uniform throughout the US‖ per Article 1, section 8, clause 1 but they do not need to be apportioned because they are not direct. Article 1, section 2, clause 3/ Article 1 Section 9 clause 4.  Glossary: Future Interest: a present right to future possession or enjoyment. Types:  Remainder: FI that comes into possession upon expiration of a prior interest (e.g. life estate).  Reversion: interest that transferor has or retains because less than the full estate is transferred  ex: A transfers to B for life then to B‘s surviving children. A has reversion.  Executory interest: a future interest that cuts short a vested interest.  A transfers to B and his heirs but if…then to C and his heirs. Or A transfers to B for 10 years then to A then to C upon reaching the age of 30.  Note: The holders of successor FIs don‘t acquire property from each other but from the orig transferor.  Vested v. contingent: vested if the person‘s ownership cannot be defeated by a condition precedent.  B for life, remainder to C (vested) v. B for life, remainder to C if C survives B but if not, to D  General transfer tax info:  Policies:  Fairness in the we want to tax property once at every generation; vertical and horizontal- fed taxes produce horizontal; Positive economic effects: estate tax: does it discourage work/ savings/ consumption?; Administrability: We want simple system. This often conflicts with equity. No signif costs for planning, compliance, enforceability. So the taxes impose costs out of proportion w/ the revenues they generate? Difficult to assess bc much of the cost of planning will be incurred even if there isn‘t a tax. We want to raise compliance and minimize disputes. Efficient tax to administer... know time to impose it (you're dead). And kids who inherit too much wealth are not productive. Conform to notions of good law- we‘ve had transfer taxes since 19th century.  Justifications for transfer taxes: Fundamental purposes of the transfer taxes are to raise revenue and redistribute wealth. These are excise taxes on the transfers of property.  Raise Revenue, though it’s a small % of total tax revenues/ stimulate the economy. Estate and gift taxes constitute only a modest part of total tax revenues collected by the federal government— estimated between 1.2% of net federal revenues, though it adds up (28.8 billion in 2008). Currently, with a $2M exemption, most people are not subject to federal estate or gift taxes  Counter: Poor revenue raiser, only 1-2% of the federal budget; unlikely to significantly increase; will never fund the federal govt  Multiple tax bases. A tax system with more than one tax base is less vulnerable to the economic or behavioral changes & better at taxing based on ability to pay bc there are diff. measures of that ability.  Ability to pay. Another policy consideration is vertical equity, or progressivity (or ability to pay). Enhance overall progressivity by taxing only the very wealth (top 1.2 percent of the population).  Counter arguments and alternatives:  Creates a double tax on assets/income; Puts burden on a relatively few people; Distorts behaviorpeople spend a lot of money trying to avoid it; invest a lot in insurance industry and shift from building retirement to investing in insurance; Causes people to create trusts that aren't necessary. Evasion is easy and savers are penalized/spenders rewarded and fails to break up concentrations of wealth  Alt: Abolish §102; incl gifts/bequests in income. All prop taxed to bene. Take into account relative wealth of every recipient and tax less well off people w/ marginal rates  Alt: Inheritance tax - have separate set of rates for inheritances and exemptions for diff policy reason  Alt: Accessions tax - inheritance tax except looks to each bene and how many gifts/bequests received over their lifetime and tax proportionately  Importance and Justifications of Estate & Gift Tax  Justifications for gift tax  Backs up estate tax: If you have prop that is only taxable at death, people will give it away IV  Tries to reach estate-depleting transfers; As Justice Frankfurter said in Commissioner v. Wemyss, ―[the gift tax is designed] to reach those transfers that are withdrawn from the donor‘s estate.‖  Gift tax backing up income tax: [this is why Congress did not repeal the gift tax in 2001 when it repealed the estate and generation-skipping transfer taxes] People also say that another function of the

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gift tax is to protect the income tax. The income tax is a graduated tax on the income of the owner of the property. In a family, one way of lessening the income tax is to transfer income-producing property to family members in lower tax brackets. The gift tax places limits on that sort of thing  Justifications for the Estate Tax.  Wealth Redistribution. Estate taxation has been advocated primarily as an instrument for the equalization of wealth; however, such a minor factor (only 8 in 100 richest Americans trace wealth to inheritance) that transfer taxes are not necessary). Anti-concentration- prevent large intergenerational concentrations of wealth like Rockefellers and Carnegies (but will they work as hard if they know it will be taxed to smithereens instead of gliding to their families?)  Discourage Idleness. Inheritance comes as a windfall, and those who benefit from such get idle.  Encourage Charitable Contributions. In determining the taxable estate, §2055(a) allows a deduction for the amount of all bequests to charitable organizations  In terms of economy, saving money is not good for economic growth so threat of tax at end of day causes you to spend at end of the day  Comparison and Relation of Estate & Gift Tax  Comparison: Gift and Estate Tax. The GT may be cheaper than the estate tax for the following reasons:  Appreciation in Property Value. An inter vivos transfer may be cheaper than a transfer at death if the property appreciates in value between the date of gift and the donor‘s death.  1014 provides that a beneficiary receives a stepped-up basis, that is the bene‘s basis is the FMV of the property on the date of death, so any appreciation in the value of the proerpty is never taxed as income and if person ever sells the property, doesn‘t realize or recognize any gain—incentive to hold onto appreciating property until death.  BUT if it is already highly appreciated resource (stock from 1901) and trying to decide whether to sell now or give to you in estatealways hold on and give to you in estate.  Or if resource is worth less than you paid, should sell it and take the loss as an income tax loss.  Encourages people to retain appreciated property until their deaths but to sell before death any property that has declined in value to get the income tax loss  Other advantages to IV giving: (note when GT and ET were de-coupled, better to make lifetime gift)  Generally speaking, when tax systems are unified, gift tax is cheaper because it is Tax “Exclusive.” For gift tax purposes, the amount of a gift is defined as the value of the transferred property, excluding any gift tax imposed on the transfer. Accordingly, the gift tax is said to be computed on a ―tax-exclusive‖ base; there is no ―tax on the tax.‖ In contrast, the estate tax base includes the value of all the property owned at death (including any amount used to pay the estate tax), not just the property that actually comes into the hands of the beneficiaries. The estate tax must be paid from ―after-tax‖ dollars, and the estate tax base is therefore said to be ―tax-inclusive.‖  Ex. Suppose that both the estate and gift tax is imposed at a flat 50% rate. A donor who makes an IV gift of $1M will incur a (tax-exclusive) GT of $500K, bringing the total out-ofpocket cost of the transfer to $1.5M. However, a decedent who dies leaving an estate of $1.5M will incur a (tax-inclusive) ET of $750K, leaving only $750K for the heirs after tax. Thus, the gift tax is $250K less than the estate tax on a comparable transfer—precisely the amount saved by excluding the gift tax from the gift tax base (i.e., $500K x 50% = $250K).  Annual exclusion; reduces taxable estate by the gift and the tax paid.  Relation:  Unification of EGT achieved by positing one rate sched for both; having a single exemption (obtained through an exemption-equivalent credit, officially referred to as the unified transfer tax credit) and under 2001(b)(1)(B), treating the taxable estate as if it were the last taxable gift of the decedent.  EFFECT OF STATE LAW  Exam: First, determine the nature of scope of the property in question. Then look to state law for that determination. Second, analyze which court is making the decision. A fed ct will interpret the IRC, but it must apply those provisions to state created property rights. It will only give proper regard to, and not be bound by, the decisions of state courts that are not the highest court of that state.Comm’r v. Bosch’s Est.,  Facts: D created an IV trust for his wife‘s benefit and gave her a general poa over the trust property. W executed an instrument purporting to convert her gpoa to a spoa. After the D‘s death, his executor

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obtained a determination from the state trial court that this instrument was a nullity. The Tax Court and COA accepted this determination in a proceeding for federal estate tax purposes.  Why State litigation: By granting his wife a gpoa over the trust property, the D would still be treated as owning the property at death and the property would, therefore, be included in his gross estate. But, the value of the D‘s gross estate was below the applicable exclusion amount and would not be taxed anyway. By obtaining a court determination that the wife‘s gpoa had not been converted to a spoa, the wife presumably sought a stepped-up, FMV basis in the trust property pursuant to §1014(a).  Held. the decisions of lower state courts are not controlling for federal tax purposes. Instead, ―proper regard‖—not conclusive force—should be given to such decisions of the lower state courts. In contrast, the state‘s highest court was regarded as the best authority on the state law. If no decision in the highest ct of the state bears on the point, the fed court must ascertain how the highest state ct would have ruled on the matter after giving ―proper regard‖ to pertinent rulings by other courts of the state.  Note: “Proper Regard” to Lower State Court Decisions: Courts often look at the following factors in determining whether to give ―proper regard‖ to a lower state court decisions:  Whether: 1. the state ct decision reflects the outcome of a bona fide adversarial dispute; 2. there are signif non-tax consequences of the dispute; 3. the state court decision represents a correct application of state law (i.e. whether would likely have been affirmed if reviewed by highest ct.).  PAYMENT & COLLECTION OF TAX  Authority: Have treasury regulations get voted on then signed for commissioner, rev ruls which courts take into account can disagree with, private letter ruling when TP will ask and the IRS will issue it, tech advice ruling saying ok or not but to binding on anyone other than taxpayer who asks for the ruling. Or IRS can change mind (as opposed to revenue ruling where supposed to follow)  Tax court (deficiency) v. district court (refund).  Estate Tax  Tax Returns. An estate tax return (Form 706) is due nine months after death (§6075) and must be filed for the estate of every citizen or resident of the U.S. whose gross estate exceeds the decedent‘s remaining applicable exclusion amount (§6018)—here 5 M. For filing purposes, therefore, the statute treats the estate as though it were not entitled to any deductions (e.g., administration expenses, debts, casualty losses, charitable bequests, marital deduction) and requires a return, unless the amount of the estate is fully offset by the decedent‘s remaining applicable exclusion amount.  The exec or admin of the estate has primary responsibility for filing the return. If fails to act or no fiduciary has been appointed, every person in actual or constructive possession of any of the D‘s prop situated in the U.S is considered an executor and is required to file a return (§2203).  Note: The estate tax return must be signed by all executors.  3 tax returns: Decedent‘s final income tax return, estate tax return and estate‘s income tax return.  Gift Tax  Tax Returns. §6019 requires that a gift tax return (Form 709) be filed for each calendar year in which an individual makes any gift that is not fully covered by the annual exclusion for gifts of present interests, by the exclusion for tuition or medical payments, or by the marital deduction.  Under §6075(b), the gift tax return is generally due by April 15 following the close of the calendar year in which the gifts were made. The donor has primary responsibility for filing the return. However, if the donor dies before the gift tax return is filed, the executor must file the return. Penalties may be assessed for failure to make a timely filing of the return, based on the amount of the tax due (i.e., no penalty if no tax due).  Only file if donor transfers to any donee during the tax yea more than 13k regardless of whether any tax is due. That means if you‘re gift splitting, still required to file gift tax return. If given gift that falls within lifetime exemption or if gift doesn‘t have a fixed value and advantage is you're giving IRS notice. When someone dies usually ask for copies of all gift tax returns they've filed. Because estate tax return is really the final gift tax return. However, does need to be filed for gift splitting under 2513.

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(support in 25.  Note: if a donor transfers by gift less than his entire interest in property.not even transfer  Are excluded from the gift tax (2501(a)(4)).just b/c premiums going into a trust--indirect gifts.  But if per 1(h)(6) A transfers property to a trust where B receives income for life and at his death the trust terminates and corpus returns to A provided A survives but otherwise to C. 4 . doesn‘t matter that 2 haven‘t transferred stock back. However. one should tackle four questions: 1. 25.  Constructive transfer: when a first party allows a second party to dispose of the first party‘s property or the second party refuses to accept a gratuitous transfer and it passes to another.not even a transfer  Using one‘s own asset is not a gift  Purchasing goods is not a gift—there may be a transfer but it was with full consideration. There was only one gift from mother to daughter.” Property’s expansive def ensures that the IRS and courts can broadly interpret 2501 and 2511.  25-2511-1(h)(2)/(3)  (2) the transfer of property [from A] to B if there is imposed upon B the obligation of paying a commensurate annuity to C is a gift [from A] to C.  Wasting your own asset is not a gift (money under your mattress could be used but isn‘t.2511-1©(1)).GIFT TAX (for transfers of property as gifts)  Internal Revenue Code §2501(a) imposes a tax on the transfer of property without receipt of consideration in money or money’s worth during the calendar year by any resident or nonresident individual. the premiums are a gift  Heyen: indirect transfer to family. [Willbanks p.no gift).  Not considered transfers:  Personal consumption and economic waste.to ee then to trust. A has made a gift equal to the total value of the property less the value of his retained interest.. Intent mattered. Is that transfer a gift? 3. Is there a transfer?  In general: §2511(a) provides that the tax imposed by §2501 shall apply “whether the transfer is in trust or otherwise. is the gift complete? 4. whether the gift is direct or indirect.2511-1(h)(2)). What if it's not payable to your estate. Court said it was an indirect transfer. with remainder to A‘s issue or reversion to D.GT applicable to entire value.maybe to trust or a person.can‘t do this. And is the gift subject to any exclusions or deductions from the gift tax?  Under 2502(c) the gift tax is to be paid by the donor. 27 returned the shares to the family..so we do count insurance as part of a taxable estate when you die. 1. if the donor‘s retained interest is not susceptible of measurement on the basis of generally accepted valuation principles.. If have policy and not paying to estate. the gift tax is applicable to the interest transferred (25.. If yes.2511-1(e)).64]  Support: well not a gift because might be getting money or money's worth---investment.  When considering whether something is a taxable gift. Is there a transfer of property? 2. transfers life estate in property to A. and whether the property is real or personal. Substance prevails over form. 25. the gift tax is applicable to the entire value of the property.  (3) the payment of money or transfer of property to B in consideration of B‘s promise to render a service to C…  25-2511-1(h)(8)/ Rev Ruling 79-490:  gift: ―D caused the economic benefit…to insure to the assignee as each payment was made…‖  Sole purpose of this ruling..  But once you let someone else use that money. the gift tax covers both (2511(a). Helping an oil producer or farmer  Indirect transfer: The transfer can be direct or indirect.  Transfers to political organizations. Decedent had her bank transfer stock to 29 recipientsall worth less than 10k. but goes somewhere else? Each of the premiums going to someone else gets paid as a gift even thought that trust/ person doesn‘t receive the proceeds until I die. there is a transfer. Failure to file a gift tax return reporting this gift was fraudulent and justified imposition of penalties. tangible or intangible. 65.  Ex: D.  Constructive transfer ex:  H having sole management power over a certain community property make a gift transfer of both H and Ws interest in the property to an adult child. W is a constructive transferor of her half interest in the community property. D argued not a transfer to family.

  5 . 1985. at time of H‘s death.  On May 13. Contrast with 12. Gift of remainder interest but also because she had a reserved life estate.  The person has not accepted the interest or any of its benefits. (2518(b)(4).D‘s will purports to dispose of his and SS‘s property (see E. 1989  If O creates an irrevocable IV trust on 4/1/1978. income to B for life. with remainder to descendants. if not to S.2518-1(b): the disclaimed interest in property is treated as if it had never been transferred to the person making the disclaimer.2511(c)(1) about indirect transfers does not apply if a donee qualifiedly disclaims the property.  Effect: 25. or the holder of legal title to the property to which the interest relates not later than the date that is 9 months after the later of the transfer creating the interest in the person is made or the day on which such person attains 21  i. Thus. No accepting dividends or rent or anything. they purchase real property with community funds and do not put the real property in their names as JTROS. Note that the disclaimant cannot direct where it goes. a disclaimant may not disclaim a specific bequest under a will and then turn around and accept the same property as part of a residuary or intestate share). the SS‘s will becomes irrevocable. Said SS made a gift.e. It passes wither to the spouse of the decedent or to a person other than the person making the disclaimer. and the H dies on January 3. 1989. the effect of a qualified disclaimer is that no transfer is deemed to have been made to or from the person making the disclaimer. B creates a trust in which C is given a lifetime income interest and a general power of appointment over the principal. then included in her gross estate under 2036(a)(1).Spousal election will. then to common descendants and the 2 joint wills are accompanied by k saying that on death of one. unqualified refusal by a person to accept in interest in property. S must disclaim (within 9 months of when D died in 2000 bc that‘s when it becomes fixed and irrevocable even though S may not know what she gets until R and B are gone. 2518-2(d)(e)(5) ex 11 (763).Vardell). remainder to R if living. it must be received by the transferor. you cannot disclaim. 1978  If a joint tenancy remains intact until one tenant dies.  Timely mailing counts 25. the W can disclaim that portion within nine months of the husband's death but cannot disclaim the interest in the property that she acquired on April 1. 1978. The starting point for a disclaimer by D is June 17. and the disclaimed interest is deemed to pass directly from the original transferor to the ultimate recipient. reserving a life estate.  Estate of Lidbury: no gift b/c SS didn‘t give up right to consume or dispose of the property. Note: 25. E.2518-2(b))  timely. that is.  Only really matters in IL there k will doesn‘t restrict SS from spending or disposing of property-Pyle: H died first and SS took net estate under obligation to bequeath combined interest to children and 7th Cir. 1978.O.This provision requires that the disclaimer remove the disclaimed interest from the disclaimant‘s ownership and control. minor could get benefits then disclaim later. devising his portion of the property to the W. C exercises the general power of appointment in favor of D upon C's death on June 17.2518-2(c)(2).  Timing Examples:  D creates a revocable trust in 1990. but only if it is in  in writing that is signed by disclaimant (‗s representative and identifies the property 25. with income payable to O's child D for life and remainder at D's death to D's child. Contractual wills where each spouse bequeaths estate to the other but if the other does not survive.  Ex can‘t disclaim in exchange for a promise to receive the cash value of it from spouse.  Disclaimer:  In general: Under §2518(a). the transferor‘s legal representative . D dies in 2000 and B dies in 2001. of entire marital property. the survivor generally has 9 months from that tenant‘s death to make a qualified disclaimer of the ½ interest received by the right of survivorship  Accepting benefits examples:  If you receive any benefits.  Requirements: Under 2518(b) a disclaimer is qualified only if it meets the following requirements  The disclaimer must be:  an irrevocable. 1978  If H and W reside in a community property state and on April 1. the starting point for D's and E's disclaimers is April 1.

Assuming the other requirements of 2518 are met. Might provide that a disclaimer of a future interest must be filed within a certain period after the interest becomes indefeasibly vested. especially b/c can decrease or increase size of marital or charitable deduction in the estate of the D without tax costs to the person effecting the disclaimer. if this leaves the wife with the sole right to all the income annually. the entire $10M will be incl in the W‘s estate upon her death. Vease: even just rearranging an estate plan is treated as if accepted and then reallocated— (distinction is if bona fide contest). (25-2518-3(d) ex 3).  Maximizing Use of the Applicable Exclusion Amount. the disclaimer is valid. Thus. F disclaimed 100 of 500 acres and H disclaimed a ½ interest in Greenacre.  can disclaim an undivided portion of an interest in property as long as it‘s severable property (2518(c)). 25. so can‘t wait until 21. the disclaimer of a life estate is not a qualified disclaimer bc the individual still owns the remainder interest. For ex.2518-3(b)).  Joint tenancy interests: may disclaim a survivorship interest in property held as JT  Ex: Roger and Evan own S as JTROS. Take-away is can't voluntarily rearrange estate without accepting the estate and then controlling its disposition.  However. §2056 grants an unlimited deduction for qualified transfers to the SS. 3(d) Ex. Either may sever the JT unilaterally under state law. During her lifetime and she retained life interest in the property so includable in her gross estate Court said they were accepting and controlling the property. Disclaimers can be used to maximize the utilization of the applicable excl amt.However. 3 and 12 (767) but see below.  Policy/use:  You don't need it and the kid is the residuary beneficiary. Commissioner said trusts had resulted from a transfer of property made by Elizabeth. only $8M will be included in the W‘s estate. 6 . Also might have situation where tax law changed and some property is taxable or D didn't know. 3. The undivided portion must be either a specific pecuniary amount or a fraction or % of the property. If al the other requirements of 2518 are met. the transfer to the trust may qualify for the deduction.  State law relevancy: may be no disclaimer statute and an heir of an intestate D might be barred from disclaiming.2518-3(c) and (d)  Tom bequeathed Blackacre to Faith and Greenacre to Hope. to Ned. 25. Ex 3/4. a time that could be too late for (9 months). be sheltered from transfer taxes. suppose that a H dies with a $10M LI policy payable to his W. if D H created a trust for the benefit of W. For ex. the disclaimer of a remainder interest is not a qualified disclaimer bc the individual still owns a life estate in the property (25. Here. (25-2518-2(c)(6)). the W can disclaim her interest in the LI proceeds to the extent of the H‘s unused applicable excl amt. Disclaimers can cure trusts intended to qualify for the marital deduction but that do not meet all of the reqs. this $2M will not be incl in the W‘s estate upon her death and will. against which her $2M applicable exclusion amount may be applied upon her death. If an individual is given a fee interest in property. if none of the deceased H‘s $2M applicable exclusion amt has been used. The kids can disclaim their interests in the trust. family wanted to carry out wishes of Walker‘s un-executed latest will.  Ex: Tom bequeathed $500k to Melvin and 600 shares of stock in Co.  Fixing the Marital Deduction. can‘t keep a life estate and disclaim remainder or something. Might provide that disclaimer can be made by a guardian of a minor or incompetent. If an individual is given a fee interest in property. but the trust instrument also allowed the trustee to pay any part of the income or corpus of the trust to his kids at the trustee‘s discretion. Roger dies on May 1. Or provide a fixed time period for making a disclaimer. Evan sends a letter to the executor of Roger‘s estate disclaiming the ½ interest from Roger. Valid under 3(b) and (d). Assuming that the H‘s prop still passes to the W by will or intestate succession. Melvin disclaims 200k and Ned disclaims 400 shares of stock. On September 1. Melvin‘s and Ned‘s disclaimers are valid.keep bundle of sticks together.  Rationale: post-mortem estate planning. Lesson: if will dispute and settle it then property that passes it is passing from decedent's estate directly. tf.2518-1© ex. Has to comply with state law.  Can disclaim part as long as can be segregated. The reverse is also true.  Life estates and remainders: An individual may disclaim a life estate or a remainder interest if that is the only interest the individual receives. To maximize use of the H‘s $2M applicable excl amt.

Gloria made a taxable gift to her H and children under IRC §§2501 and 2512(b) when she. Not a gift.e.  Ex: H and W divorce and court awards W a 3M property settlement. she can transfer a joint tenancy interest. Transfer not a gift because it occurred pursuant to a divorce order.. food. utilities for a year after college…. Is there a gift for purposes of IRC 2501?  In general: Internal revenue Code 2512(b) defines a gift: “Where property is transferred for less than adequate and full consideration in money or money’s worth. Support of child.Property Settlements in Contemplation of Divorce.as long as they are made in beginning and made throughout then not a gift.  Only minors! Any transfer for support is a gift unless donor has legally enforceable obligation to support the recipient. there doesn‘t even need to be a done alive—can gift to unborn children.  Parameters.E. Pat buys 20k car for kid. I.  Take each gift separately.2.  Note: so donor dependent whether it is a gift.  Remember: a donor does not need to relinquish all her interest in the property. for example. because the income tax is not read in pari material with the gift tax. not a gift).not even transfer  Alimony and child support payments in cash are exempt under support exclusion  Parents must support their minor children (administrability concerns. a gift made without consideration or an equivalent value received in return. donative intent is not a necessary element for of a taxable gift for federal gift tax purposes (See 25-2511-1(g)(1)). a court could say they are a gift  Transfers mandated by law (i. or (2) to provide a reasonable allowance for the minor children (for the duration of their minorities).  §2516 .‖  Intent Unlike the income tax definition of a gift in Duberstein. or a reminder. it is a gift. (unclear if those applies to same sex couples). That is. or divorce decree in Harris). is deemed to be transfers made for a full and adequate consideration in money or money‘s worth (i. a taxable gift is recognized only to the extent that the value of property transferred to the spouse exceeds the value of any support rights that spouse surrendered.e. transfers of discharge of this duty are not gifts.e.  Doesn‘t make sense completely if this is a large wealth transfer like a cash payment because you‘re depleting your estate. Thus. spouse. or an interest as a tenant in common or a life estate. denude self of assets  Goods bought outright  Ex: executor/trustee fees/commissions. §2516 provides that if H and W enter into a written agreement relative to their marital and property rights and divorce occurs within the 3year period beginning on the date 1 year before such agreement is entered into (whether or not such agreement is approved by the divorce decree).. any transfers of property made pursuant to such agreement (1) to either spouse in settlement of his or her marital or property rights. i. subjecting the transferor to both the gift tax and the income tax.  However. This is to foreclose estate tax loopholes. who have her no consideration.taxed!  Spouses must support each other (terminates on divorce)  What constitutes support depends on state law. 2512(b) is couched in consideration rather than donative intent considerations.” That is. someone could sell a friend a working car for $10.‖  ―Therefore. So say:  ―Gloria transferred the cash into the trust and Tex did not transfer money or money‘s worth back‖  ―Gloria also transferred a remainder interest to her children. which exceeds the amount of gift tax annual exclusion.. too). if that does not exempt the transfer (maybe divorce not timely obtained) then look to Harris 7 .  Tip: is property transferred pursuant to separation or divorce. these differing definitions can result in the same transfer counting as a gift for purposes of the gift tax and NOT for the income tax. look first to per se exclusion from 2516.. then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift. pay daughter‘s rent. If purchase of a car is not part of the duty.  No gift: Ask: trying to erode his or her estate. but if there's an ambiguity and don't announce it. State law will determine scope fo duty and support.00 and avoid taxes by claiming she harbored no donative intent.  The right to support (as opposed to right to share in property upon death or divorce) is consideration in money or money‘s worth..

 Rationale: Not suspicious that divorce degrees are ways of getting out of estate tax. transferor can avoid gift characterization only if transfer was made for consideration in money or money‘s worth.  “Free from donative intent” 8 .  Transfers in ―Ordinary Course of Business. Presume you‘re getting something because don‘t generally give employees or others in business transactions things if it‘s not going to make you more money  “Ordinary course of business”  A TP who sells property at a discount rate as part of her business doesn‘t make a gift. (2) at arm's length. The ―ordinary course of business‖ exception is not limited to regularly recurring business transactions with customers: It includes all business-related transfers that are (1) bona fide.  But what if they were his children? Well then becomes more fact-specific and look at donative intent and arm‘s length because it looks less like a bona fide transaction. a court determination of property rights would not result in gift tax bc obligation was a legal one imposed by the court.  Remember release of inheritance type rights does not quality! But release of supporttype rights does.  Ex: D owns 100% of stock of a local software company.  Note.  Rationale: Don‘t want to restrict business.2512-8). §25. now with 2516.e. child support..  If price is result of arms length transaction. Such transfers are considered made for an adequate and full consideration in money or money's worth. the Supreme Court held that. Concerned that other companies may raid his 5 programmers.. The Court reached this result even though the covenants in the agreement were expressly made to survive any divorce decree that might be entered  i.  In general: A sale. If there is a deed. Commissioner (Twen). In Harris v.see exclusions. the transfer is exempt from the gift tax. the transaction is a ―bad bargain‖ to the transferor) (Reg. Seller willing to sell the TV to anyone for that price.‖ Reg.. did the recipient record it? Was title to the stock transferred on the books of the corporation? Did the transferor charge interest on the promissory note? Did the transferor intend to collect on the debt  “Arm’s length”  if terms are similar to those that strangers would negotiate. If sold to everyone for 125 and to daughter for 100 then price is motivated by donative intent and the transaction would be part sale and part gift.why would give ex money willingly?  Remember: Applies only to spousal maintenance. Not a gift…ordinary course of business. Thus. analysis of applicable state law not needed. not just ―rubber stamp approval‖) and the agreement is incorporated into the divorce decree. just want to see if court has power to alter tha agreement. if a property settlement agreement is approved by a divorce court that has the power to alter the agreement (i. the transfer is not founded on the promise or agreement of the parties. and (3) free from donative intent (Unlike Wemyss. he transfers 1k shares of stock to each of them after they work 5 years. Latter does not apply where divorce court retained no jurisdiction to modify the decree or if a divorce or separate maintenance decree was never obtained. matters here). And there's adversarial blood..  Qualified transfers of tuition/ medical payments. If §2516 does not apply and a transfer of property in exchange for a former spouse‘s relinquishment of her marital property rights is effected after the parties are divorced. then there is no gift.2512-8. If latter then value it and compare it to the amount transferred.  If neither 2516 nor Harris applies..  “Bona fide”  If it is in reality what it purports to be on paper. or transfer of property is not considered a taxable gift if the transfer is made in the ―ordinary course of business. the transfer is still not a taxable gift if it is made pursuant to a court order.  Ex: Sell a tv for 100 even though cost 125 even if buyer is your daughter.e. exchange.  Transfers Made Pursuant to Court Order When §2516 Does Not Apply.  Safe harbor and only place where donative intent factors into what is a gift for gift tax purposes.‖ even if the transfer is for less than adequate and full consideration (i.e. and the division of property pursuant to the agreement.doctrine. §25.

 Prearranged is discouraged and documentation encouraged. and no property would be received from child to offset the depletion of the parent‘s estate ($10k escapes estate taxation.make it look like a first union loan. Hogle. Make it look arms length and bona fide.  Love and affection. Although the grantor‘s expert services conferred economic benefit on the children.  Yes gift  If the consideration is:  Not in money or money‘s worth  In general. Is the gift subject to gift tax? Yes. (2512(b))  Rationale: Administrability.  Rationale. never held an economic interest or discretion in the earnings of the trust.  Way to shift economic benefit without having to pay gift tax. depletion. the estate may not deduct $10k for the child‘s claim against the estate.  9 . Rendering services for someone without compensation is not a transfer of ―property‖ and will not be taxed as a gift. Issue was not about personal services but whether he made gifts to the trust and court said no gifts to trust but every court reads Hogel to say personal services are not gifts. ascertainable financial gain for the recipient.. This holds true even if those services produce definite.. clean paper trail.  What the facts turned on: The IRS contended that the annual earnings of the trust from trading in securities under the grantor‘s direction amounted to gifts by the grantor to the trust. it is property and the argument is that if he dies with this stuff in his estate he would be taxed much more.  Transfer to B in consideration of B‘s promise to render service to C is a gift to C or to both B and C depending on whether the service to be rendered to C is or is not an adequate and full consid imomw. plus all the copyrights. Contra Parent just helps child shoot child's first movie. if the parent dies after the child‘s graduation.  In General. If the child‘s promise to complete college constituted consideration in money or money‘s worth. maintaining that the grantor did not retain a beneficial interest in the trust property and.  In Commissioner v. the transfer is a gift to the extent it exceeds B‘s interest in such amount as a shareholder. backstop to estate tax... then the parent could escape transfer taxes on that $10k altogether once it was paid: No gift would be due if the value of the child‘s promise equaled $10k.indirect  The transfer of property to B if there is imposed on B he obligation of paying a commensurate annuity to C is a gift to C. Moreover.  Gratuitous services or help in kind (clean for neighbor). Relationship? What is the value of the property?  Intra-family members: presumption that these are motivated by donative intent and are subject to special scrutiny. valuation. The court disagreed. partners or equity holders  A transfer of property by a corporation to B is a gift to B from the stockholders  If B is a stockholder. No donative intent showing. administrability (valuation) problem. Money consideration must benefit the donor to relieve a transfer from being a gift!! The gift tax aims to reach those transfers which are withdrawn from the donor‘s estate‖  Ex: Suppose that a parent promises to pay $10k to a child if the child graduates from college.Depends on facts and circs. therefore. And services in kind are not gifts. A heavy burden rests on the TP to demonstrate absence of donative intent.  A business entity can give a gift and it‘s attributable to shareholders. the court held that the grantor‘s financial investment management services did not constitute a gift. the grantor created an irrevocable trust (retained no right to alter or amend or to change the beneficial interests) for children‘s benefit and managed a securities trading account for the trust.  25-2511-1(h)(2)(3). made a gift if property is transferred for less than full and adequate consideration in money or money‘s worth. Doesn‘t deplete estate.transfers by businesses.  Compare: Parent gives the Titanic master.  25-2511-1(h)(1).backstop. to the child. without having made any payment to the child.

in exchange for the donee's relinquishment of all of his or her marital rights in the donor's property.  But looked at fact that notes bore no interest. i.  An antenuptial agreement between prospective spouses may involve a transfer of property. which is not relevant. because the gift tax is supplementary to the estate tax. the estate tax statute did state that the relinquishment of marital rights did not constitute imomw. or other inheritance right  Sham aka intra-family loans  IRS can argue that the repayment obligation. Wemyss. doesn’t matter if those rights can be valued. donee‘s relinquishment of such marital rights in the property or estate of the donor is not considered consideration ―imomw‖  In Merrill v.  Look at her husband‘s estate—will not replenish estate has what he would if never married. but if you relinquish right to support that is consideration—surrender of a claim against transferor relieves him of legal obligation to deplete estate by making payments that would not be subject to gift or estate tax.2512-8/2043(b).e. The Court noted that although the gift tax statute did not specifically provide that the release of marital property rights was not to be treated as consideration in money or money's worth. BUT surrender of right or claim against transferor fails to be consideration when satisfaction by transferor would be subject to the estate and gift tax. Neither the donee's promise to marry the donor nor the detriment to be suffered by the donee (the loss of trust income) constituted money's worth consideration to the donor. Fahs.  In Commissioner v. If gp died the gc would have to pay. BUT grandfather was then going to forgive each payment as it became due. B transfers property with 10k to L on condition that L surrender claim againt B. and the release of marital rights are not in consideration in money or money‘s worth (Treas.  Valuation date: gift on transfer of real preprty bc notes weren‘t consideration. In consideration of the promised transfer.  10 . W relinquished all dower and other marital rights in the donor's property (so no rights to elective share. lacks economic substance/is a sham. elective share. §25. An agreement to marry does not constitute money‘s worth consideration to the donor. the taxes are in pari materia and must be construed together.‖ T. etc). The Court held that.2512-8. 25.Love affection.  Ex: B owes L 10k. the Supreme Court held that a post-marriage transfer pursuant to a typical prenuptial agreement was a taxable gift. transferred or sold. to compensate her for the loss of income from trusts created by her former H that she no longer would be entitled to receive after her marriage to the TP. the Supreme Court held that the TP‘s transfer of stock to his prospective wife was a taxable gift when TP made the transfer in consideration of 1.C.  ―It should be noted that the intent to forgive notes is to be distinguished from donative intent.  Note the difference: If you relinquish right to 1/3 of H‘s property when he dies. Under the agreement. just right to share in property upon death or divorce). Under Reg. either outright or in trust. the donor agreed to transfer $300k to an irrevocable trust for the benefit of his wife-to-be. her promise to marry him and 2. and Service disagree  truth is there is economic substance here. curtesy. Ruling 77-299 and donative intent (but really intent to forgive notes relates to whether valuable consideration was received)  Facts: sale of the property to grandchild in return for installment notes that would be payable in yearly amounts equal to the annual tax exclusion. an IV transfer in exchange for surrender by transferee of right to dower. though valid in form.  Relinquishment of Marital Property Rights Not Consideration. not consideration (no replenishing estate. Accordingly.  The Court held that the absence of donative intent by the taxpayer did not preclude application of the gift tax.  Agreement to Marry/ Wife’s Detriment Not Consideration. Reg.  The consideration received must benefit the donor in order to prevent the transfer from being deemed a gift because the purpose of the gift tax is to tax transfers that deplete the donor's estate. No net gift then. Court held that the release of marital rights did not constitute consideration and the entire transfer was subject to gift tax.  Courts disagree about looking at intent:  Rev.Wemyss) because they cannot add to a donor‘s net estate.

thought. unified credit) clearly absorb these sorts of de minimis gifts  11 . And Crown v Comm‘r (7th Cir. exceptions.  To avoid the IRS‘s recharacterization. if the loan is not evidenced by a writing.D. has prevailed in several cases (see Haygood). Moreover from a tax perspective. not in return for unsecured promise to pay an annuity if donee couldn‘t pay and was terminable ill.  Holding: The Court concluded that the interest-free loan of funds was a ―transfer of property by gift‖—even though the loan was payable on demand—and that the amount of the gift was the interest that was not charged by the taxpayer for the use of the money lent. For gift tax purposes. SCIN would have to be discoundted or periodic payments would need to be adjusted upward.g. The Court responds that a taxable event occurs simply because the taxpayer transferred the use of the money to someone else.  Again. Or could add provision in the installment notes that the obligations will be void upon seller‘s death prior to maturity. one that lender could recall at any time)  Promissory note: always a god idea to have a promissory note to:  Evidence that the loan exists. US (N. it is assumed to be an interest-free demand loan  In Dickman v. Tex 1966).But see Haygood v. courts and IRS disagree  Courts: Johnson v.no gift on foregone interest because parents under no duty to lend or otherwise invest their money. which the Court rejects:  Transferor Could Have Wasted Money. The taxpayer argues that. carried to its logical extreme. Notes will be included in donor‘s gross estate because theyw ere woned by decedent at death. right to use the property. or on the forgiveness of each annual installment because the transfer falls within the annual exclusion.. 1978).e. annual exclusion). this rationale would elevate to the status of taxable gifts such commonplace transactions as the loan of a cup of sugar to a neighbor or a loan of lunch money to a colleague. Commissioner. However. They had a right to keep it in cash. Rul. The Court responds that exclusions (e. that the transferor himself could have consumed or wasted the use value of that money is irrelevant. 73-61 says interest-free loans are subject to gift tax because the ―right to use property…is an interest in property.ie. The taxpayer loaned substantial sums of money to their son.no gift even thogh parent made over 18M in interest-free loans to family trusts  IRS: Rev.  Below-market demand / No-interest loans  Loans that are repaid but no interest was charged on them.‖  Below-market Demand loan: (i. The use of interest-free money can be very valuable. that the consideration should be bona fide. the Court analogized interest-free loans to the rent-free use of money: In both cases. supreme court said transfer is not the property itself but the interest in property. and credits (e. Wont be in gross estate because asset ceases to have any value. Might want to include in will a provision that forgives any balance due on the notes upon his death.. value of notes = to value of property transferred.  The taxpayer makes two arguments. donative intent is not controlling. the child should put money down when he purchases property from the parent so that the transaction looks more like a bona fide business transaction  Installment gift is aborted mid-stream if donor dies before ayments become due. Gift. In reaching this conclusion. the transfer of which is a gift within the purview of 2501. (self-cancelling instalment note0.. The taxpayer argues that an interest-free loan should not be made subject to the gift tax simply because of the possibility that the money might have enhanced the transferor‘s taxable income or gross estate had the loan never been made.  The parent‘s contention that no gift occurs on the original sale because the child‘s note constitutes consideration.g.  De Minimis Gifts. Comm‘r—intent is irrelevant. The loans were evidenced by demand notes bearing no interest. the IRS could treat a purported installment sale as a disguised gift where the donor intends to forgive the notes as part of a prearranged plan so make it look good. Consideration is to be determined by objective facts. the donor grants the use of valuable property.  Note however.

 Forgiveness of debt:  Complete on date transferred bc received no consideration  Whether particular transaction will be gift only on each year that payments are forgiven or at the time of the loan will depend on some important factors  The transferor‘s expressed intent not to collect on the loan  Whether there are negotiations or even discussion of the terms of the deal between the parties  Whether or not interest is charged and at what rate  Whether or not promissory notes are signed  Whether or not there are actual payments made  Whether the lender has a security interest  Whether the debtor has the ability to pay  the lender‘s (seller‘s) health and expectation of repayment  what records. Should reach all transfers. interest. rent.  In general: A gift is not taxed until it‘s complete “as to any property. Congress enacted §7872 to regulate the income and gift tax treatment of below-market interest rate loans (including interest-free loans). parent could therefore avoid future estate tax liability on these earnings  Administrability probs.‖ 25-2511-2(b)  Not every donative transfer results in a gift at the time the transfer is made. he makes a reduction of his own income interest and it’s a gift because giving up something he has right to. or dividends) would be attributed to the child and taxed at the child‘s (probably lower) marginal income tax rate. Not much comfort.. 31. So majority punts--says IRS will NEVER do this but we'll deal with this when we have to.. do have to pay tax on those transfers.  But might constitute gift if you are a beneficiary. if any.  Note: re: Loans and forgiveness of debt  No gift on loan: because debtor has a legal obligation to repay. Second. any income generated from investment of the loan proceeds (e. of which the donor has parted with dominion and control as to leave in him no power to change its disposition. 3. First. If he invades corpus for F‘s benefit. This § imputes a transfer between the lender and the borrower on the last day of the calendar year (7872a) thus gift is complete on Dec. remainder to F. The Court feared that failure to impose the gift tax on interest-free loans would seriously undermine the estate and income tax. Ex: D creates a trust naming E as trustee.diminishing his own income for no consideration. And dissent says the court aware for potential for abuse assumes IRS will exercise power conferred on it reasonably. income to E for life. 7872: After the Dickman case was decided. Not uncommon for parents to provide children with things like car or vacation houses simply on basis of family purposes.. What about transactions where parents let their kids use vacation homes/ cars/ things that are not cash.  Interest free loans  Amount of the foregone interest is a gift. in the case of nointerest loans from a parent to a child. any income generated from investment of the loan proceeds would be excluded from the parent‘s estate upon death.are those gifts? No. whether for his own benefit or the benefit of another.  During donor’s lifetime: There is no gift unless the transfer by the donor is completed during the donor‘s lifetime. As seen in contention of dissent. Is the gift complete? so that it is taxable under 2501?  A gift is generally complete at the time of transfer. (7872). or part thereof or interest therein. So technically under Dickman. This income tax avoidance technique is called income shifting. with him having power to pay corpus to F in his own discretion. with an exception for certain property including joint bank accounts and property that needs to have a recorded title. Incomplete transfers are those where the transferor retained sufficient powers over the transferred property ownership to preclude the gift being considered final for gift tax purposes.  Trustee gift when you have beneficial interest (25-2511-1(g)(1)&(2))  Note: A transfer by a trustee of trust property in which she has no beneficial interest does not constitute a gift by the trustee.  Not a gift if subject to ascertainable standards. Administrability problems.. 12 .  Note: Undermining Estate and Income Tax.. are kept by the lender.g. Timing can be delayed until the gift becomes complete.

(c).Retained powers: Following are retained powers that make gift incomplete:  Retained power to revoke the transfer  Because would have power over disposition.  Revocable trusts.2511-2(c). but is under estate tax.  A transfer that is subject to revocation by the donor becomes complete only when the donor‘s power to revoke is relinquished or otherwise terminates. the relinquishment or termination of a power to change the beneficiaries of transferred property. not just administrative powers).2511-2(b).  Note: If gift becomes complete because of or at the donor's death. §25.  In general: Gift is incomplete not just when the donor can revoke it but any time the donor can change the beneficial ownership 25. a retained-power transfer can only delay. the gift is incomplete under Treas. A grantor has dominion and control over the gift when she retains the power to designate beneficiaries even if she exercises that power in conjunction with another person who does not have substantial and adverse interest in the trust.e. federal transfer tax.2511-2(f).  Ex: J creates IV irrev. Note the symmetrynot taxed under gift tax.  Incomplete gifts in general: Under Reg. is incomplete to the extent that the donor reserves power to change its disposition. but subsequent distributions to benes (other than the donor obviously) are completed gifts that are subject to the gift tax as the distributions occur (Reg.2511-2(f)). other than self. occurring otherwise than by the death of the donor. Remainder. is regarded as the event that completes the gift and causes the gift tax to apply. however is not a completed gift. When the grantor retains dominion and control.2511-2(f). At L‘s death. (once that power is released then transfer is complete). Thus. if the donor retains the power until death. §25. if the donor can amend the provisions or the trust or alter the beneficial enjoyment of the trust.  Rationale:  dovetails with 2038 of estate tax which says that a transfer that was revocable by the grantor at the moment just prior to his death is includable in his gross estate  Otherwise.  Separately evaluate: Evaluate each interest separately because some parts may be a completed gift. Rationale: you are still exercising control over it.  Note: donors usually disfavor incomplete gifts and prefer to gift property currently so that any appreciation in the value of the property will occur in the hands of the donee and escape gift taxation  Incomplete. the initial transfer to the trust is not a completed gift. the trust property will be includable in his gross estate under §2036(a)(2) and 2038. and (e). not avoid. the transfer cannot be subject to gift tax because GT can only apply to a gift that becomes complete during donor's lifetime but it will be included in gross estate for estate tax purpose under one or more of 2036-38. Of course.value is property that day the power is terminated or relinquished. 25. (2) a power exercisable only with the consent of a person having a ―substantial 13 . J has given up dominion and control.2511-2.  In general:  When completed: Under Reg.2511-2(c). J reserved power to add or change remainder benes. a gift of property. whether in trust or otherwise.e. trust and transferred 5M to FNB as trustee to pay income to L for life. a gift in trust generally is incomplete to the extent that a grantor reserves the power either to  (1) name new beneficiaries or  (2) change the interests of the beneficiaries as between themselves  I. Answer: Income interest to L is a complete gift. (i. whether for his own benefit or the benefit of another. so you haven‘t really given it away.  Exceptions: A retained power to vary the beneficial interests of others does not prevent the transfer from being complete for gift tax purposes if the power is: (1) one that affects only the ―manner or time‖ of enjoyment. Has control over the property despite that he cannot become a remainder beneficiary and despite that it is irrevocable.  Income distributions: If the donor retains a power to change beneficial interests.not a gift at time of creation (Will be completed when grantor released power of revocation. trustee is to distribute property to L‘s children. 25. §25.  Retained power to name new beneficiaries or change interests of the beneficiaries as between themselves (unless per ascertainable standard). Under Reg. Reg. (25-2511-2(c). §25. people wouldn‘t make trusts because taxed even if never reaches the beneficiary or the settlor takes it all back.

TP said transfer was completed in ‘32 (no gift tax then). §25. alter or amend the transfer. remainder to A upon D‘s death. D retains power to revoke if S consents.2511-2(e): ―A donor is considered as himself having a power if it is exercisable in him in conjunction with any person not having substantial adverse interest in the disposition of the transferred property or the income therefrom. The trust instrument provided that the taxpayer could.2511-2(c)-(e)). Under 25. alter or amend the trust. income to D‘s child © while D is alive remainder to C upon D‘s death unless C predeceases then to D‘s Spouse S. the transfer is a completed gift only to the extent of the co-powerholder‘s adverse interest (see Camp v.  Exception 2: Substantial Adverse Interest. the donor is considered as having relinquished dominion and control over the property transferred.  Ex: J created IV.  Ex: D transfers property in trust. if the other person does not have a ―substantial adverse interest‖ in the disposition of the trust property or the income from the trust. if the other person has no reason not to acquiesce in the donor‘s exercise of a reserved power.  Note: Adverse to Less Than All Interests. Income interest is incomplete.2511-2(e).adverse interest‖. Under 25. and the donor reserves the power either to distribute the trust income annually or to accumulate the income (and distribute it to the beneficiary at the end of the trust period). in conjunction w/ X amended the trust to substitute his wife as the sole co-powerholder capable of revoking. Complete. remainder to surviving issue or if none. let alone an adverse one  In Camp v. Sue‘s interest in the trust is both substantial and adverse to exercise of Thelma‘s transfer so the gift of the income is complete. Completed gift The ability to alter the time or manner of enjoyment of the property does not make the gift incomplete. in effect. If a co-powerholder is adverse as to less than all interests in the property or trust. the gift is incomplete to the same extent as if the power were exercisable by the donor alone. the gift is complete at creation of the trust. (and e(ii) above). trust property would be distributed to Luke. is reserved in the donor alone  Ex: Thelma creates irrevocable IV trust nd transfers 1M to Friendly bank as trustee to pay income to sister Sue for life and remainder to niece. will become a fee simple interest. Commissioner: (not codified by 25. at which time the principal is paid to the beneficiary. Just about when A get it but she will get it. At termination. the power retained by the donor relates only to the time and manner that the income is received.  Ex an irrevocable trust continues for a period of 20 years. 14 . revoke. Completed gift. Tax court said 37 and he owed gift tax.2511-2(e) the taxpayer executed a trust in 1932 with income payable to his W during her life. or (3) a fiduciary power limited by a ―fixed or ascertainable standard‖ enforceable by the beneficiaries  Exception 1: Manner or Time of Enjoyment. D retains discretion to accumulate A‘s income and add it to trust corpus. Because the person with the adverse interest generally will not acquiesce in any exercise of the power to revoke. without the consent of any other person (Reg. 25. in conjunction with X. Thelma reserves right to add new income beneficiaries with Sue‘s consent. naming herself as trustee. The notion is that.‖  Note: Interest is monetary (not sentimental)  To the extent that the other person has a ―substantial adverse interest‖ in the disposition of the trust property or the income from the trust. the taxpayer. As trustee.2511-2(d). altering or amending the trust. Remainder is complete because no power to change beneficiaries.complete. In 1937.2511-2(d) a gift is not considered incomplete if the donor reserves the power merely to change the manner or time of enjoyment. the gift is complete. Income is payable to A while D lives. the property will be distributed to L. irrevocable trust and transferred 1M to Friendly bank as trustee to pay income to M for his life and remainder to L J retained power to terminate the trust. Commissioner). Nell. Because the beneficiary ultimately receives the income from the trust property. the power.  On the other hand. But if Thelma reserved right to add new remainder beneficiaries with Sue then remainder is not complete because Sue doesn‘t have any interest. to X. (25. Remainder interest is complete because if she terminates the trust.  Ex D transfers property in trust.

Even though J has the power. trust proepty will be distributed to Jenny‘s issue in whatever shares the trustee deems equitable As long as Jenny cant replace the trustee with herself or a related or subordinate party. happiness. 1(g)(2). education.  Rationale: donor has given up control over the trust property bc the beneficiary can sue for distribution of trust property. To the contrary. 25-2511-1(g)(2) discusses what standards are fixed or ascertainable: An ascertainable standard is one that is clearly measureable and on under which the holder is legally accountable.  Under Reg. maintenance or heath. maintenance or support.  Ex: Jamal creates IV irrev trust with Friendly bank as trustee. . as long as new trustee is neigher related nor subordinate to Jamal. trust and is trustee. or maintenance  D creates IV irrev.2511-2(b). to enable him to maintain his accustomed standard of living.power to benefit donor:  A donor can create a trust for her own benefit. and therefore has the power to reduce C's remainder interest.. At Jenny‘s death. Also has dirscretion to distribute trust property to any of Jamal‘s children for their comfort and happiness.2511-2(g)(2)  No: pleasure.  Just a fiduciary duty (act in good faith) is not enough to insulate from gift tax. If the trustee‘s power to distribute income was limited by an ascertainable standard. J does not have unlimited discretion to exercise the power. Of course. Trustee has sole discretion whether to distribute trust income to Jenny or accumulate it. support. with income to be paid to B for life. If Jamal retains the power to relace Friendly as trustee and become trustee himself.(g). or to meet an emergency.  Retained interest. the gift is complete and the entire value of the trust assets will be subject to the gift tax at the time the trust is created. Discretion also to distribute principal to any kid for health.. then the gift would be incomplete (25. comfort. powers will be imputed on him  But if Jamal can only replace Friendly with another corporate trustee.  Yes: HEMS: education."  An ascertainable standard for distributions is articulated in terms of the beneficiary's health. she will be deemed to have the trustee‘s powers. education. a transfer involving a retained power to change the interest of the beneficiaries as between themselves is nonetheless a complete gift if to the extent that the power is a "fiduciary power . subject to J's power as trustee to distribute principal for the HEMS of B after considering all other income and assets available to B. to invade the principal for the benefit of B.2038-1(a)(3). for his reasonable support and comfort. the gifts will be complete. Trustee must distribute income equally to kids. gifts of the income and the remainder will be incomplete. the income interest is not a gift because it is for Jenny‘s own benefit. If the donor‘s power is limited to replacing one corporate trustee with another corporate trutee or to appointing only a trustee that is neither related nor subordinate to the donor. welfare  Examples  J transfers property in trust. Rationale: no longer in control because must obtain consent of someone with adverse interest  Exception #3: Fixed or Ascertainable Standard. Commissioner). If the trustee has any discretion over distributions that is not limited by an ascertainable standard.2511-2(c). then the trustee‘s power will not be imputed to the donor (Rev. limited by a fixed or ascertainable standard . as trustee.. 20. or maintenance. remainder to C. Estate of Wall v. Even though Jamal is not serving as trustee.  Jenny creates IV irrev trust with Friendly as trustee. 15 . the donor will be deemed to have those powers. ruling 95-58). support. and the court will enforce the standard. the transfer will be complete because Jenny has given up all dominion or control over the preprty. J is deemed to have relinquished sufficient dominion and control over the transferred property. desire. Trustee has sole and absolute discretion to distribute trst property among Jama‘s children or to accumulate it. J's power is limited by an ascertainable standard relating to B's health. support. This is true even if the donor has not exercised the power to replace the trustee (Reg.. §25. Both income and principle are completed gifts. -1(g)(2). 25.  Retained interests: powers held by others:  If the donor has the power to replace the trustee at any time for any reason and appoint herself as trustee. education.

accepted by drawee bank. Rather. (Merrill v. §25. cashed or presented in the calendar year for which completion is sought and within a reasonable time of issuances  The donor intended to make a gift  The delivery of the check was unconditional  The donor was alive when the check was paid by the drawee bank.yes of ½ amount  completed gift when title passes. §25. Unconditionally delivered and promptly paid will relate back to when written.…the gifts should relate back to the date of deposit‖ (see also Rev. there is no completed gift to B until B draws on the account for his own benefit..  16 . then gift is complete when son turned 21 and could sue Dad to enforce contract if he doen‘t pay when son is 23. a joint account belongs to the parties. on date of marriage (but who cares because qualifies for unlimited marital deduction 2523). Under Reg. probably.  Checks:  Gift by check is complete when check is paid. the gratuitous promise to pay someone‘s obligation in the future is not a completed gift of property.2511-1(h)(5). if a gift is made in property. Accordingly..so may be a difference in annual exclusions. Commissioner held that ―where noncharitable gifts are deposited at the end of December and presented for payment shortly after their delivery but are not honored by the drawee bank until after the New Year‘s holiday.. Reg. when withdrawn….  Prenups:  marital rights are not consideration so transfer of property pursuant to a prenup is a gift. Rul. In general. during their joint lifetime.i.  (25-2511-1(h)(4)). both having reasonable knowledge of the relevant facts and neither being under a compulsion to sell. 96-56)  Requirements from Rev-ruling 96-56:  The check was deposited.  Joint tenancies and tenancies in common:  is it a gift when put kid‘s name on deed? 25. 2512-1 provides that. certify.  Miscellaneous completions  Joint bank accounts:  creation is a revocable transfer because either joint owner can withdraw the entire amount on deposit. Fahs).2511-1(h)(4). if A uses her own funds to create a joint account for herself and B. Metzger. Said as long as decedent still alive then we'll loko back to when checks are written.  Promissory Notes. and  The check was paid y the drawee bank when it was first presented for payment. or negotiated for value to a third person. Not a completed gift until the funds are withdrawn.  Problem arises when talking about tax year because maybe check is written year end but paid next year..e. Page 99 of Willbanks. the promise becomes a completed gift when the promisor actually makes a payment in satisfaction of that obligation  Subsection to is there a gift: what is its value?  In general: Valuation of Gift.the donor could force the trustee to distribute pursuant to a standard as a result the donor would be able to control who received the property. The court in Metzger’s Estate v.2512-1 and 2031-1(b) defines “value” as the price at which the property would change hands between a willing buyer and a willing seller. a gift is deemed complete on the date the check was either delivered to or deposited by the donee in the donee‘s account. in proportion to their respective net contributions. Completed.  Promises  Not a gift until pay: "I promise you 1k when you graduate"  Contract: if you contract with son to pay 25k if he quite smoking before age 21. its value at the date of gift shall be considered the amount of the gift. §25. however.dont need to look at it. ex: check written 12/25 then taxpayer dies on Jan 5 and the check is negotiated or paid on Jan 6 then the property is still considered property of the TP's estate.  Under the ―relation back‖ doctrine. Completion occurs when no dominion or control.. Reg.not when the account is set up.

b. 2512-5T for interests for life or term of years or remainder or reversionary interest. valued at 0. the prospects for the market for O‘Keefe works as of the date of death. use actuarial tables. If is famliy. taking into account the location. The law will allow a discount or require a premium on the valuation of these kinds of assets." iii. and the art market in the US.  Lack-of-marketability discount –  20-2031-1(b) states that FMV is established in market in which item is most commonly sold to the public. personal residence trust]. Replacement costs  Look at regs for particulars re: stocks and businesses. the types of works to be valued. T shall distribute all fo the trust property to X‘s sister. Tf. bc interests in those benefit from a liquidity premium. If qualified. 19.2512-1: Price is that in the market where the public usually obtains this item. included in his estate pursuant to 2036(a)(1) because he had the right to income for his life. X transfers 1M to T as trustee to pay so much income and or principal to X as T shall determine in the exercise of sole and absolute discretion. X‘s retained interest (lifetime income) is valued at 0 becaue it is not a qualified interest with meaning of IRC 2702(b). For family. annuity or unitrust).entire amount (D's retained interest=0) unless retained interest is qualified. factors may be relevant:  Similar sales. taking into consideration the location. d. Ex. If income interest is not qualified (e. 17 .25. Stock is mean price on date of transfer  Discounts (for all these.  2512-1 and 20-2031: particulars of valuation  If it‘s stock and during the day traded at a high of 100 and a low of 98 the value of the gift is 99. Upon X‘s death. gift value. Ex. IRC 2704(c)(2) – more suspicious i. FNB is to distribute property to daughter Sally and. D or any applicable family member (IRC 2701(e)(2)) "retains an interest. even this presents difficulties because transfer restrictions or size of the property interest will also affect valuation.d. e. burden of proof is on TP: In general.  closely held business interests can claim these where value of the enterprise is initially valued by way of comparison with publicly traded enterprises. What result when D funds the trust? IRC 2702 applies. Remainder interest = zero (unless qualified). What result when Daniel dies? Full value of trust as of d. If the market is restricted to a limited group (like the donor‘s or decedent‘s immediate family members) the value fo the asset will undoubtedly be less than if there were no such restriction. bc assets are not in fact sold on valuation date it is difficult to est. X is deemed to have transferred 1M to her sister on Oct. 1) Valuation of remainder: (727) a. Present valuation of estimated future net yield. even though sister will not likely receive property for a long time. if she predeceases to her issue. ii.1: D establishes an irrevocable IV trust with FNB as trustee to pay the income to himself for life. which is reflected in higher stock-market prices  Can also be taken if the value of the enterprise is initially computed by adding up the value of the constituent asset of the entity. So gift tax would be full value of trust even though Ann doesn't get anything right now  c. a unitrust interest. At D‘s death. value unless the asset is sold in the public marketplace.‖  20-2031-1(b) states that FMV is established in market in which item is most commonly sold to the public.o. So full value of trust considered a completed gift to Sally (even though no guarantee when she will receive). Expert appraisals. Other bids/offers. which in most cases would be the retail market. Valuation is extremely fact specific. depends on D's age. ―value is determined under 7520—qualified means 2702(b) [an annuity interest. Non-family. taking into account the location of the item. term of interest and applicable interest rate IRC 7520 (gives an assumed rate of growth) (IRC 720 gives assumed rate of growth). any noncontingent remainder interest if all other interests are annuity or unitrust.2: On October 19.g. 2010. Value of the gift is the value of the property transferred less the value of the donor‘s retained interest as determined under 2702.  O‘Keefe: ―it is necessary to examine the history of the market for O‘Keefe works. (25-2512-1 also).

In the gift tax. Assume the decedent owns 10k shares of stock. the blockage rule is applied to each separate gift.  Blockage discount for stocks (25. 25. may be a more accurate indiction of value than market quotations. the supply would exceed the demand despite the price.  i.2512-2(f) provides that the degree of control of the business represented by the bloc of stock to be valued I among the factors to be considered when valuing stock where there are no sales prices or bona fide bid or asked prices. was substantially less than the total of the FMV of each individual work. reflecting that if 500 separate parcels. is factor of corporate control in the fam to be considered in valuing the transferred interest? each of 5 ids gets 20 shares of stocks so value of 100 is a million but value of any 1/5 is much less because non-controlling share  Here.if giving away controlling interest in company will be worth more than if give away minority interest. the sare of other family members will not be aggregated with the transferred shares to determine whether transferred shares should be valued as part of controlling interest.  Applied to fractional interests in real estate too. the done and other Ss.give 200k shares of stock and co only has 1M shares that will totally skew value but if give each person 10k then don‘t need blockage discount because wont skew market  O‘Keefe: Owned about 400 paintings at death worth 72M each. 25.. Would look for expert to value. Minority interest discount. ct said ½ the value of the art would be discounted by 75% and other 1/2 by 25%.  Ex: Rev Ruling 93-12:  Facts: P owned stock at X corp. therefore. the price at which the block could be sold as such outside the usual market. Even if each acre was identical. If all those shares were offered for sale at one time.  Issue: If donor transfers shares in co to children. Look at each separate gift. 18 . No family aggregation even if all relate. price would decerease because the spply would exceed demand. Here. it would depress market price for each item. Minority interests to 5 ids should be valued for gift tax purposes without regard to the family relationship of the parties.  When corporation with single class of stock.e. not FMV. each one acre in size were offered for sale on the same day.  If the donor can show that the block of stock to be valued.2512-2(a) tells us the value of stocks and bonds is the FMV per share or bond on the date of the gift. transferring 200k. Transferred all his shares making simultaneous gifts of 20% to his 5 children. highly unlikely that buyer would pay that. prospects as of DoD and types of works to be valued and art market. as though an underwriter. Ct noted that if all or substantial portion were offered at ne time.  Has also been applied in cases involving estates of prominent artists (O‘Keefe) .  Concept: based in notion that a minority interest in a closely-held business entails downside risks that would cause a willing buyer to bid less for this interest than an amount based on the pro rata share of this enterprise represented by the interest. Broker advised trustee that any attempt to sell them all would depress price to about 7/share (trading between $9 and $11).  Stock is thinly traded and usually only 20k shares are traded daily on exchange. is so large in relation to the actual sales on the existing market that it could not be liquidated within a reasonable time without depressing the market. the price might be that which an underwriter could obtain rather than a sale on the open market (20-2031-2(e).  And have to look at each separate gift. 25-2512-2(e). with reference to each separate gift.2512-2(3))  The size or amount of property that is subject of gift or in the decedent‘s estate can affect its value. ―the fmv of the aggregate of the works in the estate.‖ After reviewing history of her market. as of the date of death. Regulations acknowledge this and note that in such a case. notwithstanding the family relationship of the donor.  One acre of and in a particular location is selling for 10k an acre. (2be)  so what happens if in small company and amount of stock will skew the price? Blockage discount--not mean price. Price would be less. Dad owns 500 acres of land there so worth 5M? Probs not.

§529(c)(5). books. What value should be used here?  we can't aggregate what a donor gives out.Planning technique: See also nonbinding PLR 200602002—can remove tax-free large portion of assets by prepaying multiple years to tuition.. 19 .  most common example is a property subject to a mortgage. 4.  Qualified transfers of tuition/ medical payments  In general: Under 2503(e).fact based analysis.  Ex: D wants to transfer wholly owned company to daughter. the assumption by the done of it is an economic benefit in money‘s worth to the donor. dorm fees supplies. Assume same values and that broker advised that sale of 2k would not depress stock value. Since the donor is legally liable for the gift tax under 2502(c) and the payment of it would not itself be a gift. if separating gifts by year probs ok but not if by as week. (reg 25-2503-6(b)(3)). Id.. look at different transactions differently..revenue ruling from reading--if give out a bunch of differet distributions then cannot aggregate.  2503(e):Contributions to a 529 plan.  Educational organization must be one that maintains a regular faculty and curriculum and has a regularly enrolled group of students in attendance at the place where educational activities are regularly carried on. Qualified educational and medical expenses (2503(e). or for the purpose of affecting any structure or function of the body or for transportation primariy for and essential to medical care or for medical insurance premiums.  Not limited to degree candidates or by educational level and it covers part time study.  Note: don‘t have to be related to the person  Irrelevant in case of minor children because legally obligated to pay for their edu/med expenses  Reason. Appraiser said stock valued at 6k per share. Currently D owns all 100 shares of stock in the company..  Medical expenses and insurance premiums (213(e) defines)  Includes payments for diagnosis. D transferred each of her 100 family‘s 2 shares of the stock. the final question is whether there are any deductions or exclusions available to relieve some of the gift tax due. mitigation. Also want to avoid transferring the prop at minority interest to person or entity that you still control  Will the fact that child owns 60% of the corporation‘s stock at D‘s death prevent the estate from claiming a minority discount at that time?  Yes. etc. or prevention of disease. Stock therefore has FMV of 10l/share. D wil then bequeath remaining 40 in will. the gift tax does not apply to qualified transfers. Why?  MINORITY DISCOUNT! beware IRS says that this a step transaction. cure. FMV=1M. or expenses that are not direct tuition costs (Reg.  Note can preload on 529 up to 5 years.. Net gift of 35k. Does not apply to amounts paid for by insurance that are reimbursed by donee‘s insurance. Is there an exemption. treatment..Donor transfers property worth 100k to done and done assumes a mortgage that is 65k.breaking down 1 transactions into steps and we should look at whole thing together. can still get minority discount as long as not step. Risk: might drop out. D‘s atty advised her that she can reduce transfer taxes by making gifts of 20 shares to B for next 3 years.  Only transfers paid directly to providers qualify (not excl if reimburse person or ask them to pay)  Tuition paid to educational organization  Does not include room and board. which is any amount paid on behalf of an individual (whether or not a family member) as payment of another‘s tuition (directly to educational organization) and medical bills (paid directly to providers for medical care/ insurance.gift is made on condition that the done pay any gift tax due. 25-2503-6(b)(2)). so would be 9 no blockage discount look at all gifts separately Transfers for partial consideration  Off-set rule  ―net gift‖ transaction. move away. exclusion or deduction?  Assuming the gift was complete. Id. Tuition payments cannot be refunded and are forfeited if the grandchildren do not attend that particular school. 40% isnt a controlling interest  Ex: instead of transferring 200k.

SC said that beneficiary and not the trust was the donee. together the couple can only qualify for 26k to one individual. Future interests includes reversions.  So 2 steps here: 1.  Remember Gift splitting election.g. H and W can be presumed to split and then 2.  Ex: Cannot transfer money into a trust and say it must be used for tuitions. and whether or not supported by a particular  20 .2503-5(c) #2). she would not have to file gift tax return--to as many different people every year as you want. then make gifts to whoever want to benefit OR pay medical or education or give a fractional interest in house but have to get valuation  Rationale: administrability.i.2503-3(a) says no part of the value of a gift of a future interest may be excluded in determining the total amounts of gifts made during the ‗calendar period. if any. in Helvering. so 24.  Note: doesn‘t double the total benefit.  Annual exclusion 2503(b) [and remember gift splitting 2513] 122 of CB has old rates.The function of the annual exclusion is to obviate the necessity of keeping an account of and reporting numerous small gifts and.  Present interest requirement to annual exclusion 25.. and no restrictions on distributions. or enjoyment of the property or income from the property (such as a life estate or term certain) 25. If there are not mandatory payments of income.rescued a large class from being tax-evaders. 15k to neighbor=115k  Take out 26k (her and her husband‘s annual exclusion) for each gift. H can‘t give 26k to child and W gives 26kto child an they both claim that the 52k is sheltered. Many who paid for these tings for kids and grandkids had no idea that gift tax was involved. the beneficiary must have right to demand payment (crummy right). must signify consent on tax return. adjusted for inflation. so wife only has made 24k of taxable gifts.  Remember: no getting around it like Heyen (indirect transfer where making gifts to large number of individuals who then give back to family members of the donor) or reciprocal gifts (Grace. 25.2503-3(b)  To qualify for the annual exclusion.000 per person per year.give to my 2 kids and your 2 kids and you do same. (or 26.000 in the case of split gifts by married couples). there must be a present interest in the gift. Currently allows 13k of gifts made to each person per year not to b included in the total gifts for the yr.  Future interests are not excludable.0=48  Assume that is given ½ by spouse. Remember there must be mandatory payments of income. 50k to friend.  Use: So if want to reduce estate. (25. to fix the amount sufficiently large to cover occasional gifts of relatively small amounts (e.]  This was to avoid geographical discrimination-so decided to confer benefits on transactions not involving community property in an attempt to create parity between community property and common law property states. income producing property. possession.  Requirements:  Both spouses must be citizens of the US  Donor must not give spouse a general power of appointment over the property  And donor must be married to spouse at time of gift and not remarry during calendar year  Can only include gifts of present interest-not future interest!  [note: must be elected by filing a gift return signed by both spouses.2503-3(b). on the other hand.Rationale: Administrability. In general: Allows 10.. Wife makes following gifts: 50k to son.  Requirements:  Such present interest much attach to a single identifiable done  Note.e.‘‖ The gift will qualify as a present interest if the transferee has an unrestricted right to the immediate use.  Exam strategy: If the gift is not in trust look for any restrictions imposed on ability to transfer the asset. wedding and Christmas gifts). Any gift in excess of this amount is applied against the unified credit‘s applicable exclusion amount. 2513: A gift made by one spouse to any person other than his spouse shall be considered as made ½ by him and ½ by spouse. only the income interest will qualify as present. whether vested or contingent. They can each use their annual exclusion amounts to cover it. If the gift is in trust. 24.  Ex: Gordon stood at street corner and handed out 5 envelopes of 13k each. Example:  In 2004. So each interest must be examined to determine if there is a present interest. remainders and other interests or estates.

possession or enjoyment at some future date or time.2503-3(a). the entire value of any future interest gift is a taxable gift for the year in which the gift is made (to the extent the gift exceeds the applicable exclusion amount). the transferee must have an unrestricted right to the immediate use. trustee can invade corpus for comfort and happiness of grandchild but income supposed to go to child—no go for present interest.  3(c) Ex 4: Net income to F for life w/ remainder to G on F‘s death.  Ex: when there is a gift of income and a gift of the remainder – there will be an exclusion for the present value of the interest income. Ex of present interest:  cash or property in fee simple qualify  -3(c) Ex. And if T‘ee can change the income interest for someone else. Transfer insurance policy on life into trust created for benefit of D and only upon C‘s death income to D. Maryland Nat‘l Bank For trust interest. B‘s income interest is NOT a present interest because makes the value of the income interest unascertainable.e. income will be paid to K.  3(c) Ex 5: corpus of trust created by J consists of prop subject to a mortgage..  Transfers to minors.  Ex: A for 20 yearsto B until his death  to C.2503-3(a))." (25. Only argument is that if it‘s an ascertainable standard. all incidents of pwnerhsip in the policy (including right to surrender the policy) are vested in M. To qualify as a present interest.  I. but no exclusion for the remainder interest (and there will be no exclusion in the year that the remainderman gets the remainder  Income interest is only considered a present interest if the payments commence immediately About trustee‘s power to invade corpus  2503(b)(1).see below (2503(c)). 6: L pays premiums on a policy of insurance on his lie. promissory note or payments under an installment contract.―The possibility that a present interest may be diminished by exercise of a power is of no consequence unless the interest will pass to someone other than the done (i. 21 . The §2503(b) annual exclusion is not allowed for a gift of a future interest in property.  Spendthrift provisions: prevents bene from anticipating or assigning interest. B and C don‘t have present interests. power to invade corpus for B. But ok if child has the remainder interests and can invade for child‘s comfort or happiness)  If A creates trust income to B. Doesn‘t affect whether benes have present possessory interest  If trustee can change an income interest but it‘s a change that affects only recipient then still present income gift.     interest or estate which are limited to commence in use. 1  -3(c) Ex 2.  Ex: T‘ee is given the administrative power to invest all 100k trust corpus in wide range of permitted investments. power to invade corpus for C.e. then that makes the income interest not a present interest.. you could value it. B‘s income interest is a present interest  If A creates trust income to B. In other words.2503-3(c) Ex. 25. After mort. NO other person has right to income interest so it‘s PI. (just can’t delay). or enjoyment of the property or the income from property.2503-3© Ex. 2.needs to be clear that there will be substantial income distribution that can be valued (if facts make it uncertain that any income will be distributed then exclusion denied). is paid in full. if A creates a trust tht says income to B power to control corpus for B then B has a present interest.  Normal administrative powers don’t take present interest away. 25. But not if transfers policy to trust. possession. Trustee has uncontrolled power to pay over the corpus to F at any time. The exclusion under 2503(b) is only available to the extent of the value of a present interest transferred to an identifiable done. Trust terms provide that net income is to be used to pay the mort. have to use each separately. Rather.  Uncontrolled trustee discretion: 3(c) Ex 3: net income to be distribted to 3 children in such shares as trustee in uncontrolled discretion deems advisable. Same is true of a bond.. even gifts that delay financial benefit might qualify it it‘s the nature of the property rather than method of transfer that imposes the restriction like a LI policy even though won‘t pay out until death (25.fine. Ex of future interest:  Discretion to withhold payments: 25.2503(b).

The value of this income interest at the time of transfer could be determined using the IRS tables. when is exclusion denied? Trustee administrative powers]  Gift of non-income producing property. To accomplish the desired valuation discounts. (timber) Gen: a gift must provide substantial present economic benefit to qualify as a present interest for the §2503(b) exclusion.can trustee not reinvest and makes those distributions out (rosen).   Note: if power is to invade half the corpus then B has a present interest with respect to other half income interest Rationale. It‘s hard to evaluate future worth Breakdown of requirement:  Present Ascertainable Interests. not at some future time.which index present rights to the FMV rather than their profit histories  But see Berzon where same as Rozen but denied.  Each such interest must be capable of valuation (i. Company was profitable and retained earnings for growth. actually showed losses.  But if J transfers 100k to trust with bank as trustee. Administrability. Not present right bc couldn‘t compel. Even though the actuarial tables give a value for the income interest. The LLC operating agreement contained the following provisions: (1) The husband was manager and had discretion over distributions of available cash.  If the grantor created a trust and the trustee was required to distribute all of the net income of the trust to the beneficiaries each year.‖ The major question is whether there’s a right to demand money presently. The LLC held timber prop and the H and W expected no current income from the LLC. and (2) a member could not transfer an interest in the LLC without the consent of the manager.  Hackl: the exclusion can be denied even for outright gifts of non-income producing property that the donee is prohibited from assigning.. contributed property to it. Should use the actuarial tables…. National Bank v. Very fact-specific.. When value is nebulous or nonexistent. The case highlights the tension b/t desired valuation discounts for transfer tax purposes and the §2503(b) req that only present interest gifts qualify for the annual exclusion. Such a 22 . and in Hackl the IRS successfully asserted that the restrictions created future interests that negated the §2503(b) annual exclusion. Like Rosen because choice. but they expected eventual capital gain. Here. and transferred interests in trusts for their descendants. Also GORDON: if re-invest dividends.  Use actuarial tables supplied by treasury (7520)  Interests subject to the exercise of discretion cannot be valued:  Non-income producing property like unimproved real property or stock in a co that never pays (and is unlikely to start paying) dividends is transferred into trust there will be no annual exclusion. US [how to value income interests. there is no exclusion available).e.  Dissent: Compared to publicly traded corporate stock which confers present interest even though never paid dividends. Can't create it if no present right to it. Can‘t use actuarial table if not actual value! ―Tables are appropriate only when there is proof that some income will be received by the trust beneficiaries. These very same restrictions burden the interest that is received by the transferee. If kids can compell trustees. not a real right because history of no and no foreseeable opp in the future. And the trustee has the power to distribute principal to D at any time in any amt—no annual exclusion bc the present interest is not ascertainable. And C is to receive all income annually and D is to receive corpus at C’s death. there is nothing to the interest. the gift would qualify as a present interest. would be valuable if make multiple family residential dwelling but choosing to use as farm and family rental. (Rosen). substantial restrictions are imposed on the interests transferred by gift because the restrictions enhance the discounts.. Willis‘ partnership in MD was not profitable…consistently at a loss. The decision is particularly important for gifts involving interests in closely-held businesses.. Unlike Rosen. must be definite value in order to calculate the annual exclusion. (MD)  Property should produce income.  Md.  Facts: The Hackl case involved a H and W who created an LLC. however.

donors will make gifts pursuant to UTMA or UGMA. §2041 applies bc the 23 . Assuming these benes do not withdraw prop from the trust.  H was manager of LLC and had complete discretion over any distributions So even though kids got all income. another adult individual. If the custodian is not the donor but is the parent and dies before the minor reaches 21. securities. w/ statutory authority to apply the prop and the income therefrom for the minor‘s benefit with a minimum of legal supervision. But guardian must obtain court approval and investment powers restricted. no gain or loss is recog on the sale of these LLC interests.  Says: No part of a gift to someone under 21 shall be considered a gift of future interest if the prop (1) may be expended by. however. such a transfer ―can hardly be called a substantial economic benefit. or a bank. but prop is under control of custodian who may be donor or other party w/ legal capacity). The IRS has ruled that gifts under these statutes are present interests eligible for the annual gift exclusion  UGMA: Parent transfers 13k to a custodian for kid under state UGMA that permits custodian to distribute income and principal for benefit of child while child is under 21. which give custodian broad powers to deal with the gift prop w/o court supervision/ allows investment decisions to be governed by the prudent person rule. court said not present interestsnothing compelling him to pay out to kids and any economic benefit the donees might obtain is not a present interest.  UTMA: the donor. In this case. the property will be in the donor‘s gross estate under 2036 or 2038 because the custodian had broad powers to use the property for the minor‘s benefit. Even if a member could violate the operating agreement and sell his shares to a transferee who would then not have any membership or voting rights. any remaining income and principal will pass to child when she‘s 21 or to her estate if she dies before 21.  2503(c): About Present interest transfers for the benefit of a minor: Provides a special exclusion for gifts for the benefit of persons less than 21 that otherwise would be considered future interest gifts under 2503(b). (outright transfer of cash.this is present interest. If the minor dies bf then. the §2503(b) present interest requirement means that the donee must receive a substantial present economic benefit under all the facts and circs of the case. the payment is made to the minor‘s estate.  Gen: outright gifts may not be desired for fear of youthful and unfettered dissipation/mismgmt & minor lacks capacity to sell/otherwise deal w/ the prop. partnership had discretion. The unexpended income and principal are paid to the minor at age 18 (or the age of majority under state law).2503-4(b) says doesn‘t matter if law says minor cant exer poa). The benes should be given an unrestricted right to withdraw their share of the annual additions to the corpus so that the contributions qualify as present interests under 2503(b) (Crummey). Sev options in ascending order of good: Non-trust 2503(c) transfers to minors:  Guardian: Parent transfer to legal guardian. in gross estate again. life insurance policies or other eligible property to a minor. the trust can then buy the LLC interests from the grantor. If custodian actually uses property for minor‘s support.  Custodial gift: To avoid guardianship problem. So what would you do? Lifetime credit  Held.‖  Avoiding Hackl.transfer without the consent of the manager would cause the transferee to be considered an assignee with no right to become a member or to participate in the business.  Disadvantages: prop must be distributed to beneficiary at age of majority. If the statutory requirements are met. the donees could not expect that any income from the LLC would flow to them because the operating agreement provided that all distributions were at the discretion of the manager. the entire value of property transferred will be considered a gift of a present interest that qualifies for the annual exclusion under §2503(b). Moreover. be payable to the estate of the donee or as he may appoint under a gpoa as defined in 2514 (note: 25. or for the benefit of the donee before his attaining the age of 21 and will to the extent not so expended pass to the donee on his attaining 21 and if the donee dies before that. future interests. If the donor is the custodian and dies before the minor reaches 21. Since the trust was created as a grantor trust. set up a trust and make a gift to the trust each year = to the annual excl amt for each bene. the parent will be taxed on the income from the property. the restrictions on the transferability of the shares meant that they were essentially without immediate value to the donees.

The practical effect here is that benes are discouraged from exercising this power and rarely ever do. So if 4 children then 52. which gives the parties sufficient leeway.  Time to withdraw: Right to demand must be meaningful.2503-4(b)(1): The governing instrument cannot place ―substantial restrictions‖ on the trustee‘s discretion here. 30 days is generally considered suff. Bc a bene may obtain immediate enjoyment of trust property by exercise of the demand right. and it is not uncommon for grantors to want the bene not to have outright ownership over the prop when the bene attains the age of 21 years (as required in a 2503(c) trust). describes a trust the contributions to which qualify for the annual exclusion under §2503(b) bc the bene has an unrestricted right.  Notice Provisions. fall outside scope of the ―Crummey‖ trust). but also wants the transfers in trust to qualify for the 2503(b) annual excl as a PI. it is generally prudent for the trust instrument to provide for notice to the trust beneficiaries within a reasonable time. education and welfare. support. (69-345)  Note: a 2503(c) trust can be set up to avoid termination when the donee reaches age of majority if it gives the donee a right to demand the trust property at 21. 24 . The withdrawal right. The notice req‘s defined in the trust instrument must be strictly adhered to so that the bene will not be deemed to have a FI in prop transferred to the trust (i. NOT care. most donors prefer to create a trust to benefit minors. care.  The Crummey trust. Rul.  I. is referred to as a ―Crummey‖ power. Such a grantor faces a dilemma bc the grantor wants to protect the property from the possible indiscretions of the 21-year-old bene. to withdraw from the trust an amount equal or lesser than 1) the amt transferred to the trust by the grantor during the year or 2) the max annual excl. distributions benefit the parent. but the right brings the annual gifts to the trust under the PI req for the annual excl. so if trying to get money out of estate with these annual exclusions.custodian‘s powers are equivalent of a general power of appointment. This is the same as a distribution to a creditor of the parent.000 will qualify. comfort.  Then if the power is not exercised. and welfare" will pass muster because those standards impose no objective limitations on trustee's discretion. named after the Ninth Circuit decision in Crummey v. which generally is limited to a specific period of time following a contribution to the trust (which is communicated by notice from the trustee). in Cristofani ok at 15.2503-4(b)(1). cant be substantial restrictions on trustee‘s ability to use the property for the child‘s benefit (can‘t be only for illness or emergency.  Trust instruments must strictly adhere to 2503(c) language  Note: § 25.e. The donor tf is entitled to the §2503(b) annual exclusion with respect to contributions that are subject to such ―Crummey‖ power  For each beneficiary. Exclusion is lost if the trustee‘s discretion to expend for the benefit of the minor is subject to substantial restriction (25. Rev. This dilemma gave rise to the ―Crummey‖ trust under which the property doesn‘t need to pass to the donee at 21. the gift amts become part of the trust corpus and cease to be subject to the demand power. Can be ascertainable standard. education. then doesn't work Trust 2503(c) transfer:  2503(c) Trust: B/c of the disadvantages/ limitations of outright gifts or gifts to custodians or guardians.included in parent's estate. Because the parent is legally responsible for supporting the child. 81-7 (where bene given no notice of additions to trust and had only 3 days to effect withdrawal—shows intent of the donor not to make a present-interest gift).too restrictive).e. So 13k qualifies each yr bc the bene had the right to withdraw it. Flexible. Commissioner.  The bene would have to be notified of right and given reasonable time to response. the bene has a PI in prop transferred in trust to the extent the prop is subject to the power— even if the donee doesn’t actually withdraw property from the trust. TF. The donor may think that conferring this right at 21 may cause undue risk. Power holders much be given notice of their right to withdraw.. What if you don‘t want property to be able to pass to child at 21?  Crummey [works for child or adult and need not be trust beneficiary]  In general: Trust grantors often use trusts to transfer prop for the benefit of family. exercisable annually. They must also be given notice of contributions to the trust that trigger their right to withdraw. in writing or orally.  Transfer will not qualify where trustee required to consider minor's situation and resources before applying funds but trust for "support. Biggest disadvantage: if a parent is a custodian and dies before kid reaches age of majority.

R 76-360). each grandkid had a present interest that qualified for the annual exclusion. The court held that Crummey does not require a vested present or remainder interest in trust corpus or income to qualify a demand right for the §2503(b) exclusion.  §2523(a) grants an unlimited deduction for qualified gifts to a spouse.taken after annual exclusion (2524)  §2522(a) provides an unlimited deduction for transfers made for public. Note or Life Insurance Policy. and enjoyment of the property‖ If the stock is subject to transfer restrictions. and it‘s taxed on her death (tax at each generation).  Vested remainders because no right to ―immediate use. bc the grandkids had the legal right to withdraw trust corpus w/i 15 days following any contribution.2503-3. since the SH‘s enjoyment of this gift is dependent on the declaration of dividends or the liquidation of the co. The donor intended to benefit grandkids and there was no agreement that they would not exercise their powers of withdrawal  Appointment to self or others in crummy: if the holder of the gen‘l power transfers a prop to someone else pursuant to that pwr. §25. §25. Rationale recipient of these gifts can immediately sell the bond. Also. who were to receive income from trust until D died then trust terminated and kids got property if they were still living.if the corporation is closelyheld. Gift to a corp. Contingent beneficiaries can be given Crummey powers: Cristofani’s Estate: court allowed annual excl for benes w/ Crummey withdrawal powers who were contingent beneficiaries in the remainder of a trust Facts: D created irrev trust for benefit of her 2 kids. 2523). charitable and religious uses. an outright gift of a bond or note or LI policy qualifies even if the obligation bears no interest or bears interest payable only at maturity. However. holder made a gift. possess or enjoy it since she can‘t sell. Held. recipient might not have immediate right to use. possession. the gift is a FI for which no exclusion is allowed Is this a present interest?? YES  Outright gift of cash or property or simple income interest in a trust  Business: Gift of corporate stock. Trustee could distribute trust principal to children for HEMS.transfers to charitable orgs and to spouses (2522. 5 grandkids were contingent benes.  However. note or LI policy to another party and ―cash out. gift. this was undesireable in large states through 2009 bcause H‘s exemption equivalent amount would have been wasted so in 2010. in proportion to their respective interests in the cor.  Gift to 2503(c) minority trust  Transfer subject to Crummy withdrawal rights Gift of Bond. (Rev. The Tax Court concluded that.  Only for gifts that qualify under 2056 and 2523. Both kids and grandkids given right to withdraw an amount = to annual excl w/i 15 days of a transfer by donor.. 2514(b) NO  Gift of interest in wholly discretionary trust or trust where T‘ee can accumulate income.  Criticized for being illusory.  Avoids double taxation to H and W so that H can bequeath everything to W. introduced portability where deceased souse can transfer his or her unused exemption equivalent to the SS. recipients could not compel distributions or withdraw capital accounts without managerial consent or transfer interests freely. a gift made to a co is gen treated as a gift to the individual SH.‖  Gift of promissory note  Gift of partnership interest (usually) (Hackl) Not if interests are significantly restricted.2511-1(h)(1). or transfer it. IRS challenged validity of powers in grandkids but lost. then stock is not a PI and doesn‘t qualify. 25 . Under Reg.  Contribution to 529 plan  Deductions. Hackl purpose of co was to hold/acquire land for long-term development and it would not make any distributions for a number of years. might not pay dividends but this alone doesn‘t prevent it from being a present interest.

Gross estate  The gross estate includes Property in Which Decedent Had an Interest. real or personal. the election may only be made if it brings about a decrease in both the value of the gross estate and the amount of the estate tax  Look at Estate Tax overview for everything estate includes. That this is not broad and other provisions generally expand its scope. the value at the date of disposition. transfers for spouses.  Note: Alternate Valuation Date. is defined under §2051 as the value of the gross estate less allowable deductions. However. prior gifts push the taxable estate into progressively higher rate brackets.‖ 26 . Similar to gift tax. however. If it is a completed gift. Rationale: prevent estate tax avoidance  Willing buyer/ willing seller (discounts for lack or marketability.  Tax Rate. The tax is determined by applying the rates and computation method of §2001(c) to the taxable estate. depending on their cumulative size. under §2032(c). incl. §2031(a) states that the decedent‘s ―gross estate‖ shall be determined by including the value at the time of his death of ―all property. Unified Credit. §20. This grand cumulative total is then subjected to the rate schedule of §2001(c).‖ defined in §2001(b) as the decedent‘s taxable gifts made after 1976 and not otherwise included in the gross estate.2031-6).  Note: On valuation. However. Appraisers required (20. wherever situated. the value at the time of his death of all the property. Nonresident aliens are subject to estate tax only on property situated in the US (2101-08) A former US citizen or resident claiming nonres alien status who is subject to 877 is subject to US estate tax on worldwide net wealth if she is present in US for more than 30 days in year of death] ―Taxable estate. Note.800  RESULT: few. The executor may elect to value the property included in the gross estate as of a date six months after the decedent‘s death. The estate tax is imposed by §2001(a) on the taxable estate of every individual who at death is a citizen or resident of the United States.. tangible or intangible. real or personal. Value d.2031-1(b) provides that the measure of value for the purpose of determining the gross estate is the FMV of the property §2033 makes it clear that the value of the gross estate shall include the value of ―all property‖ to the extent of any interest in that property held by the decedent at the time of death. charities and political orgs and for tuition and medical expenses)  Credit: $345. wherever situated. The basic computation of the estate tax takes this form:  Gross Estate  Deductions  Net Taxable Estate  x Tax Rate  Tentative Estate Tax  Credits  Estate Tax  Gross Estate. tangible or intangible. in the case of property already sold or otherwise disposed of by the estate.d. Generally. to the taxable estate are added all ―adjusted taxable gifts.  To make it clear that an interest in property will be included in the D‘s GE even if he does not own legal title to all of the bundle of rights in the property. §2033 goes on to state that 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.o. [Note. Thus. it will not be included in gross estate There are. §§2031 and 2033. Under the unified rate schedule.  Section 2505 provides a credit against the gift tax that allows a TP to a specific amount (exemption amount) during life before paying any gift tax  Exemption amount: $1M (in addition to the annual exclusions.‖ Reg. or. under §2031. some exceptions  Basic Formula. §2032(a) provides for an alternate valuation date. from which is subtracted the tax on the decedent‘s post-1976 gifts. Under §2031. instead of at the date of death. lack of control and blockage. the value of the decedent‘s gross estate is determined at the time of death. the value of the gross estate of the decedent shall be determined by including to the extent provided in this part. if any TPs ever pay a gift tax! The exemption amount is coordinated with the unified credit n the estate tax (§2010) so that the total amount transferred free of estate or gift tax cannot exceed the estate tax exemption amount Estate Tax Basics  Relation to gift tax: if a transfer of property is not a completed gift.‖ in turn. in gross estate.

included under 2033 Outright ownership/ fee interest ½ community property or TiC. to D. If Owen dies while Craig is receiving income.  Need to be the beneficial owner.are future interests created by others. They can be vested or contingent. Non-charitable gift cks written but not cleared by bank NO. property in trust. §2033 does not require inclusion of discretionary death benefits in the decedent‘s gross estate. Property interests that terminate at death are not included.o. included in his gross estate though he didn‘t have legal title to them because had use and economic benefit (9152005). would be included in his gross estate.  Note: don‘t decrease the value of the D‘s gross estate due to rights of a SS.   Cks written in spending in commerce & later cleared and charitable gift checks written and later cleared. Whoever receives the reversion through will or by intestacy will receive the trust property at the end of 15 yrs. Contingent remainders and other defeasible interests are property interests that are included in gross estate unless the interest is contingent on survival until the time of possession.  SS benefits: not from decedent. retirement benefits (IRAs or pensions). and the debt must be included in the gross estate under §2033 to the extent of its fair market value immediately before death. remainder to C. POD acts.  This section primarily includes probate property.d. (If Max dies before Sarah. and such approval was given only after investigations that included inquiry into the financial circumstances of the deceased ee‘s fam.look at 125/6 of Willbanks for valuation)  Stolen/illegal goods (Lewis stole art objects in WWII Europe. but from gov‘t. Section 2033 applies if the D had a property interests immediate before death & that property interest passed from D to others as a result of death. Ex: Owen creates a trust to pay income to Craig for 15 years. income to be for life. if C survives if not. Right to receive payment like accrued salary or bonus death benefit by contractual obligation fees of atty (but not if the value of a contingent fee is too uncertain) lottery winnings or certificate from agriculture subsidy program payable for next 10 years and treated as property interest under state law) deferred compensation plan under 2039/2033 owed rent or other k-ual payments (not future) Obligation/debt (but maybe deductible) Cancellation of Debt By Will.  Remainders.  Reversions.C. Andrews case. Disguised bequest whereby the D hoped to relieve his son of the unpaid installments w/o having to include the value of those installments in his estate. Property owned by he decedent alone or as a tenant in common is included by this section. not its inclusion in gross estate.)  Copyrights. and similar rights (V. depending on the terms of the trust or deed creating them as well as on state law. Because the decedent could have revoked the will until death.. Ex: Dad‘s forgiveness of his son‘s debt at death did not avoid inclusion of the debt in the dad‘s gross estate.  Probate property: In decedent‘s name (sole or as TIC). joint property (JT/TIE). the cancellation is the functional equivalent of a bequest. passes through probate by will or intestacy  LI. property subject to creditor‘s claims.are future interests retained by a transferor. Whether Owen explicitly retains the right to the property after Craig‘s income interest terminates or state law implies it. Any contingencies will affect the value of the interest. right to publicity. However. Owen‘s reversion will be in his gross estate. i. Owen has a reversion. If the insured is not the 27 .marital deduction territory            YES. Barr’s Estate D made death benefit payments to a deceased employee‘s W. the BoD had the discretion to approve such payments. patents.not if you‘re just agent. can transfer interest in will or by intestacy.e. not included under 2033  Powers of apointment  jtros  Discretionary Death Benefits.  Life insurance on the life of another. A debt owed to the decedent may not be canceled by a will without incurring estate tax.  D needn‘t have actually possessed it [A. No enforceable right to them.  Ex: any life estate or remainder interest held by the D at d.no survivorship interest.

Upon X's death the property's full value (at dod) is includible in X's gross estate. in which case only the decedent‘s fractional share of the property must be included in his GE  so presumption that the first JT to die provided all the consideration and the survivor(s) must establish contribution towards purchase of the property. 1/2 of the value of the boat is includible in Y's gross estate. Y purchased a boat and took title in his name alone. Wrongful death proceeds are not includible in the decedent‘s gross estate under §2033 because the wrongful death action cannot exist until the decedent has died. that interest passes automatically to surviving JT. For estate tax purposes. When a TiC dies. Example.  (e. (Ex. if a parent devises a summer home to 2 children as joint tenants with right of survivorship.  Note: 2040(a) excludes conidersation that was received or acquired by the surviving JT from the decedent for less than adequate and full consideration in money or money‘s worth. an unrelated party. X and Y. no part of the property is includible in Y's gross estate. 20 years later. Pain and suffering or expenses occurred before death ok. the property is included in the gross estate to the extent the D contributed to the purchase of the property.g. money. the insurance policy is included in owner‘s estate.  Exam strategy: look for any consideration. which establishes two different sets of rules different sets of rules for married and non-married JTs  Nonmarital Joint Interests. can‘t pass it in your will (or at least won‘t be effective). Note: Avoiding Benefit of Applicable Exclusion Amount. Y sold to X. no tax consequence on that.owner of the policy and the owner dies before the insured.  Note: tenancy by entirety applies only to spouses and transfer tax consequences same as JTROS.  Ex: Mother plans to purchase Greenacre and take title with son as JTROS. a one-half interest in the boat. property or services contributed by the survivor. §2040 deals with property owned jointly by the D and one or more persons ROS. they can transfer interest by will or intestacy. If the joint tenants are not husband and wife. A JT is property jointly owned by two or more people that has the distinctive feature of a right of survivorship. Costs 40k. Valued as of DOD. The next year. If the tenants are not H and W. If Y predeceases X. T buys LI and transfers to L who dies before Tom. If X predeceases Y. however. 28 . The amount excluded is the percentage of the cost of the property paid by the survivor. Therefore. mother dies. it‘s included. She said 50k included because each provided ½ consideration but full value is included. and title was transferred to X and Y as JTROS. At the death of one joint tenant. the surviving joint tenant is entitled to full ownership of the property by operation of law.  Causes of action: if the D has a suit of action bending and if state law allows that cause to survive death. The purchase price that X paid was fair value.  §2040. who are not married. When a JT dies.  Joint Tenancy. Example. That is. so it‘s included in gross estate by 2033. each child is deemed to own half). or  (b) the tenants did not themselves acquire the prop but received it by gift or inheritance from someone else. In the case of a joint tenancy between H and W. Mom gives son 20k then they both purchase Greenacre contributing 20k each. 1/2 of the value is includible in X's gross estate.  Wrongful Death Recoveries. §2040(a) requires inclusion of the full amount of the property in the gross estate of the first to die. [versus if D and J are TiC and Julie dies without a will then J‘s interest passes to her 2 kids equallty who then become TiC with D and D owns ½ interest and kids own ¼ interest]  Note: if made gift then terminate joint interest during life. the spouses are deemed equal owners so that 50% of the property‘s value is included in the gross estate of the first to die. If Y predeceases X. own personal property as JTROS. the decedent does not possess a property interest in such cause of action at the time of his death. In L‘s estate).. Joint Interests. unless  (a) the survivor furnished part or all of the consideration with which the property was acquired. property held in joint tenancy is governed by §2040. Transfer tax consequences depend on whether they are spouses (2040(b)) or not (2040(a)). Can disclaim Note: 3 years of death rule not applicable.  Transfer on death. when Greenacre is worth 100k. The property was purchased with funds provided solely by X.

Paying for improvements. With respect to property that has appreciated or depreciated in value.So: On 12/1/08. The boat‘s purchase price was 600k and D contributed 300k to the purchase. One third of the value of the property is included in the gross estate of the first JT to die. . So has to be reduced to cash. whether that value is lower or higher than the acquisition value. A sold G for 300k.000. If property received by the survivor by gift from the decedent has appreciated in value between the date of the gift and the date on which the survivor contributes the property toward the acquisition of jointly held property. C and B own backacre as JT fmv 100k. the gain will be treated as "originally belonging" to the survivor within the meaning of § 2040(a). to what extent is the appreciation deemed to be "contributed" by the survivor? If the appreciated gifted property is used directly in the acquisition of the jointly held property. X and Y purchased securities as joint tenants with right of survivorship for $20.Also appreciation in value that is recognized by the survivor for income tax purposes Does not count: money or other property obtained from the other JT (Reg. W buys pays 100% consideration for house and gives/beqeaths to X. the securities were valued at $60. no portion of the gain constitutes a contribution by the survivor.000. in cases in which the survivor realizes gain from the sale of property gifted by the decedent and uses the proceeds to acquire joint tenancy property.o. Note: Prior Gifts of Appreciated Property from Decedent. Ex: the decedent transferred property valued at $25. Original cost of Blackacre was 50k and C paid 30k while B paid 20k. Y. And Z as JTROS. (See below for more). On 3/15/09.Example.. Example. So what is includable in D's estate? [so the boat was worth 100k. If at X's death the securities were valued at $15.now 200k)= 160k Example . D dies and boat is worth 200k on his d. the amount excluded from X's estate would be $7. the amount excluded is that part of the value of the property that 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. How much is includable in D‘s gross estate under 2040 assuming the boats FMV at DOD is 900k? Answer: if the property previously received from the JT is sold and then sale proceeds are used then that means that appreciation is treated as property of A. A used the 300k to purchase a boat with D.Paying part of the down-payment Making mortgage payments . (2040(a)). .. C and B purchase Whiteacre as JTROS. Costs 100k. The amount excluded from X's gross estate is $30. C pays 25l and B pays 75k. . 20k/50k= 40% is excluded from Colin‘s gross estate (only 60k is included in Colin‘s estate). D transferred Greenacre to A as a gift. So 900 x‘s 200 (the appreciation)/600= 300k.JT property qualifies as survivor contribution. If gift were traded as boat. Appreciation on a gift is treated as a contribution. Amount excluded: 75/100 x‘s 200k= 150k excluded from Colin‘s gross estate. A and D took title as JTROS. Note: What contributions count for IRC 2040 tracing purposes? . and the value of the jointly owned property attributable to such amount will be excludible from the decedent's gross estate. then full value would be attributed to the D and not set off.Any amount that the surviving JT pays for acquisition or improvement of the property qualifies for consideration unless that amount was gifted by the decedent.000. Upon X's death. 200k gain gets counted as a contribution. The daughter sold 29 .000. Example. whichever is applicable. D pays 80k for boat and survivor (not spouse) pays 20k. Worth 100k and 200k contribution from recipient. This can be expressed algebraically as follows: Amount excl= (survivor‘s consideration/entire consideration paid) X‘s entire current value of the property The ratio described above is applied to the date-of-death value or the alternate valuation date value of the property.. Example . Each contributed one-half of the purchase price from his own funds. Colin dies when Whitacre has FMV of 200k. So 50k (200k-150k) is included. Income earned on the property that is taxed to the survivor as income and then used to purchase additional . At the time it had FMV of 100k. Do then died in 2009. However. 20-2040-1(c)(4). Note: Appreciation or Depreciation in Property Value.d. So that portion of the purchase price.500.000 to her daughter as a gift.

383. Blackacre was purchased for $200. who are not husband and wife. except that instead of selling the securities given to her by M. When M died in 2002. which is the value attributable to the amount of the daughter‘s contribution representing realized appreciation on the gift from the decedent to the daughter. D contributes the securities to the purchase price of the joint tenancy property when the securities have a value of $25. D made her contribution with the proceeds from the sale of the securities previously received from M. nothing may be excluded because no part of the securities' purchase price is attributable to gain realized by D from a sale or other disposition of the securities M gave her. to an income tax basis of $350k-$100.000. In 2000.000. the full value of the securities are includible in X's estate Example.500 $50.000. meaning either (1) as tbe or JTROS if they are the only JTs  The one half interest qualifies for the marital deduction. taking title in joint tenancy with the decedent.000) x $75. (1014). Note that §2040(b) appears to contain a paradox. which is the value attributable to the amount of D's contribution representing realized appreciation on the gift from M to D. is included in D‘s gross estate under §2040(b). in the event of a future sale of the property. for the ½ interest belonging to the survivor. one-half of its value is included in the gross estate of the first spouse to die under §2040(b)—regardless of how the property was acquired or who supplied the consideration for its acquisition or any contributions. the value of the jointly held securities was $75. §2040(b) requires inclusion in the decedent‘s gross estate of one-half the value of any qualified joint interest. and was worth $500k when D died. for the ½ interest that was included in the D‘s gross estate 30 . M's estate must include the entire $75. at a time when the stocks and securities had appreciated in value to $160.  Surviving spouse‘s basis: bene receives DOD value as her basis in property received by decedent. So included in gross estate of decedent. purchased securities as jtros.000 Example.500 and invested the proceeds from the sale in various stocks and securities. §2056 grants a marital deduction that offsets in full the amount included under §2040(b). or $25k. it passes to SS under 2056©(5). If property is held exclusively by husband and wife as joint tenants with right of survivorship or as tenants by the entirety.  Joint Interests of Husband and Wife. meaning there will be no estate tax or JT interests passing from decedent to SS. At X's death.500 of the $75. M and D purchased other securities as JTs for $50. this means the beneficiary receives a stepped-up basis and will have no income tax consequences if she sells the property immediately after D‘s death. For property that has appreciated in value.000. Example. Later in 2000.000.that property for $32. the decedent should have placed all the property in the daughter‘s name (instead of creating a joint tenancy) and retained a power of attorney so that she could still maintain some level of control over the property. Y's contribution consisted of funds previously acquired from X as a gift. M's estate may exclude $7. each contributing $25. on the other hand.000) x $160. ½ of its value. The excludible amount is computed as follows: ($32.500 .000 . These stocks and securities remained in join tenancy until the decedent‘s death. This stepped-up basis for the one-half interest included in the decedent‘s estate is acquired without tax cost because the inclusion is matched by a marital deduction of the same amount under §2056  Example. The SS is entitled.  One-Half Basis Step-Up. plus $250.000 = $7.  §2040(b) is designed not to raise revenue under the estate tax but rather to establish one-half as the maximum amount of marital survivorship property that is eligible for the date-of-death basis prescribed by §1014(b)(9). M gave daughter D securities having a value of $20. X and Y. On the one hand. Doesn‘t matter who provided what portion of the consideration. Although X and Y each contributed one-half of the purchase price. D sold the securities for $25.000.25.000. as JTROS. The excludible amount is computed as follows: ($25.011 $32.20.500 Note that to avoid any inclusion in the decedent‘s gross estate related to this gifted property. Same facts as the example above.  This applies as long as the JTs owned a qualified joint interest. Decedent‘s estate may exclude $37.000.383 = $37. In 1999.383.011 of the $160.000.

 Simultaneous Death of Joint Tenants. which provides that under these circumstances each tenant is deemed to have survived with respect to one-half of the property.  Also if the Donnee releases the power (after 9 month disclaimer period) its treated as if he did in fact withdraw the property and then transferred it to the trust bc he could have withdrawn it all for his own benefit.  the decedent never owned the property during his lifetime and never personally possessed or enjoyed it. A having paid the entire consideration for its acquisition. Rul 76-303 (CB 219) held that A‘s estate is taxed on the entire value of the property. A power of appointment comes from someone else.  §2041.1). IN Md National Bank the language ―to such person or persons as the D shall designate‖ didn‘t include decedent . §20. gift or estate) tax. 2041 Powers of Appointment. And when he dies. it is to decide in a non-fiduciary capacity who will enjoy the property (See Reg 20-2041-1(b)(1). They are killed in an accident under circumstances that make it impossible to determine the order of deaths. In other words. §1014(b)(6) states that the surviving spouse‘s one-half share of community property receives the stepped-up basis provided that the other half is included in the decedent‘s gross estate.. exercise. Under §2041. both the deceased and surviving spouses‘ one-half share of community property receives the stepped-up basis  Exam strategy: doesn‘t apply to same-sex couple.  a minor child may be given a general power of appointment in order to qualify trust income and principal for the gift tax annual exclusion 25. etc. if donor appoint the trust property to someone else.e. Remainder is a gift to his issue. Property subject to a GPOA is in the power holder‘s gross estate. Can decide in non-fiduciary capacity who will enjoy the property. WB 180. it is not retained or reserved.  Note: Reg. and lapse of a gpoa causes property to which the power pertains to to be subject to transfer (e. even though legally married because of DOMA. Suppose that A and B own Blackacre as (nonmarital) joint tenants.Basis on Succession to Community Property. while B‘s estate is taxed on one-half. a decedent‘s gross estate includes the value of property with respect to which the decedent possessed a general power of appointment at the time of his death—even if that power was never exercised during his lifetime. 2514(b)  i.” §2041(b)(1) defines a ―general power of appointment‖ as a power which is exercisable in favor of: (1) the decedent.g.2503-4(b). Darren is treated as the transferor (2514(b) giving income to himself for life and remainder to issue.e. a parent to whom property is transferred as trustee for a minor child has a general power to the extent that the parent has discretion to use the trust property to discharge his or her own obligation to support the child  31 . it will be a gift unless receives full and adequate consideration. decedent‘s creditors.  The property is includible even if:  that power was never exercised/ able to be exercised (minor or incompetent) during the decedent‘s lifetime. and  the decedent never knew that he possessed a general power of appointment. if a donee exercises a GPOA during life.  “General Power of Appointment.  A power of appointment is a power that enables the donee of the power acting in a non-fiduciary capacity to designate recipients of beneficial ownership interests in the appointive property (R3 of Property: Wills and Other Donative Transfers §17. (2) his estate. Thus. for example. [insert other definition things below in box if necessary] Under §2041. i. or (4) the creditors of his estate. the trust property will be included in his estate because 2041 includes proepty exercised or released.  Note: The possession. property over which the decedent had a general power of appointment is includable in the gross estate even if the power was not actually exercised and thus terminated at death. (3) his creditors.  Rev. release. The jurisdiction has adopted the Uniform Simultaneous Death Act (CB 219).  Note: depends on state law.  Note: Reg 20-2041-3(b) if a power is subject to a condition that has not occurred then D doesn‘t have a gpoa. In MD need the explicit words for a gpoa. that exercise is a transfer of property by that individual and is often a gift. Thus.2041-1(c)(1) treats a power as general to the extent it is exercisable to discharge a decedent‘s legal obligations.

then goes to kids). 2041(b)(1)(C)(ii)  i. banks.. exercising her power by appointing the remainder to Calvin if Calvin survives Matthew.20-2041-1b1  power of withdrawal (Crummey trusts)  discretionary power as trustee to invade corpus and a beneficial interest in the trust  to remove trustee and appoint others. A settlor transfers property in trust to pay income to D for life w/ remainder to her issue.  if not. Calvin never married. (2041(B)(1)(C)(III) 32 . donee presumed to have aliquot portion only. Then make sure D doesn‘t have power to demand any amount of trust principal during life for own benefit. with D remaining as the income beneficiary. trust companies.  Note: if co-holder and donee are both permissible appointees of inter vivos but power terminates on donee's death.  Exception: A power…which is exercisable only in conjunction with a person having a substantial interest in the property subject to the power. Commissioner: want spouse to first use up marital trust so family can use the one for the kids.so conditions within control as opposed to conditions in regulation. If Calvin dies before Betty. if power is held jointly as bene with someone having a substantially adverse interest then no gpoa. Property will not be in Calvin‘s gross estate.e. D‘s GE will include the value of the trust property since she possesses a general poa. a third party should be named as trustee. To avoid this result. Calvin has power to withdraw 5% each year.. with a power to barry to appoint the remainder by will and betty dies before Matthew. Note: the general power of appointment is not always labeled as a poa.  if co-holder is donor... STILL included.  Note: Inclusion Required Even If Decedent Never Owned or Enjoyed Property or Exercised the power.e. if power is held as beneficiary with grantor as a co-holder of power. presumed his interests outweigh those of the donee so no general power. In other words.  Conditional powers: if a power is subject to a condition that has not occurred. but only when married.  Exceptions to general power inclusion  Exception: A power of appointment …which is exercisable only in conjunction with the creator of the power is not deemed to be a general power of appointment.. co-holder ignored and power is general  corporations.. Upon her death. including self  power to consume even if dont take or use  power as holder of life estate n real proeprty to sell the proeprty and consume its proceeds  power to cause a trust to pay off creditors or satisfy support obligations. 2041(b)(1)(C)(i)  I. §2041 will require inclusion in the decedent‘s gross estate of property which he may never have owned during his life and which he may never have personally possessed or enjoyed and whose ownership or receipt he has never actually determined by the exercise of a power of appointment. etc are deemed NOT to have a personal stake. D is named the trustee of the trust and has the power to terminate the trust and thereby withdraw all property from the trust.. then Betty‘s power is not exercised. which interest is adverse to the exercise of the power of appointment is not a general power of appointment. then no gpoa. then decedent does not have a general power of apppointment  ex: Matthew‘s will leaves property in trust with Friendly f/b/o Calvin. the mere possession of a general power of appointment is treated as the possession of such an important component of ownership that the decedent should be subject to an estate tax.  ex: Matthew‘s will leaves property trust to Cakvin for life. 20-20413(a) and (b)  Kurtz v. So spouse dies and the argument is the condition never applied! So tax court buys that argument but the other doesn't .  Power is considered exercised if not impossible  ex: D never exercises her power to appoint Greenacre to whomever she wants (and if she doesn‘t exer it. see 20-2041-1(c)  so ask what does this person own and what do they have the right to control?  Example. Betty is considered to have exercised her power of appointment if Calvin is living at Betty‘s death.

Special: General: can appoint to anyone including himself. General v. support. Special: aka limited or non-general: restricted group of appointees: among my children. invade or appropriate property for the D‘s benefit when that power is limited by an ascertainable standard relating to the ―health. Rul. Inter vivos: exercisable by instrument (deed). Indeed.  I. health and general happiness in the manner to which he is accustomed. 33 .. maintenance.‖ ―to meet an emergency‖ 25. welfare. In D‘s will she appoints to her 3 children.‖  But see Rev. Can use it to pay your bills--just that opportuity alone means youre taxed on it even if don't use it. Use exact language. Under §2041(b)(1)(A). could be viewed as approaching beneficial ownership of the property subject to the power. 77-60: Under D‘s will SS granted a life estate in certain properties with the power to invade the corpus as desired in order to ―continue D‘s accustomed standard of living‖.‖ ―health.‖ ―proper support.is not a general poa even though says comfort. including college and professional education. Exception: Ascertainable Standards. Terminology Donor: person who creates the power of appointment Donee: recipient--person who exers the power (in general looking t what donee gets taxed on Objects aka permissible appointees: class of people eligible to receive the property Appointees: people for whose benefit the property is actually appointed Takers in default: people who take property absent exercise of the power When and how excercisable: presently (can be immediate). maintenance. Rul. welfare. the exercise of the power is functionally equivalent to a testamentary gift of property and will be taxed accordingly.so it‘s a general PoA  In determining whether a power is limited by an ascertainable standard. hospital and nursing expenses and expenses of invalidism.‖ ―for her comfort and care as she may see fit.‖ ―support in his accustomed manner of living. anyone other than herself. education. her creditors and the creditors of her estate [this isn‘t taxed] Ex: D is income beneficiary of a trust created by A. or maintenance. the mere possession of such a power. even if it is not actually exercised. dental. comfort. welfare. and the D instead exercised the power by will in favor of another person.‖ ―reasonable needs and proper expenses or the benefit and comfort. a power to consume.2041-1(c)(2) specifies that ―support‖ and ―maintenance‖ are synonymous and their meaning is not limited to the bare necessities of life. Why have it? Flexible! Not a fiduciary power: wholly discretionary/free of constraint of impartiality or other standards. creditors of his estate. or other purposes‖.  Reg. a power to use property for the ―comfort. §20. education. testamentary (exercisable by will).  Rationale: acting pursuant to creator/donor/settlor‘s instructions rather than own  Ascertainable standards?  Standard must relate to decedent‘s health. not a general power if power to appoint to oneself is limited by ascertainable standard.  Meaning of ascertainable standards: When drafting don‘t be creative.‖ ―support in reasonable comfort. it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.‖ and ―proper comfort and welfare. among my relatives. his estate.‖ ―education. 76-368: D‘s spouse created testamentary trust under which income was payable to D for life. Rationale.  Courts don’t like “continue” Rev. Examples of powers which are limited by ascertainable standards are powers exercisable for the holders ―support.‖ ―other expenses incidental to her comfort and well-being.‖ and ―medical.e. support or maintenance‖ of the decedent is not considered a general power of appointment. Case law has also held that the following powers are not limited by an ascertainable standard: ―Whatever purpose she desires. her estate. his creditors.25111(g)(2)  In contrast. A gave D power to appoint trust corpus at D‘sdeath to any of D‘s issue. If the D held a poa that could have been exercised to make him the owner of property held in trust. T authorized to invade corpus and pay portions to or for use and benefit of F if its sole and unfettered discretion deemed advisable for ―health.‖ ―maintenance in health and reasonable comfort. or happiness‖ of the holder of the power is not limited by an ascertainable standard.

the amount by which $25.000 or 2) 5% of the trust principal. B is given a Crummey power (or gpoa) to withdraw $25.  GPOA: lapse occurs when power can no longer be exercised. the right lapses for that year. 187 for more. Life Insurance Proceeds. employees. flexible.2041(1)(b)(2). or (2) 5% of the trust assets ($200. which provides that this section governs ―life insurance of every description. This includes oneself. the payment receivable (i. family members. If.2042-1(a)(1). or (b) 5% of the aggregate value of the assets out of which the exercise of the power could be satisfied. Otherwise.  The so-called “hanging” Crummey power may avoid the adverse gift tax consequences associated with the lapse of demand rights. Where RAP has been abolished. Because if don‘t exercise crumy withdraw power. with trust principal to be distributed on B's death to B's descendants.000 exception. if the withdrawal right is not exercised by December 31. a of distribution ltd by IRC ascertainabe standards is a special poa). Only applies if the power is limited in time (so can withdraw every year) and is non-cumulative.000.. This is differnt.power that the D received from someone else.000 in a trust and M has right to withdraw 20k each year. Lapse of GPOA is treated as a release of that power (2041(b)(2) which is treated as a transfer of the property by the done 2041(a)(2). to the extent of the amount in excess of the §2514(e) 5% or $5. the amount that has not lapsed is included in his gross estate. and continues in subsequent years until it lapses within the 5% or $5. not the face amount or value of the policy) from a life insurance policy are includable in the decedent‘s estate if they are (1) payable to the decedent‘s executor or (2) payable to others if the decedent retained with respect to the policy ―any of the incidents of ownership.000 during December each year.  For example. which treats the powerholder as withdrawing property from the trust equal to the amount of the demand right and transferring by gift that property back to the trust.000. exercisable either alone or in conjunction with any other person.. in perpetuity Distinction from “Retained powers”. §2514(e) provides a safe harbor rule that narrows its application: A taxable lapse occurs only to the extent that the value of the property subject to the lapsed power exceeds the greater of: (a) $5.000 x 5% = $10.000 exceeds the greater of: (1) $5. exempt from transfer tax. the powerholder does not actually withdraw property from the trust pursuant to his demand right) may cause a taxable gift by the powerholder under §2514(e). Under Section 2042. moral hazard. Page 188 for more.000 exception in subsequent years. including death benefits paid by fraternal beneficial societies. goverened by IRC 2041  Note: Lapse/ Lapse of Demand Rights and “Hanging” Crummey Powers.  Note: the lapse is a release only to the extent that the property which could have been appointed by the done exercising the power exceeds the greater of 1) 5. so not treated as a transfer.000 to an irrevocable trust.  NOTE FOR DONEE: Will have gift and estate tax consequences unless there is 260k in the trust (because then 5%). The trust instrument provides for distribution of all trust income to B for life. reg 20.e. does not lapse.000). Accordingly.  The lapse of a Crummey demand right (i. etc. §2042  General rule: 2042 makes plain 2 rules for the estate tax treatment of life insurance proceeds paid on a policy on the life of the decedent. but there must be a shifting of the risk of loss from death for an agreement to be insurance and the regulations provide that the definition is broad as seen by 20. you must have an insurable interest in that person.‖  Insurable interest: In order to take out a policy on someone‘s life.e.. lapse to extent that 13k (whatever put in that month) exceeds greater of 5k or 5% of the trust. In any year in which B allows the power to lapse. B is treated as having transferred by gift to the trust $15. however.  But assume that J transfers property valued at $200.can create a dynasty trust.. the powerholder dies before all demand rights lapse.Benefits from this tax advantage for Special POAs: Possible to give does something close to funcational equivalent of ownership without additional tax. (used regularly in contemporary estate planning to preserve flexibility in longterm trusts wihtout tax costs. However. The hanging power is intended to avoid a taxable lapse of the demand right because the demand right. operating under the lodge system.‖  Broadly defined: 2042 does not define insurance on the life of the decedent. And powers of appointment at death come from another source.000. if 500. this is not a lapse because her right to withdraw is limited to less than 5% of the corpus. 34 .what you keep after you've given something away. A power that the D retains with reqpect to property she gave away goverened by IRC 2036-8 (see treas.

If third party is empowered but not required. The major advantage of permanent insurance is that the increase in the investment element (cash values) occurs on a tax-deferred basis. term insurance is the ideal policy. Under §2042(1). because there is not enough cash value to pay the charges in the policy.. buy out shares of a business  Savings for retirement (whole life)  Making charitable gifts  Creditor protection  Types of Insurance. buy-sell agreement).  Receivable by Executor. Rul 77-157:  Facts: Beneficiary of LI is a trust created y decedent/insured. if the insured plans to hold the insurance for a long time and use policy cash values for retirement income.. although premiums are paid with after tax dollars. DOES IT SHIFT RISK AND DISTRIBUTE LOSS?? There are 2 primary types of insurance:  Term Insurance. Instead.‖ exercisable either alone or in conjunction with any other person. the policy will terminate in the later years. term insurance is not the proper vehicle if the insured wants the insurance proceeds to pay any estate tax due when he dies. If a death benefit is needed for a specific. term insurance is not the proper vehicle. This means that. Reasons to purchase:  Support for dependants  Liquidity/ cash: pay debts and estate taxes.  Note: Margrave: revocable trust does NOT equal estate. the interest income on the policy cash values accrues on a tax advantaged basis.e.a. Term insurance provides a death benefit but does not provide cash values.  Note: Payment of the premiums will not cause the proceeds of the policy to be includable in your gross estate. such power to volunteer does not require inclusion of insurance proceeds. For example. whole life or universal insurance) combines a death benefit with a savings (i.k. if the proceeds of a life insurance policy on the life of the decedent are payable to the executor. Term insurance may also be appropriate if the taxpayer owns a business with a relatively short investment life and is obligated to purchase the co-owner‘s interest upon his death (i. Term insurance premiums generally increase with age. Any arrangement by which proceeds of insurance on life od decedent made available to estate raises 2042(1) issues.e. However. if the proceeds of a life insurance policy on the life of the decedent are payable to other beneficiaries..  Note: When to Buy Term Insurance. If. creditor or anyone with legal obligation to pay expenses so if imposed on 3rd party. term insurance proceeds may be used to fund all or part of the purchase price. Where trustee may voluntarily pay. Under §2042(2).this was rev. In general. relatively short time period. however.Trustee empowered but not required to pay estate obligations. so no need fr trust to pay  Holding: 20.  Receivable by Other Beneficiaries. In that case. 35 . Assets of estate sufficient. Permanent insurance (a. unless significant cash additions are made. the entire proceeds are includable in the decedent‘s gross estate. the cash portion is underfunded. ruling we talked about and property not included under 2042(1) but any amounts actually expended are part of gross estate. the power does not require inclusion in the decedent‘s gross estate. If bene is a trust and trustee empowered but not required to use the trst funds to assist D‘s estate.  Note about using LI to pay estate obligations:  Rev. the entire proceeds are includable in the decedent‘s gross estate if the decedent possessed at his death any ―incidents of ownership. term insurance may be appropriate if the taxpayer has young children and needs to replace his income upon his death so that his family can continue their lifestyle and pay for the children‘s college expenses.  Permanent Insurance. as long as beneficiary is not subject to a legally binding obligation to make the payments. term insurance is proper when the taxpayer wants to cover the risk of death during a term. cash value) element that has the effect of providing an insurance benefit that will last for the entire life of the insured.  Means payable to estate.2042-1(b) not implicated.

 Issue: does he have an economic interest in this policy if he can't do anything with it (he buys it and goes onto airplane immediately  The Supreme Court held that it is irrelevant that the D had no opportunity to exercise any incident of ownership within the short time between the take-off and the crash. Mary‘s gross estate will include the interpolated terminal reserve value of the policy (which generally approximates the cash value of the policy). D dies.because she still owns it and didn't transfer she still had it so has ownership. In the case of term insurance.xx  Must have legal right. so might have some gift inplications Note: Life Insurance on Another. However.  Intent doesn’t matter. Noel’s Estate (flight insurance case).. loan or collect on polcy. and the payment of the insurance money is contingent upon the loss of life. possibility that greater than 5% of the policy or proceeds will return to the insured or the insured‘s estate). the risk assumed by the insurer is the loss of the insured‘s life. §20. In both cases. borrow against the policy‘s cash surrender value)  The power to obtain from the insurer a loan against the surrender value of the policy. Have to have a legal right to it. (i. hour-by-hour capacity to dispose of property which he owns. the sum of the premium payments Mary had previously made). and predeceases Jeff. day-by-day. legal power to exercise ownership.    What are “Incident of Ownership.”  Reg.e.‖ 36 . Not includable in his estate if illegally cause company to pay part of the policy‘s surrender value because didn‘t have any right to it. boarded the plane and tragically died in a plane crash three hours later. Spouse purchases a life insurance policy on D‘s life and D pays the premiums on the poliy.  D purchased an insurance policy on his life at an airport. 2 years later. Not includable because still no claim to any economic benefits. Ex: At D‘s request.e. What if instructed inruance agent to issue it to Child but accidentally issued it to D? Then problably inn D's estate according to IRS. the value of the life insurance policy may be includable in Mary‘s gross estate under §2033. handed the policy to his wife.. naming herself as beneficiary. Ex: you purchase insurance policy and intend to hold the policy for child‘s benefit but failed to transfer it to child. have to have a legal right to change the bene. Reasoned that individual circs should not affect the estate tax laws: ―It would stretch the imagination to think that Congress intended to measure estate tax liability by an individual‘s fluctuating. the life insurance policy is not includible in Mary‘s gross estate under §2042 since §2042 does not apply to insurance on the life of a person other than the decedent.  The power to surrender or cancel the policy  The power to assign the policy or to revoke an assignment  The power to pledge the policy for a loan (i. and  A reversionary interest if the value of the reversionary interest immediately before the death of the decedent exceeded 5% of the value of the policy.2042-1(c)(2) and (3) provide that the term ―incident of ownership‖ includes: [rationale: ownership/controlyours]  Power to cash in the policy or receive economic benefits of it  The power to change the beneficiary. The fact that ordinary life insurance is payable upon an inevitable event (death) whereas accident policies are payable only upon an evitable event (accidental death) is not relevant in determining whether ―insurance‖ exists. In the case of permanent insurance. Mary‘s gross estate will include the replacement cost of the policy (generally. without regard to the owner’s ability to exercise it at a particular moment. Does a Policy Constitute ―Life Insurance?/ Incidents of Ownership: In Commissioner v. the Supreme Court held that ―flight accident insurance‖ constitutes insurance taken out on the ―life of the decedent‖ within the meaning of §2042(2). We hold that estate tax liability for policies ‗with respect to which the D possessed at this death any of the incidents of ownership‘ depends on a general. If Mary takes out an insurance policy on the life of Jeff. IRS would probably say you have to prove or show but the mistake would be a defense  Doesn’t have to be practically exercisable.. We can't possibly make what D wanted the test.

Rul. the actual terms of the insurance contract) will prevail over ―intent facts‖ (i. Note: Mere power to change timing. The decedent does recognize an economic benefit if the life insurance proceeds are to be used to pay his estate tax liability upon death. Under Reg. 2037. even though it affected only the time and manner of the beneficiary‘s enjoyment of proceeds (like 2038). therefore. then not incident of ownership.if policy payable to someone else like spouse then is includable 37 .e.. the conduct. Court says won't look at ability to exer and test is do those rights exist. and intent of the parties with respect to the insurance policy). The decedent had no beneficial interest in the trust. the court relied on the terms of the policy itself. Moreover. the court concluded that the decedent‘s fiduciary power did not constitute an ―incident of ownership‖ (and. Noting that the legislative history of §2042 indicated an intention that the principles of the estate tax transfer sections (§§2036.  Incidents Possessed in fiduciary capacity: Decedent as Fiduciary. the court in Connelly’s Est. and (2) the power was not retained by the decedent. Power was given to him as a trustee by his W.. the balance of trust property would be distributed to various remainder beneficiaries. not whether you had the ability. a decedent does not possess incidents of ownership over an insurance policy on his or her life where (1) the decedent‘s powers devolved to the decedent as a fiduciary and (2) were not exercisable for his or her personal benefit. the IRS accepted the result in Skifter and ruled that.. In rejecting this approach. No such assignment or change of beneficiary was endorsed on these policies. 2 cases with similar facts/ different outcomes: In Lumpkin‘s Est. Looked to Sifter which said if you received it rather than retained it. provided (3) the decedent did not transfer the policy to the trust and (4) did not furnish consideration for maintaining the policy. §2042 will not require inclusion in the decedent‘s gross estate if: (1) the decedent held incidents of ownership as a fiduciary and only for the benefit of persons other than himself. ―policy facts‖ (i. and consequently the power to assign the policies or change the beneficiary remained in the decedent at the time of his death. The trust provided that the daughter was to receive the income during her lifetime and. understanding.e. The IRS argued that the decedent‘s power to distribute the policies to the daughter (thereby favoring the income beneficiary over the remainder beneficiaries) was an incident of ownership. the policies were to be held in trust with the decedent named as trustee.  the decedent‘s estate contended that the decedent assigned his rights to a flight insurance policy when he directed the clerk to give the policies to his wife. and 2038) apply to §2042. 84-179 (CB 390). under the terms of her will. However. So Impossibility of Exercise Doesn’t Matter The fact that it may be impossible for the insured to actually exercise any of the incidents of ownership before his or her death is not relevant.” In general.  Incidents of Ownership Held by Corporation Controlled by Decedent. The D‘s wife predeceased him and. S's power to change benes was not under the terms of the policy. The trustee was authorized to pay all or any part of the trust principal to the daughter. the following provisions apply:  treasury regs say you do not attribute if policy is payable to corporation.  In Rev. reached a contrary result on similar facts.  Note: Economic Benefit. the life insurance proceeds are not includible in his gross estate): The decedent‘s fiduciary power was not reserved by him at the time of the transfer.  “Policy Facts” Prevail Over “Intent Facts. Commissioner the D transferred certain insurance policies on his life to his wife more than three years before his death. so we care about whether you had the power. 2042-1c4 [rationale: no power to control and not in his estate]  I. So court makes distinction bt retained interest and something that comes back to you  In Skifter’s Estate v. the decedent could not have exercised his powers to derive for himself any economic benefits from their insurance policies. but devolved upon him.  The court rejected the government‘s position.e. incidents of ownership encompasses mere power in insured to affect time or manner of enjoyment.2042-1(c)(6). it devolved upon him at a time subsequent to the assignment to his wife. Group Term life insurance where er provided the policy and usually ees keep very little control over it. at the time of her death. The court held that the decedent‘s right to select a settlement option under a group term policy constituted an incident of ownership. §20. for purposes of §2042(2). Rather. which provided that the policy could not be assigned nor could the beneficiary be changed without a written endorsement on the policies. Estate of Levy.

. S‘s life. Example. S nor Ms. the insurance proceeds will be taken into account in valuing the corporate stock included in the decedent‘s gross estate. Policy 2 -. payable to Acme. Best to buy a new policy and have trustee pay premiums pursuant to transfers from insured and include crummy rights (252503-3(c). but insured can transfer money into it.      Estate of Levy: petitioner owned corporation and life insurance policies on D's life were owned by company but payable to widow and at time of D's death.2512-6(a)  Trustee. payable to Mrs. J has any direct incidents of ownership in the policies. So insurance trusts add that level of housekeeping like crummy trusts but if you do that then circle back to this insurance policy owned by trust were not in your estate. To the extent the proceeds of insurance policies on a shareholder‘s life are payable to or for the benefit of the corporation.000 per year per beneficiary if split gift by husband and wife). If payable to the corporation. respectively. he owned more than 50% of the voting power of the corporation.000 policy on Mr. includable in his gross estate. the proceeds of Policy 3 will not be included in Mr. J‘s estates.000 policy on Ms.  Irrevocable Life Insurance Trusts. the life insurance policy can be held in an irrevocable life insurance trust (―ILIT‖). at the time of his death. The trust agreement may not state that any life insurance proceeds are to be used to pay the decedent‘s estate tax liability  Trustee has to own the policy so can either transfer it to the trustee or have trustee make it. S‘s and in Ms. the corporation‘s incidents of ownership will not be attributed to the insured/shareholder. A decedent will be considered a controlling shareholder only if.  In general: Trustee owns. payable to Acme. Result: Neither Mr. a gift is made to the trust for premium payments (up to $26. Instead. Policy 3 -.” Typically. Good to have someone used to record-keeping to do these trusts. the insured can avoid the application of §2042 since all of the incidents of ownership are held by the trust—not the insured. J. corporation had IOO and D didn't have them but he did own the corporation Look at c(6): So here. Mr. J own 49% and 51%.  Make sure: records are good and all incidents of ownership are owned by the policy. and on death of insured then can have family member be trustee  The following are characteristics of ILITs:  No “Incidents of Ownership.so give money to trust to make payments on new policy. the insured/grantor should probably not be named the trustee of the ILIT. of the voting stock of Acme Corp.000 policy on Ms.  Trust Language. To avoid estate inclusion of life insurance proceeds. S. David is the sole stockholder of DDDD Corp. 38 . causing the policies to be includible in the D‘s GE under §2042? Will the insurance affect the valuation of the stock includible in the decedent's gross estate under §2031? Answer: The proceeds of Policy 4 will be included in Ms. which totally owned an insurance policy on David‘s life.so someone who can keep the records/ pay the premiums/ sending crummey notices.$250. Ex. Future gifts are made as required for additional premium payments. In a properly structured ILIT. in the Levy case. J‘s life. S and Ms. anyone but me can be beneficiary of the trust. J‘s life. See treas 25. although the poicy and all rights associated are not owned by D. S‘s gross estate. because paybale to wife (someone else0. not includable in D's estate….. and the proceeds of Policies 1 and 2 will affect the valuation of Acme in Mr. also making a gift.. Policy 4 -.000 policy on Mr. As a general matter. the corporation‘s incidents of ownership will be attributed to the insured/shareholder if he or she is a ―sole or controlling‖ shareholder. To the extent the proceeds of insurance policies on a shareholder‘s life are not payable to or for the benefit of the corporation. with the trustee applying for and owning the policy for the benefit of the trust beneficiaries. seems to be contrary to skifter but wisdom is to not have insured serve as trustee Moreover. Acme possesses incidents of ownership in the following four policies on the lives of the SHs: Policy 1 -$250. and the trust pays the premiums. Not includable in decedent‘s estate. trust is beneficiary of policy. the insured/grantor should also be denied the power to remove the trustee without cause and appoint another trustee. S‘s life..$250. Will Acme‘s incidents of ownership be attributed to the insured SH. passes outside of estate and this was the biggest  Major downside: in estate if die within 3 years.$250. payable to Mr. The corporation was the beneficiary of the policy. 6 to make sure any gift to trust to pay those premiums is present interest for annual excl. If isincident of ownership if is trustee. Ex 2. J‘s GE.

If the spouse dies first and was the named beneficiary of the ILIT.e. the 3-year rule under §2035 does not apply as it would if the D bought the policy himself. ILITs frequently contain a ―Crummey power‖ provision that allows the gift to qualify for the annual gift tax exclusion. Under §2035(a). and died within 3 years of the transfer.e. Thus. 39 . the decedent‘s gross estate includes the excess of the FMV of the property at the time of death over the value of the consideration received by the decedent.2042-1(b)(2). The trustee should hold liquid assets or insurance with a cash value at least equal to the value of the demand rights..o. Note. half of the ILIT‘s assets will belong to the insured-decedent and half will belong to his spouse. the decedent possessed an ―incident of ownership‖) had it been retained by the decedent until death. “Crummey” Power. fractional ownership interest in apartment buildings)? Must the executor ―monetize‖ these assets to pay the estate tax? The executor may sell these illiquid assets to the ILIT in exchange for cash (i. (1) the decedent can gift money or other property to the trust and (2) the trust can then purchase the policy from the decedent. the beneficiary must be given reasonable notice of a contribution to the trust and of his or her immediate right of withdrawal. But what if the decedent‘s probate estate contains only illiquid assets (e. if within 3 years before death the decedent took out a policy on his own life and thereafter transferred all incidents of ownership in the policy to another person.g. his probate estate is generally responsible for paying any estate tax that is due. LI purchased with community funds in a community property state is an asset of the community. that for gift tax purposes the insured-decedent and his spouse may still make a split-gift to the ILIT sufficient to cover the annual premium payments. the premium payments may be subject to gift tax but they do not cause the proceeds to be drawn back into the GE. The beneficiary must also be given a reasonable opportunity to exercise the right.  To avoid this result.d. transferred it to the trust. to rebut any claim that the rights have no substance and are merely ―illusory.  Property for which marital deduction was previously allowed §2044: QTIP Property.  Ex. good!  Transfers for Insufficient Consideration. the value of her one-half interest in the ILIT‘s policy will be includible in her gross estate under §2036. property that qualified for the marital deduction pursuant to 2056(b)(7).‖  3-Year Rule. Inclusion if  D made a transfer of an interest in any property or relinquished a ower with respect to any property during the 3-year period ending on d.e. the GE includes the proceeds of a life insurance policy if: (1) within 3 years before death. §20. Reg.the value of the underlying QTIP property will be included in the spouse‘s gross estate upon her death (i.  So if designates irrevocably the policy‘s beneficiary and then dies 4 years later.‖  Community Property State. §2035(d) provides that the 3-year rule does not apply to bona fide sales for ―an adequate and full consideration in money or money’s worth.  Note: Transfers within 3 Years of Death. if any of the above transfers were made for a consideration.d. and  Teh value of such property (or interest) would have been included in the D’s gross etate under section 2042 if retained by D on d. The result is the same if the D transferred the policy more than 3 years before death but retained incidents of ownership which were relinquished within the 3year period.  Payment of Estate Tax Liability.. however. Under §2043. The executor may then use this cash to satisfy the estate tax liability. Once the insured dies. the insured-decedent should fund the trust with his own separate property. Moreover. if community assets are used to fund an ILIT. the proceeds are includible in the GE. For a Crummey power to qualify a gift as a present interest. the ILIT was the beneficiary of the insurance proceeds) in a bona fide sale for an adequate and full consideration.  Moreover.. if the policy already exists and is owned by the decedent. even though the transfer may have been subject to gift tax. the decedent transferred an interest or relinquished a power with respect to the policy. and (2) the interest or power would have given rise to inclusion under §2042 (i.o. If the D paid premiums to keep a previously transferred policy in force. rather than separate property of the insured-decedent.

possess or enjoy the property?  How much is included? Entire value of property (20. a retained life estate). less value of A's life estate.d. determine if the D retains a right to income from that property. Look at his age and look at IRS charts to see his income interest. i.  Exam analysis:  First. or the right to the income from.o. a retained life estate) even if the property doesn’t produce any income. Mortality 40 .d.o. included in her estate because she had the right to income for a period which did not in fact end before her death.2036-1(c)(i).‖ About 2036(a)(1): (1) the possession or enjoyment of.  About a period not ascertainable without reference to his death: David establishes an irrevocable IV trust with FNB as trustee to pay income to him each quarter. for any period which is not does not in fact end before his death: (1) the possession of or enjoyment of. 2038)  Rationale: ask is this the type of transfer that is intended to take effect at or after death? That is. for any period not ascertainable without reference to his death or 3.e. Thus. After death of A and H.  What is right to income?  Trust Ex:  B created an irrevocable IV trust with FNB as trustee to pay income to B for his life. 2037 reversions. At A‘s death. (20. less only the value of any outstanding income interest which is not subject to the D‘s interest or right and which is actually being enjoyed by another person at the time of the D‘s death. included because he had the right to income for a period not ascertainable without reference to his death. (2036.2036-1(b)(i)(ii).Retained interests: 2035 Deathbed transfers. is included bc he had the right to income from the property for his life. then full value of trust as of d..  If Debra died in year 16. determine if the D made a transfer of that property interest.e.  Life estate: H establishes an irrevocable IV trust with FNB as trustee to pay income to A for life. 2036 Retained life estates. for life or 2. Any income generated between last payment and trust termination distributed to David‘s surviving issue. ―…the amount to be included…is the value of the entire property. 2037. remainder to bro.  When David dies.e. 2038 revocable trusts: ―The cost of holding on to the string may prove to be a rope burn. the full value of the trust as of d. the property (i.  Third.  Second.. The right terminates with the quarterly payment immediately preceding his death. both the retained and remainder interests will be included in the decedent‘s gross estate. FNB is to pay income to H for life.d. if you don‘t give it all away.  the right to the income after someone else‘s death or term of years  the ability to have the income used to discharge the decedent‘s support obligation.20361(b)(1)(ii). probably brought into gross estate. it may end up being treated as yours. under which he has retained 1. This includes:  the immediate right to the income or the use. is it testamentary in nature? If the answer is yes. trust property distributed to B.‖ Old Colony Trust.o. or the right to the income from. or (2) the right. determine if the decedent owned a property interest. §2036(a) Transfers with retained life estate provides that the value of the gross estate ―shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money‘s worth) by trust or otherwise. did D use.o. to designate the persons who shall possess or enjoy the property or the income therefrom. Full value of trust on d.  Ask: Did the D make the transfer? Did he retain the right to income? If not. possession or enjoyment of the property at the time of her death even if no legal right.d. either alone or in conjunction with any person.  If H dies (before A) then include full value of trust on d.  About not ending before her death: If Debra establishes irrevocable IV trust with FNB as trustee to pay income to Debra for 15 years and then to distribute the trust property to her issue  If dies in year 12. 20.  Transfers with Retained Life Estate.. the property (i.nothing included because she outlived it.

D dies after 14 years Whole shebang included in D‘s gross estate. When D dies.  D transfers bonds in trust. that the interest or right would later be conferred  Transfer of Residence. D pays rent and Maxwells pay interest—so rent is equal approximately to the interest due in each year. (3) neither daughter made any attempt to sell her own house.  The court notes that there was no express agreement allowing the decedent to retain possession and enjoyment of the home. Answer: Don't get thrown by assets—doesn‘t matter if he doesn‘t survive them. Possession or enjoyment of gifted prop is retained when there is an express or implied understanding to that effect among the parties at the time of transfer.e. remainder to E.  Was included bc continued to enjoy. forgiving $20.000 on the note. They do so monthly.800. remainder to E. (2) the decedent paid no rent to his daughters for the continued use of the property. and the outstanding balance at her death was forgiven in her will.  Some reminders: D transfers bonds in trust. and (4) neither daughter ever attempted to sell or rent the residence prior to the decedent‘s death. remainder to E. One common §2036(a)(1) problem arises when a person transfers the family residence to a family member and then continues living in the house until death.   41 . Each year during her life. However. See Maxwell. Reg.] The D sold her house to her son and his wife (the ―Maxwells‖) for $270. then to D for life. Makes a transfer and keeps income interest. the decedent has transferred the house with a retained life estate in the form of retained possession and enjoyment. However. the decedent forgave another $20. income to A for life. Commissioner-[intra-family agreement so scrutinized to see whether bona fide arm‘s length. D dies before A&E.this paid down principal) and accepting a $250.2036 -1(c)(i) provides that ―an interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding.  House life estate ex: Blackacre to issue but D can live there.  Not if H and W: W transfers family home outright to H but still lives there until H dies 4 years laternot includable in W‘s gross estate. 2036 doesn’t’ care about contingencies. Thus. Here. In this situation. Included in J‘s estate bc pattern of trust distribution indicates likelihood of express or implied agreement  What’s included for 2036?? All of it less only value of outstanding income interest which is not subject to D‘s interest or right and which is actually being enjoyed b another at the time of the D‘s death. Included bc D kept an income interest. Trustee (not grantor) has absolute discretion but still distributes regularly  Examples: J creates irrev IV trust with FNB as trustee who can in sole and absolute discretion distribute trust income to J. D dies before A and E. Same with trust. income to D for 15 years.000 mortgage note for the balance.  In Rapelje’s Estate v. income to A for life.  Note: Avoiding §2036 by Paying Fair Rent. implicit understanding or agreement allowing the decedent to retain possession and enjoyment of the house. 100% of Blackacre value is included in her estate because she retained it for life  Stinks if it‘s increased in value because that increase is in estate now.000 (its FMV). The decedent continued to occupy the house until her death and leased it at a monthly rental of $1. Gives a roadmap with how to deal with transfer and Maxwell family tried to follow it. the court reasoned that several factors suggested that there was an implied understanding between the parties to that effect: (1) the decedent maintained almost exclusive occupancy of the residence until his death. then to D for life. express or implied. Maxwells pay costs going forward so no problem like in Rapelje. So really mechanical. treated home as own and continued to enjoy it. §20. since in that case he or she also has given the income right to the transferee. was it a bona fide sale?  In Maxwell’s Estate v. the court concluded that the value of the residence must be included in the D‘s gross estate under §2036.no evidence that the rent charged had any relationship to the FMV of the house.  Didn‘t matter that he went to Florida to look for another house because he had made identical trips. he continued to live in the house until his death.  Was there full and adequate consideration? I.  What is retained enjoyment? Was there an express or implied agreement?  Possession or Enjoyment of Property.D transfers bonds in trust. Commissioner (CB 271). Inclusion in the gross estate can be avoided if the transferor pays fair rent for the occupancy. the decedent made a gratuitous conveyance of his personal residence to his two daughters and reported the transfer as a taxable gift.all in.000 of the purchase price (which was equal in amount to the annual gift tax exclusion to which she was entitled.

000 note..  The court in Gokey’s Estate v. The D in Maxwell should have instead made a gift to the Maxwells in the amount of the annual gift tax exclusion.‖  What if the trust instrument provided that ―the trustee may pay income from the trust to the children at his discretion but can pay for support only if not forthcoming from any other source?‖ Perhaps §2036 is not applicable because the power to pay income from the trust is subject to a contingency which may not occur before the settlor‘s death  Note. the court relied on Reg.  Dissent said there was real economic substance here.  Note: permissible Trust Provisions.  Held: D‘s GE includes the value of the trusts‘ property. and (4) the forgiveness of the entire mortgage debt either by gift or testamentary disposition. Moreover. non-subordinate T’ee: in D‘s gross estate only if the T‘ee is req‘d to distribute income (or principal) for support of D‘s minor children or spouse or if the trustee is in fact doing so.‖ In making this determination. if the settlor is the trustee. within the meaning of §2036(a)(1). need a formal lease. §2036(a)(1) applies even though the income ―may be‖ applied to defray the decedent‘s legal obligation. Ex: D transferred 300k to an account she established in a local bank for her child. at the time of the transaction. which the Maxwells would then use to pay down the principal and interest on the $250.  Note: Bona Fide Sales with Creation of Partnership—see below in FLP. stating that the use. she is in control and can decide whether or not to use the trust property to discharge her legal obligation. welfare and education of the beneficiary..Held. the lease was ―merely window dressing‖ and had no substance. (2) there is no evidence that the Maxwells ever intended to occupy the house themselves or to sell or lease it to anyone else during the D‘s lifetime. The court emphasized that the trust mandated the trustee to use income for support and that the trustee did not have discretion.  Independent. the court concluded that the sale-leaseback transaction was not a bona fide sale. right to income or other enjoyment of transferred property was retained. Commissioner found that the separate irrevocable trusts created by the D for each of his two minor children were in fact for the support of the children even though the TP argued the standard of distribution was much wider than support because the language of the trust required that ―the Trustees shall use such part or all of the net income. or (2) ―the trustee may pay income from the trust to the children at his discretion. D designated herself as custodian of the account. In other words. age 10. This scheme will likely be more sustainable on audit if the timing and amount of the reciprocal payments are varied. residence is owned by Bs.trustee was wife). The result in Gokey would not have been reached if the trust instrument provided that either: (1) ―the trustee (not the settlor) may accumulate the trust income until the children reach the age of 18‖. unrelated.2036-1(b)(2)  Custodian Accounts. courts have held that the custodial property is includible in the donor-custodian‘s gross estate under §2036(a). (20. care. there was no real expectation of repayment or an intent to enforce collection of the indebtedness. If a donor dies while acting as custodian for his or her minor child. at end of term.  Is it satisfying a legal obligation of support: D is deemed to have retained possession or enjoyment of the right to income from property if the property or its income is to be used to the discharge of his legal obligations or for his pecuniary benefit.2036-1(B)(2))  D as (or related/subordinate) trustee: if has discretion to use the income or principal or both for the support of her children or spouse then included in D‘s gross estate if she dies when children are minors or while she is married.  Note: Avoiding Inclusion Under §2036(a)(1). Because the D is the trustee. (3) the rent paid by the D to her son came remarkably close to matching the mortgage interest which he paid to her. Reg. (Gokey. Died the next year. under UGMA. §20.2036-1(b)(2). §20. Thus. possession. for the support. Could also have made a qualified personal residence trust: remainder interest has low gift tax value (based on life expectancy and 7520 rates). to the extent that it is applied toward the discharge of a legal obligation of the decedent to support a dependent. implied agreement that the D would continue to live in the house until her death.  42 . The court reasoned that the note had no value at all since there was an implied agreement between the parties that the Maxwells would never be called upon to make any payment to the decedent. but not for their support until they reach the age of 18. the value of the house must be included in the D‘s gross estate under §2036(a)(1) since she retained possession and enjoyment of the property for life. Reasoned that: (1) the D had sole possession of the residence until her death.

 State law provides that the decedent‘s creditors can reach the trust income despite the trustee‘s sole and absolute discretion. educations. which can occur in states that have not adopted legislation permitting selfsettled asset protection or spendthrift trusts  The trustee‘s discretion is limited by an ascertainable standard relating to health. Active business or real creditor protection? If just cooling investments or teaching kids. In that case the decedent doesn‘t have a legally enforceable right to the income.Note: Tax Planning to Avoid §2036. §2036(a) does not apply to this arrangement since the husband-donor is not acting as custodian for his child  Exceptions to 2036(a): bona fide sales. The wife is named the custodian and invests the custodial property into a partnership in exchange for a 99% limited partner interest. The D created the partnerhsips to transfer management of the businesses to the children and settle disputes among the children regarding the operation of the businesses. the husband still has control over partnership distributions to the child even after the child reaches the age of majority.  Exception to 2036(a) inclusion: Bona fide sale for adequate and full consideration  Exam strategy: Ask whether bona fide sale for adequate money or money‘s worth.. The courts have held that the consideration is adequate and full if the D receives partnership of limited liability member units proportionate to his contribution to the business. Was there a real reason for forming the business entity? I. Inclusion under §2036(a) can be avoided by naming another person as custodian for the minor child  The following is another way to avoid §2036(a) while retaining control of the custodial property: Suppose the husband transfers property to a custodian account for the benefit of his child. nontax business reason for creating the company. less sanguine. the person who transfers wil have those as retained interests under 2036  D can avoid 2036(a)(1) application if transfer is a bona fide sale for adequate and full consideration. All the facts and circumstances are relevant in determining whether or not such a reason exists. Stone  Creditor protection stemming from limited liability of the partners  43 . Kimmel and Strangi show parameters for bringing kids into business. purely discretionary trust with regard to both income and principal. (see below)  2036(a)(1) will not apply if the trustee has absolute discretion to distribute income to the decedent. Gifts and tax breaks do not suffice. private annuities. so sale does not deplete the estate  bona fide sale – ―in good faith‖. maintenance or support I which case the decedent. The bona fide sale requirement is only met if the D has a legitimate. Stone: D created FLPs with his kids and transferred ongoing businesses to each of them. Kimbell  Subject to heightened scrutiny where sale between family members Kimbell  Sufficient non-tax business reasons:  Involving children in the family business (so long as the children actually get involved / Pool assets  Estate v.  Unless:  there is an explicit or even implicit understanding bt the D and the trustee that the trustee will in fact distribute the trust income to the decedent whenever he wants it.e. and each case is decided on its own merits:  Must have:  full and adequate consideration – where assets are transferred into a partnership in exchange for a proportional interest therein. not the trustee is actually in control of the flow of trust income. If not adequate/bona fide. objective standard – does the sale serve a substantial business or non-tax purpose?  There must be a valid business purpose of the partnership to avoid inclusion in the gross estate  Does not meet exception of only a paper transaction without substance. As general partner.  Putting in place a mechanism to resolve disputes among partners  Estate v. The children had been active in the businesses before the transfers and assumed more significant management responsibilities afterwards. The husband invests some additional property in the partnership in exchange for a 1% general partner interest.

which were significant portion of family wealth. taxpayers contemplating FLP planning should retain sufficient assets to support themselves for the remainder of their lives and to pay the estate tax that will be due upon death  Discounts for minority interest and lack of marketability: Because minority interests in a business may be entitled to a discounted value to reflect minority status.  Consolidating assets for purposes of a liquidation event (so that assets can be sold all together on liquidation)  Estate of Bongard v.  Retain those holdings and to perpetuate investment philosophy:  Estate of Schutt: D transferred DuPont and Exxon stock.own buy and hold philosophy  Estate of Miller: managed according to husband‘s charting stocks investment philosophy. centralizing management of investment assets.  Insufficient nontax business reasons  Strangi: D transferred almost all of his asets to the partnership. Primary assets were brokerage accounts that continued to be managed the same way after creation of the partnership. The court rejected every claim justification for creation of the partnership finding noneed for protection against a potential will contest by D‘s step-children or aginst a potential claim by his housekeeper. Court also found that the partnership was not justified either as a joint venture of by need for centralized and active management of ivestments. Kimbell has to include assets he transferred to partnership  No. TPs transfer their property to a family LP or LLC.  Form v.transferred almost all of her assets into it and remained financially dependent on those assets. If the D is successful in transferring a significant percentage of the entity in this way. Courts will disregard the form and tax the substance when  the taxpayer ignores the formalities and treats the partnership property as his own. If interests in the entity are subject to restrictions or transferability. Commissioner  Estate of Mirowski: D created LLC after her husband‘s death when his invention (artificial pacemaker!) royalties increased to millions. to a FLP. When the TP transfers interests in the entity to his children. Wanted to jointly manage with daughters and reate a single pool for investment opportunities and providing for each of her 3 daughters on an equal basis. Kimbell v.  Hurford: needed to either be functioning business or some meaningful economic activity! One partnership held only cash and marketable securities and all investment decisions continued to be made by Chase Bank. US D transferred working interests in oil and gas properties that required active business management and other trust assets to an FLP.  A discounted valuation of a pro-rata partnership interest does not preclude a finding that the interest is adequate consideration for the assets transferred  Issue: whether Mr. D was 88 years old and had Alzheimer‘s when she created the partnership. and preserving property as a separate family property. Other justifications for the transfer included protection from creditors. 44 . full and adequate consideration and real business reason for forming the corp.  Rosen: assets were marketable securities and cash and the partnership engaged in minimal business or investment opportunities. he will only own a minority interest at death and again receive a minority discount. they will enjoy further discounts. those gifts will have a discounted value because they represent only a minority interest in the entity.  Note that according to a recent case (katz‘s good practice).  possession/enjoyment includes assurance that assets will pay expenses/debts after death  deferral of rent payments until after death (paid by estate) = economic benefit to deceased  decedent‘s lack of liquid assets after transfer evidenced implied agreement for his enjoyment  Bigelow: no pooling of assets and no change in management. Facilitating gift-giving program is not nontax business purpose. One parnerhips held only phantom stock (could only be held or cashed out) and one collected rents because the D had leased all of the real estate prior to creation of the partnership. substance: this planning technique tends to elevate form over substance.

The IRS argued that the decedent‘s voting control of the corporations amounted to a taxable accumulation power under §2036(a)(2) by way of being able to withhold dividends from the trust. Thus. at least 20% of the total combined voting power of all classes of stock.‖ and the value of the partnership interest is included in the husband‘s gross estate upon his death  This result can be avoided by transferring the husband‘s limited partnership interest to his wife before the wife transfers the interest to their children.  Right to vote stock (2036(b)):  The right to vote stock does not give the decedent power to control the beneficial enjoyment of the stock. while the husband retains the §2036(a)(2) right.  2036(b)(1): for purposes of subsection (a)(1).  the TP is too greedy (ex: by transferring all of his assets. Courts will apply 2036(a)(1) to determine if the decedent has retained use. This provision states that the retention of the right to vote (directly or indirectly) shares of stock of a controlled corporation shall be considered to be a retention of the enjoyment of transferred property under §2036(a)(1). a trust grantor who could not appoint himself as trustee because needed corporate trustee transferred voting stock in certain closely held corporations to a trust to pay income to his children and reserved the right (1) to vote the shares of stock. Court will find such retention where D has retained a substantial economic benefit from the transferred property which exists if there is either an express or an implied agreement that the transferred property will be used for the D‘s benefit. Byrum. and (2) husband as a 99% limited partner. As general partner. Consequently. as a 1% general partner. or had the right to vote.  In United States v. the Court determined that such retained powers did not cause inclusion in the gross estate  Byrum was overruled by 2036(b) which provided that the right to vote will be retention of the enjoyment of the transferred prop if the corp is controlled by the D. §2036 does not apply at all. including the transferred stock.  (b)(2) Controlled corporation—at least 20% of the total combined voting power of all classes of stock during last 3 years. In this way. possession or enjoyment of the property.  However.  Ex: Suppose a partnership has two partners: (1) a corporation. Settlor owned 71%.  Congress acted to overrule the Byrum result by enacting §2036(b). Control means that the D during the 3 year period ending on the DOD owned or had the right to vote stock possessing at least 20% of total combined voting power of all classes of stock. the Supreme Court rejected this argument on several grounds: (1) The power over corporate dividend policy was in the board of directors. 45 . and the members of the board were at most subject to the decedent‘s power of persuasion in the context of their fiduciary duties under corporate law to all stockholders. often including personal residence into partnerships).  there is no legitimate business purpose other than tax avoidance for creating the partnership. under §2036(a)(2). Thus. either actually or constructively by application of §318. the husband has the right ―to designate the persons who shall possess or enjoy the property or the income therefrom. retention of right to vote (directly or indirectly) shares of stock of a controlled corporation shall be considered retention of enjoyment of transferred property. §2036(a)(2) is inapplicable RETAINED BUSINESS INTERESTS: 2036(b) might apply if D retains right to vote stock or right to preferred stock. and (2) to disapprove the sale or transfer of any trust assets. (Byrum) because the decedent had fiduciary obligations to the minority shareholders and because he was not trustee and thus could not control the distributions from the trust.  Ex: Suppose that a parent contributes $99 to a FLP in exchange for a 99% interest in the partnership and his child contributes $1 in exchange for a 1% interest. the wife is the transferor. which is owned 100% by husband. Is the $99 transfer a bona fide sale for an adequate and full consideration? If so. The husband transfers his 99% limited partner interest to his children. and (2) the trustee of the trust possessed an intervening right to accumulate income in case the corporate board flooded the trust with dividends. This attribution rules of 318 apply to determine D‘s ownership of stock. the husband (through his wholly-owned corporation) controls the children‘s enjoyment of the partnership property and income by controlling distributions to them. A ―controlled corporation‖ is defined as a corporation in which the decedent at any time after the transfer of the property and within 3 years before death owned.

D transfers his common stock back to the co and receives in return 2 classes of stock: preferred and common.  Applicable retained interests/Estate freezes (2701):  Comes into play with transfer of stocks  Give low-value common stock to kids.retained power to determine enjoyment of property  In general: When the D has the power to control the beneficial enjoyment of the property. only the value of the preferred stock will be in his GE under 2033. Thus. When D dies. the trustee‘s voting rights may be attributed to the D.  This ensures that the D doesn‘t shift economic benefit through failre to collect dividends.  if transfer interest in a corporation or partnership to family member and either he or a family member keeps an interest in the tax.  Ex: D transfers prop in trust.  Section 2701(a)(4) requires that the junior equity.  2701 Applies  applies to a transfer of interest I a corporation or partnership  to a member of transferor‘s family  where transferor or family member  retains any applicable retained interest  except for interests for which market quotations are readily available  retained interest then = 0 value. for any period not ascertainable without reference to his death or 3. (i. it has no application to transfers of interests in a partnership. income to A for life. By its terms. with it all future appreciation of value of co.  §2036(a)(2) provides that the value of the gross estate ―shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money‘s worth) by trust or otherwise under which he has retained 1. to designate the persons who shall possess or enjoy the property or the income therefrom. retained interest has no value unless it‘s a qualified payment. the D in Byrum could have also avoided application of the later-enacted §2036(b) by designating his wife to vote the shares of stock transferred to the trust  §2036(b) Does Not Apply to Partnerships. either alone or in conjunction with any person. remainder to B and names herself trustee. for life 2.‖  look above for ending before death and ascertainable without reference to death ex. that prop will be included in her gross estate under 2036(a)(2) or 2038(a)(1). With little or no value in the common stock.  so give away everything. whose not related/ subordinate to serve as trustee and D retains right to compel T to accumulate income and add it to B‘s remainder interest.  This prevents D from shifting all future appreciation to next generation at no gift tax cost. if D transferred stock in trust with an understanding or agreement that the trustee would vote stock in accordance with directions from the decedent. The D has frozen the value of his asset at its value at the time of the gift to his daughter. the common stock transferred to the next generation have a value = of the greater of 10% of all equity interest plus any debt owed the transferor or an applicable family member. D will pay no gift tax. D retains the right to not pay income to A and instead accumulate for B. a dividend payable on cumulative preferred stock at a fixed rate 2701©(3)(A). pay gift tax but younger generation gets appreciation value  Keep preferred stock with relatively high value and dividends  Ex: Assume the D owns all the stock in a co and wants to transfer ownership of the co to his daughter with the least EGTs. The provision that will cause the greatest value to be included will control.  46 . to daughter. D then transfers common stock. 2036(a)(2) and 2038(a)(1). If D doesn‘t enforce his right to dividends on preferred stock. D structures the preferred stock to absorb most of the current value of the co. Answer doesn‘t change if D names T. he can shift additional value to his daughter at no extra cost.e. for any period which is not does not in fact end before his death (2) the right. but there will never be more than 100% of the property‘s value included in the GE. §2036(b) applies to transfers of stock in a controlled corporation. On the other hand.What is an indirect voting right? Ex. All of this is includable in D‘s estate under 2036(a)(2)  Don’t have to be trustee to control. a D is not treated as having retained the right to vote stock transferred in trust merely because a relative was the trustee who voted the stock. B will obtain possession of the accumulated income at the same time that he takes the corpus.

 Nor does it apply to a power held solely by another person than the D (unless the D reserves the unrestricted power to remove the trustee and appoint self then seen as having powers of trustee). if reservation of a power to alter or amend a transfer of property will result in inclusion of the property in the decedent‘s gross estate even though the power could not be exercised in favor of the decedent or his estate. §2038(a)(1).  Whether the exercise of the power was subject to a contingency beyond the D‘s control which did not occur before his death.e. or terminate the transfer (or where any such power is relinquished within 3 years of his death) the interest subject to such power will be included in the decedent’s gross estate. then entire dod value of trust will be in gross estate under 2038(a)(1). In general: the gross estate includes any property transferred during the D‘s life if the D possessed at the moment of death the power to alter.e.  Power deemed to have existed at death even relinquished within 3 years of death  Power deemed to have existed at death even (1(b)).2038-1(a)(3)  Exceptions: if there‘s a contingency. includable if a decedent made a lifetime transfer (except in the case of a bona fide sale for an adequate and full consideration in momw) of an interest in property and if at the time of death the enjoyment of the interest remains subject to a change through the exercise of a power held by the decedent alone or in conjunction with another person[i. has to be during life: so if Karen reserves right to designate who will receive trust property in her will then NOT 2036(a)(2) but will come in under 2038(a)(1). 2038(a)(1) includes only the remainder because she does not have power to amend the income interest. 20.  I. a power that can only be exercised if a specific contingency occurs). Commissioner.Power Subject to a Contingency. §20.  Therefore. under Porter v. however. a power to name new benes or to rearrange the beneficial interests among a limited class of beneficiaries will produce inclusion in the gross estate  Power to revoke doesn‘t disappear because holder is incompetent. Reg. if the power to alter enjoyment is subject to an ascertainable standard. K reserves right to designate who will receive trust property in will.  Designating persons has nothing to do with a power over the transferred property itself which does not affect the enjoyment of the income received or earned during the D‘s life (that‘s what 2038 is for). to accumulate income even if only one person will get the income and the remainer. amend. i.e. terminate or revoke and  Ex: Including an power affecting time or manner of enjoyment.  Exception for 2038 only. brings into gross estate  The property transferred by the decedent  If the decedent has the power to alter amend.2038-1(b) states that §2038 is not applicable to a power the exercise of which was subject to a contingency beyond the decedent’s control which did not occur before his death (i. per §2038. doesn‘t matter if the person has an adverse interest here] (3) to alter. exer in will to add or eliminate income beneficiaries as well as remaindermen. 47 . revoke or terminate alone or in conjunction with anyone or where that power is relinquished during the 3-year period ending on the date of the decedent‘s death.2036-1(b)(3) is not limited this way. amend.)  Immaterial  Whether power exercisable alone or only in conjunction with others regardless of whether other has an adverse interest.)  (20. (1(a)(3))  The decedent had the power at the moment of death.2036-1(a). for 2036. Note. revoke.2036-1(a). If Karen had power..  I. property is not includible in gross estate under 2038.e.e.  Meaning of reserved right: The right to designate the person or persons who shall possess or enjoy the property or income includes a reserved power to designate the person or persons to receive the income or to possess or enjoy nonincome producing property during the D‘s life or any other period. §20. (20. Reg. Karen creates an irrevocable IV trust with FNB to distribute income to children and grandchildren. §2038.  If it could not be exercised without prior notice  or if the revocation would be delayed after the exercise of the power or  or.  Different from gift tax: to change timing here counts as a power to alter enjoyment).

 In Jennings v. Smith d created irrevocable trusts for his kids. By the terms of the trust, the trustees (of whom the decedent was one) were given power in their absolute discretion to use any or all of the trust income as they determined ―reasonably necessary to enable the beneficiary in question to maintain himself and his family, if any, in comfort and in accordance with the station in life to which he belongs.‖ Also, the trustees had the power to invade the trust corpus in the event the beneficiary in question ―should suffer prolonged illness or be overtaken by financial misfortune which the trustees deem extraordinary.‖  Held. that since the benes had not suffered prolonged illness or financial misfortune (i.e., since the contingencies had not happened before the decedent‘s death), the D’s power to invade the trust corpus did not bring the trust property within the reach of §2038. Similarly, the contingency that would justify exercise of the power to distribute trust income had not happened before the decedent‘s death. Therefore, the trust income was also not includible in the decedent‘s gross estate under §2038.  Note: for ascertainable language standard- Can go in and say look how we've lived up to now and give us the money to live in this want similarly. Similarities between 2036(a)(2) and 2038(a)(1)  Note: They apply regardless of whether power is exercisable alone or in conjunction with others—this means unlike gift tax 25.2511-2(e), no safe harbor if that other person has a substantial adverse interest.  Judicial exceptions developed to the inclusion rule. The portion that is HEM-ed will not be included. Similarity Examples:  D created an irrevocable trust to pay the income to her children for their lives. After death of all the D‘s children, the trust property is to be distributed to her descendants. There are 3 T‘ees, one of whom is D. D has the discretion to add or delete income or remainder benes as long as all trustees agree. Answer: The trust will be in Decedent‘s gross estate under 2036(a)(2) and 2038 because D has retained for her life the right to determine who will enjoy the prop and has at the moment of her death, the power to alter, or amend the trust. Doesn‘t matter under either one that can only act in conjunction with other 2 trustees  D creates an irrevocable trust, transferring property to himself as trustee to pay income to his son, A for life, At A‘s death, the trust property is to be distributed to A‘s surviving issue. D retains the right to revoke the trust, but only with As consent. Upon revocation, the trust property reverts to D. Answer: includable under both. Irrelevant that Adam must consent and never would because has substantial adverse interest. Differences between 2036(a)(2) 2038(a)(1) retained for life without reference to death or for power exists as of date of death (need not be period that does not end before death retained) and applies regardless of power source applies even to right exercisable in a contingency, does not apply to contingency power if regardless of whether contingency occurs contingency did not occur before DoD requires inclusion of entire property inclusion only of spec. prop subject to D‘s pwr. That is:  2036 looks at life (period without reference to death or doesn‘t end just before death) v. 2038- looks at exact time of death.  2036 explicitly applies regardless of contingency not being met whereas 2037(a)(1) doesn‘t apply to contingency power if contingency didn‘t occur before DOD.  2036 will generally include more...2036 requires inclusion of entire property whereas 2038 requires inclusion only of specific property in D‘s power (control income or remainder?) If both apply as often do, then rely on whatever is more (probs 2036) Differences example:  D establishes an irrevocable IV trust with himself as trustee or the benefit of son, S. Trustee is required to pay the income to S at least quarterly. At S‘s death, the trustee is to distribute the trust property to S‘s issue. The trustee has the sole and absolute discretion to distribute some or all of the trust property to S after his marriage. S does not marry before D‘s death. The ability to distribute corpus is a power to determine who will enjoy the trust property and 2036(a)(2) applies. It is immaterial that the power to distribute the trust property is subject to a condition that has not in fact occurred and over which D has no control. (20.2036-1(b)(3). Section 2038(1)(1) doesn‘t apply because the contingency had not occurred before D‘s death. (20.2038-1(b).  M creates an irrev IV trust and is serving as trustee when she dies. Trustee is to distribute income quarterly to daughter, R, and trustee also had power to distribute principal to R but only if her H died or divorced.  Not included under 2038(a)(1) bc her power is subject to a contingency that never happened  Will be included under 2036(a)(2).

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Note: Amount Included in Gross Estate. the entire interest subject to such power will be included in the decedent‘s gross estate. The value of such interest is its FMV on the date of the decedent‘s death. Note: Powers Not Affecting “Enjoyment.” §2038(a) does not reach powers to alter, amend, revoke or terminate unless an exercise of the power will change ―enjoyment‖ of the transferred interest in property. Under this theory, trust property has escaped inclusion under §2038 despite the grantor‘s retention of the following powers: (1) a power to add property to the trust; (2) a power to substitute property of ―equal value‖; and (3) a power to amend the trust to clarify the original language (e.g., to reflect changes in the tax law), if it does not enable the grantor to ―shift economic benefits‖ Courts have disagreed on whether a power to amend the trust to enlarge the power of a trustee to shift enjoyment of the property among the beneficiaries constitutes a power to change ―enjoyment‖ of the transferred interest in property.  Transfer. Section 2038 focuses on power had at moment of death to alter, amend, revoke or terminate transfer but 2036(a)(2) includes in gross estate any property transferred by D when D retains right to designate persons who will possess or enjoy property or income from it.  Note: both sections require the D actually make the transfer of the property that is to be included in GE.  United States v. O’Malley, the settlor named himself a co-trustee and gave the trustees discretionary pwr to distribute income currently or accumulate it and add it to corpus. The inclusion of the original principal was not in dispute; rather whether the accumulated income should be included in the D‘s estate.  Issue: whether the decedent had ever ―transferred‖ the income additions to the trust principal.  Holding: The court answered in the affirmative, noting that all income increments to trust principal were traceable to the D himself by virtue of (1) the original transfer and (2) the exercise of the power to accumulate. Thus, the ct found that the accumulated income should be included in the decedent‘s gross estate since he should be treated as transferring the accumulated income to the trust.  Note: Someone Else Transfers Property to Avoid §2036. Assume that the decedent-husband had transferred property to a trust for the benefit of his children. The decedent is the trustee, and the trust instrument provides that the trustee may distribute the income or corpus from the trust at his absolute discretion. Upon his death, the trust property will be included in the decedent‘s estate pursuant to §2036(a)(2) since the decedent, as trustee, retained the right to ―designate the persons who shall possess or enjoy the property or the income‖ from the trust. In other words, the decedent is empowered to distribute the trust income to the income beneficiaries or to accumulate it and add it to the principal, thereby denying the income beneficiaries the privilege of immediate enjoyment. How can this result be avoided? The decedent‘s wife (or any other person) should have transferred the property to the trust. Care should be taken to document that this transfer was from the wife‘s separate property. The decedent may still be named the trustee of the trust and retain control over the distribution of the trust income and corpus to his children. This arrangement is permissible because the husband is not the same person transferring property to the trust.

 36/38: Power to Designate/Remove Trustees- enough control to include in gross estate? A settlor who keeps the power to designate himself as a trustee will be treated as holding all administrative and dispositive powers of the trustee, even if the settlor never actually designated himself as a trustee or never exercised any powers as a trustee. It is immaterial whether the settlor retained the power to remove the existing trustee from office. (So could, under 36 affect who get it and 38 affect when).  In Farrel’s Estate v. US, the D established an irrevocable trust for the benefit of her grandchildren. Two individuals were names as trustees, with discretionary power to distribute or accumulate all or part of the income from the trust. The trust instrument provided that the decedent could appoint a successor trustee if a vacancy occurred, but she could not remove a trustee and thereby create a vacancy. Moreover, the trust was silent as to whether the decedent could appoint herself as a successor trustee in the event of a vacancy.  The court held that the contingent right of the decedent to make herself a trustee in the event of a vacancy was a legally enforceable right, which bore directly on the designation of the persons to possess or enjoy the trust property or income under §2036(a)(2). Thus, the court held that the trust property must be included in the decedent’s gross estate.  Estate of Wall v. Commissioner- retained the right to remove the corporate sole trustee and replace it

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with another corporate trustee, which has to be independent. Court said right to replace did not equal the right to exercise the powers of the trustee. She might have thought a beneficiary could move away or something making it impractical to maintain personal contact with the trust department. Not equivalent to retained rights. Ms. Wall did not retain an ascertainable and enforceable power to affect the beneficial enjoyment of the trust property.  Rev. Ruling 95-58- Questioned whether a grantor‘s reservation of an unqualified power to remove a trustee and appoint a new trustee (other then the grantor) is a reservation that will include in in 2036(a)(2). Nope, not includable. If can be yourself or someone you can control, that's different. An independent trustee is presumed to be acting in bene's best interest. Needs to be a corporate successor not related or subordinate or individual.  The IRS generally equates independence with the status of being other than a ―related or subordinate party‖ within the meaning of §672(c). Thus, if the grantor retains the power to remove and replace the trustee with a related or subordinate party, the property is included and the gift will be deemed incomplete. A related to subordinate individual is someone who does not have a substantial beneficial interest in the trust which would be adversely affected by exercise or nonexercise of power and who is either 1. The grantor‘s spouse (but only if living with the grantor), parent, issue, sibling or employee (2) a corporation or employee of a corporation in which the grantor has significant control or 3. An employee of a corporation in which the grantor is an executive.  Ex: Dan sets up trust and reserves right to remove trustee and replace with anyone other than himself or his spouse. Still included because there are other related or subordinate parties as defined in 672(c).  Power to Distribute or Accumulate Income- included If the settlor-trustee retains the discretion (―alone or in conjunction with any person‖) to distribute or accumulate income, the trust property will be included in the settlor‘s estate pursuant to §2036(a)(2) since the settlor, as trustee, retained the right to ―designate the persons who shall possess or enjoy the property or the income‖ from the trust. In other words, the settlor is empowered to distribute the trust income to the income beneficiaries or to accumulate it and add it to the principal, thereby denying the income beneficiaries the privilege of immediate enjoyment.  In United States v. O’Malley, the settlor named himself a co-trustee and gave the trustees discretionary power to distribute income currently or accumulate it and add it to corpus. The court held that because the trustees retained the right to distribute or accumulate income, they could deny to the income beneficiaries the privilege of immediate enjoyment of that income. This power is sufficient to be deemed the power to designate the person who was to enjoy the income and property from the trust. Thus, the court held that the settlor must include all the trust principal, including the accumulated income, in his gross estate.  Note: §§2036(a)(2) and 2038(a)(1). When the IRS argues that a settlor-trustee‘s power to distribute or accumulate trust income constitutes a right to ―designate the persons who shall possess or enjoy the property or the income‖ from the trust under §2036(a)(2), it will also tend to argue that this same power constitutes a right to terminate the trust and distribute all of the trust property to designated beneficiaries under §2038(a)(1).

 Exception: Ascertainable standards: Neither 2036 not 2038 make any reference to ascertainable standards but courts have interpreted these sections to include the exception.  Powers that are limited by ascertainable standards relating to health, education, maintenance and support will not cause inclusion under either 2036(a)(2) or 2038(a)(1).  Note: Typically, this rule comes into play where the grantor names himself trustee and retains the power to distribute income or invade the trust corpus for the ―health, education, maintenance or support‖ of the beneficiaries  Rationale: we care about control- benes can go into court and say give me a payment…  Powers limited by an ascertainable standard include:  ―reasonably necessary to enable the beneficiary in question to maintain himself and his family…in comfort and in accordance with the station in life to which he belongs‖, Jennings  ―in the case of prolonged illness or financial misfortune,‖ Jennings  ―in the case of sickness‖ Old Colony  ―support and general welfare- maybe Leopold  Emergency is ascertainable. 25.2511-1(g)(2)

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 Moreover. the trustee had the discretion to cease paying income to the income beneficiary and add it all to principal ―during such period as the [trustee] may decided that the stoppage of such payments is for his best interests. to allocate receipts between income and principal. the court required the corpus of each trust to be included in the decedent’s gross estate under §2038(a)(1). to buy and sell trust property. be powers to accumulate income and/or invade trust principal. The trustees were ―required‖ by the standards to distribute only that part of the income as was necessary under the standard. v. United States. These powers (though they can affect the beneficial enjoyment of the property) will not cause the trust to be included in the D’s gross estate under 2036(a)(2 or 2038(a)(1). Look for the “Magic Words. the actuarial value. education.  In Leopold v. or desirable in view of changed circumstances. not subject to §2036. v. Instead. 51 . Thus.. of this portion of the outstanding income interest was excluded. the court held that the ―best interests‖ standard is so loose that the trustee is in effect uncontrolled. etc.‖ In contrast. the court held that the trustees‘ power to distribute trust corpus as they thought “necessary or proper” was not subject to an ascertainable standard.  In Old Colony Trust Co. the accumulated income would be paid to the daughters when they reached 21. the trust instrument provided that the settlor-trustee could. The court rejected this argument.” the decedent had created trusts for his daughters naming himself as co-trustee and giving the trustees the power to pay income for the beneficiaries‘ ―support. United States (2036). in his absolute discretion. by the same token. the court held that administrative powers do not constitute powers to designate the persons who shall possess or enjoy the trust property or income and are. United States. Powers NOT limited by ascertainable standard include:  ―desirable in view of changed circumstances‖. increase percentage of income payable to the income beneficiary ―when…such increase is needed in case of sickness. therefore.  focus on best interest/necessary and proper is difficult to ascertain whereas health/accustomed manner is ascertainable  Exception: Administrative Powers. to borrow money. in substance. In particular. the D does not have unfettered control to determine beneficial enjoyment. As a result. The idea was that a power of a trustee to invest in non-income-producing growth property or to treat receipts as ―principal‖ amounted to a power to accumulate and that.  In general: Trustees‘ administrative and management powers can include power to invest the trust money.‖  The court held that both ―sickness‖ and ―[if] desirable in view of changed circumstances‖ constitute ascertainable standards. and happiness  In Old Colony Trust Co.Leopold  comfort.‖  The court held that the trustees‘ power to pay or accumulate income for the beneficiaries‘ support. and the daughters had an enforceable right to enjoy that portion of the trust income. it relied on the fundamental principle of the law of trusts to the effect that such powers are never beyond the ultimate control of a court of equity to prevent abuse of the respective interests of income and remainder beneficiaries. These administrative powers may include the discretion to acquire investments and the right to determine what is to be charged or credited to income or principal.  The IRS tried to argue that broad administrative powers pertaining to trust investments and trust accounting could. at the time of the decedent‘s death. Therefore. ―best interests‖ Old Colony Trust  ―if necessary and proper‖. The accumulated income interest was likewise excluded since the trustees could not prematurely distribute the accumulated income (unlike the trust corpus). maintenance and general welfare was subject to an ascertainable standard.  Rationale: the decedent as trustee is bound by fiduciary obligations in exercising these powers and is subject to review and control by the court. the trustees had the power to distribute the trust corpus to any beneficiary to the extent the trustees judged such a distribution to be ―necessary and proper.‖ amounted to a power to invade the trust property for the income takers. education. a power to invest in income-producing property or to treat receipts of property as ―income. maintenance and general welfare‖ or to accumulate the income and pay it over to each beneficiary when she reached age 21.‖ In addition. the court concluded that the latter standard is ―roughly equivalent to maintaining the [income beneficiary‘s] present standard of living. In addition. welfare.

the first person will be viewed as the grantor or transferor of property with a retained life estate.  Reciprocal Trusts.  52 ..  Policy: thought form of a transaction usually governs and taxpayer have a right to structure their affairs to minimize impact of taxes. For example. the husband created a trust with income to his wife.  An objective test: It is enough that the trusts are inter-related and leave the parties in the same economic position they would have been in if they had created trusts for themselves (Grace). with remainder at death to other beneficiaries. There does not need to be an agreement. the court will strike down and include the property in your estate. (3) the transfers in trust left each party. Reciprocal trusts  From Grace – does not matter if there was not a deal. these parties in same economic situation.they say objectively.‖ The Court rejected a test involving the subjective intent of the settlors since this intent is difficult to determine. about two weeks later with income to her husband. court looks at whether trusts are interrelated and settlers are in same economic position  Do the two vehicles look so similar that the donor is trying to give more money to his family?  What they are: If one person transfers property to another person under an agreement or understanding that the transferee will make a transfer in trust with income to be used for the benefit of the first person for life. virtually identical in terms. Holding onto admin powers (even though can invest.included. when they ignore the formalities or subvert the form.  Red flags: right before new gift tax. If quid pro quo trusts.. (3) the identity of the trust provisions. as life beneficiary. They don't care about subjective tests-. (2) the relationship of the settlors. mortgage. loan) of trustee short of distributing it. Grace’s Estate. same time. one of the trusts can grant the beneficiary a limited power of appointment.  Example. one of the trusts can provide that the trust corpus will be distributed to the beneficiary upon his attaining age 30. Look at substance rather than form  Note: Factors Relevant in Ascertaining “Interrelatedness. The Supreme Court stated that the test to be used is whether or not the trusts were ―interrelated‖ and the principal factor to be considered was ―whether the trusts created by the settlors placed each other in approximately the same objective economic position as they would have been in if each had created his own trust with himself. The husband‘s trust gives the wife a life estate with remainder to their children.  Exam strategy: remember reciprocal trust doctrine can be extended to transfers that are not in trust.” The following factors should be considered in ascertaining the requisite objective interrelatedness: (1) The relative sizes of the trusts. to the extent of mutual value. If the two trusts are of approximately equal value and are established around the same time. The reciprocal trusts doctrine can be circumvented by varying the terms of the trust provisions. The two trusts are interrelated because: (1) they are substantially identical in terms. Note: Avoiding the “Reciprocal Trusts” Doctrine.those powers aren’t enough to be powers that would subject trustee to determining what possesses/enjoys property. in the same objective economic position as before.  In general: The transferor cannot circumvent §2036(a)(2) or 2038 by using a ―conduit‖ to avoid retention of an interest in the property transferred.  Applying this test to the present case. and the wife created a trust. while the other trust can provide for a distribution at age 35. the court concluded that the value of the trust created by the wife must be included in decedent-husband‘s estate for federal estate tax purposes. (2) they were created at approximately the same time. and the wife‘s trust gives the husband a life estate with remainder to their children. each spouse will be treated as the grantor of the trust created by the other spouse on the ground that they each established an equivalent trust with reciprocal benefits  In United States v. rather than the other. H and W. courts will exalt substance over form to prevent tax evasion. only inter-related transfers that leave parties in approximately same position as if made transfers themselves. and (4) the relative contemporaneousness of creation. each owning separate property. Alternatively. establish separate trusts for each other‘s benefit.

Amanda will obtain possession of the trust property as long as she survives.Reversions—2037  2037. the possibility of the decedent‘s survival is almost nonexistent?  2037(b) says reversionary interest will be valued ―without regard to the fact of the decedent‘s death by usual methods of valuation. need not survive D (reversion in estate under 2033. then to D if living. including the use of tables of mortality and actuarial principles. the gross estate includes interests gratuitously transferred by the decedent during life if: (1) the beneficiaries can obtain possession or enjoyment only by surviving the decedent. remainder to B  2037 doesn‘t apply. 2033 and 2037. and (2) the decedent possessed a reversionary interest that was worth more than 5% of the value of the property immediately before death  Definition: A reversion is a future interest in proepty that is retained by the transferor.  Note: will the value of the reversion be diminished because immediately before death. Donna predeceases J and A.  Rationale: testamentary effect. emasculating 2037 and making it only apply in narrow cases where someone is killed suddenly or accidentally. with independent trustee to pay income to A for life.use actuarial tables unless decedent is terminally ill when gift is completed. D‘s death is irrelevant  D establishes a trust that accumulates income for 30 years then distributes to B  2037 doesn‘t apply.  Examples:  D creates an irrevocable IV trust to pay income to A for life. 53 .  Pattern: Income to A for life. exceeds 5% of the value of the trust property. D predeceases both A and B. value under the applicable valuation tables. like 2036 and 2038 there is an exception for bona fide sales for adequate and full consideration in money or money‘s worth. At J‘s death. so long as D has greater than 5% chance of taking (under actuarial tables)  What will be included in D‘s estate?  Value of trust property minus value of A‘s life interest  Note: if D’s death is irrelevant but still has a reversion.  Applies if:  the decedent made a transfer in trust or otherwise  the possession or enjoyment of the property can be obtained only by surviving the decedent and  the decedent retains a reversionary interests and the value of it immediately before the decedent‘s death exceeds 5% of the value of the property. Cannot use the actual life expectancy of the decedent involved. pass from D to heirs at D‘s death). otherwise back to D.incurable illness or other deteriorating condition such that there is a 50% probability that she will die within 1 year of gift being completed.  Ex: D creates an irrevocable IV trust to pay income to J for life. otherwise to Donna. covered by 2033.  D.  Note. In this situation. 2037  If D predeceases A. once trust is established. B will only obtain possession of the trust property if D dies before A. otherwise to B. Section 2037 doesn‘t apply because Donna‘s death is irrelevant. is transfer out of D‘s estate?  2037 doesn‘t apply. At A‘s death.7520-1(b)(3). ―the value of the gross estate shall include the value of all property to the etent of any interest therein of which the decedent has at any time made a transfer…(except in the case of a bona fide sale for an adequate and full consideration in money or money‘s worth) by trust or otherwise…Under §2037(a). the trustee is to distribute the trust property to Amanda if she is living. There are 2 sections that govern reversions. The value of the trust property minus the value of A’s life estate will be in D’s gross estate if his reversion. D‘s death irrelevant  D establishes a trust to pay income to A for life. B must survive to inherit. once trust established.  Does 2037 apply if:  D establishes a trust to pay income to A for life. the trustee is to distribute the trust property to D if he is living. otherwise to B. the trust property would have been distributed to Dwight. remainder to B if living.  2037 doesn‘t apply. remainder to D if then living or If not to B. under regulations…  Roy: See also 25. otherwise. although B must survive A. If A had died first.

because gifts are taxed at same rate as transfers at death and there is one unified exemption amount. if a decedent. A assigns her outstanding income interest to the children for no consideration.  Since Betty did not have the financial resources to pay the tax from her separate property.000 in taxable gifts because these were outright transfers to her children but gift tax she paid on these transfers will be included under 2035(b). W made a gift to Betty of 3. transferred an interest (or relinquished a power) which. would have triggered inclusion of the underlying property under the following then the value of the property is includible in the gross estate just as if the decedent had actually retained the interest (or power) until death. Having discovered that if she continues to receive income until death the trust property will be includible in her GE under §2036(a). Note: Bona Fide Sales. Insurance trust also created to hold insurance on Betty‘s life. US. Willet gave her the money to pay the gift taxes in the form of two checks totaling $1.250. A will succeed in removing the trust property from her gross estate. Example.2035. But there‘s still an advantage to the gift tax being tax exclusive that we want to capture. Congress hasn‘t gone that far. The next day she drew two checks from her personal account. Most of these are not brought back in—only if life insurance or retained interest or gift tax. the gift tax on all gifts would need to be included in the gross estate. Her gross estate doesn‘t include the 1. 2037 (certain reversions).  Does not apply if the beneficiary herself. within 3 years before death.1 million. the 500k will not be in L‘s gross estate under 2035(a) or 2042(2).415. The scope of §2035(a) is limited by §2035(d). Under §2035(a).  Once the gift and estate taxes were unified. payable to the IRS for the identical amount. Willett arranged his will and other docs so the entire estate was placed in a marital trust. the trust property will be includible under §2035(a). 54 . which makes the 3year rule inapplicable to bona fide sales for adequate and full consideration. 2038 (retained power to alter. terminate) or 2042 (proceeds of life insurance). revoke. Betty was. Purpose appeared to be payment of estate taxes at Bettys death. §2035(b) increases the decedent‘s gross estate by the amount of any gift taxes paid by the decedent or the estate on gifts made by the decedent (or by the decedent‘s spouse) within 3 years before death  it applies to outright gifts as well as gifts of life insurance and retained interests.  Thought it was better for Betty to pay the gift taxes because she was younger than Willet and so more liable to outlive 3 year rule. to satisfy the gift tax liability.  ex: Terry gave each of her 5 kids 250k and died 18 months later. amend. had it been retained until death. which was then used to purchase the LI. Betty was named the income bene.  Ex: S purchases policy on father with S as bene. which she deposited in her own account. however.  2036 (retained life estates or right to possession of property). D must have owned the property.  F: Betty is mere conduit of Willet.  Brown v.  Note: for 2036-38 to apply.step transaction. Suppose that A created a trust many years ago to pay income to herself for life with remainder at her death to her kids. If she dies within 3 years. made a transfer and retained an interest that would trigger 2036-8 and transferred that retained interest w/i 3 yrs of death  LI: included in gross estate amount receivable by a beneficiary on life of D if D owned the policy and transferred it within the 3 years immediately preceding his death.  2035 Gifts Within 3 Years of Death: 2035 basically performs 2 functions:  (a) Certain Property Included in Gross Estate. However. or someone else.Transfers within 3 years of death  Exam: Just look out for gifts made within 3 years of death. there was no longer a need for this really. To fund the LI trust. As long as L didn‘t own any incidents of ownership in the LI policy at his death or did not transfer any incidents of ownership in the 3 years preceding his death. to truly capture that.  (b) Inclusion of Prior Gift Taxes Paid.732.  Ex: L transfers policy where son is beneficiary to son. however. If she survives for at least 3 years after the assignment. purchased the life insurance policy even if they did so within 3 years of death.

Gifting vs. When she was 78. The estate tax. not subject to estate tax. the gross-up requirement applies to gift taxes paid by the decedent on gifts made within 3 years before death. If 2 parties to a transaction are sufficiently related…we have…applied the step transaction analysis w/o any finding that the intermediary was legally bound to comply w/ the prearranged plan. in contemplation of death. even if the underlying gift is immune from inclusion. so imposed whether gratuitous transfer or selling. Note that §2035(b) operated independently of §2035(a). thereby removing all the property which he has enjoyed from his GE. Where the D is entitled to all income. on the other hand. AS a result. the actuarial value of the remainder interest. ―it does not seem plausible. (See also Kelley). Held: D had not received adequate and full consideration even though son was bona fide purchaser and had paid the actuarial value of the life estate.e.   under no legally enforceable obligation to use the funds in that fashion.  Transfers for consideration:  What if sold rather than transferred? The gross estate doesn‘t include transfers that were made for adequate and full consideration in money or money‘s worth.  D‘Ambrosio v. Recall that the gift tax is levied on a net basis.  Sale of a life estate:  Section 2036(a)(1) includes in the gross estate the value of property where the D retained a right to income for life. Rationale. Advantage of gifting is that any gift tax paid is no longer included in the gross estate and. the D will have the full FMV of the property in his GE albeit in the form of the investment rather than the property itself.  Sale of a remainder:  TP can avoid 2036(a)(1) by selling the remainder interest for adequate and full consideration. she sold life estate for its actuarial value to her son. nothing was in Ds gross estate even though D had retained right to income for life. however. Value of a remainder is the prevent value of the right to receive the property in the future. so that gift taxes paid are not included in the gift tax base. the full value of the trust principal is included in her gross estate. so that estate taxes paid are included in the amount taxed. tf.  Family limited partnerships:  2 step analysis  did D receive adequate and full consideration on the creation of the family limited partnership?  If the D receives partnership interests proportionate to her contribution of property to the partnership this step has been met  Was there a bona fide sale? 55 .  Rationale: Time value of money. that Congress intended to allow such an easy avoidance of the taxable incidence befalling reserved life estates. The function of this ―gross-up‖ of gift taxes is to eliminate any incentive to make deathbed gifts to remove an amount equal to the gift taxes from the decedent‘s gross estate. Commissioner: Court held that payment of the actuarial value of the remainder interest was adequate and full consideration. Allen: D created an irrevocable IV trust and reserved 3/5 of the income for her life. If the D receives this amount and then invests it without ever invading the principal or the accumulating interest. 2036. This result would allow a TP to reap the benefits of property for his lifetime and. IRS said substance over form.‖  undermines 2036. Retaining Property Until Death. the current rule is that she must receive as consideration the full value of the trust principal bc that‘s what would have been included in her gross estate pursuant to 2036(a)(1).  United States v. is levied on a gross basis. sell only the interest entitling him to the income. So 2035 3-year rule doesn‘t apply. If the D decides to sell her retained life estate. W died w/i 3 yrs and estate tax return filed showed no tax liability. i. Thus. The sufficiency of the consideration depends on the nature of the interest at issue. 2037 and 2038 explicitly exempt them. Disadvantage recipient does not receive a stepped-up basis in the prop. Died unexpectedly a short time later. Note: Applies to All Gift Taxes Paid. But there is nothing that says that a D can‘t employ appropriate estate planning techniques to minimize potential estate tax liability. The only thing missing is the appreciation in value of the original property.still included in her estate.

 Must be bona fide. §20. additional estate tax on the difference must be paid  Usually accepted practice to be similar to those of similar size and character in jurisdiction. §20.2053-3(b) and (c) recognize that at the time the estate tax return is filed. either for the decedent or his family. Reg. In addition. §2051 provides that the value of the taxable estate shall be determined by deducting from the value of the gross estate the deductions provided for in the statute.  Note: Deductions are limited to amount of the property in the gross estate. (c) appraisal fees. (20.‖ However. when founded on a promise or agreement. The taxable estate. be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth.  Claims against the Estate. As a result.2053-1). §2053 allows deductions from gross estate (as are allowable by jurisdiction‘s laws whether within or without the US. under which the estate is being administered)for the below. monument.‖  Note: Estimating Executor’s Commissions and Attorney’s Fees. the amounts of the executor‘s commissions and attorney‘s fees will often be as yet undetermined. §2053(a)(3) authorizes deductions from the gross estate for amounts paid to satisfy ―claims against the estate. The expense must be allowable though under state law. is the base against which the tax rates of §2001 are applied. to the cemetery for the tombstone setting.2053-1(b)(2). and distribution of the property to persons entitled to it.. Has to be that land will plunge in value not just that bene doesn‘t want land. §2053(c)(1)(A) further provides that such deductions ―shall. with discounts for lack of marketability and minority interests as appropriate Failure to meet this test will cause the underlying partnership assets (undiminished by any discounts) to be included in the gross estate rather than the partnership interests (which may be significantly discounted for minority status and lack of marketability). you can only deduct 5%).  If amt is approved by local law that can be the amount it‘s deductible (like if can only get 5% of estate for exec‘s commission under state law but you get a decree that says 7%. six months later. in the collection of assets.  In General.  Note: Amounts must be bona fide in nature 20.2053-1(d)(4) as long as not a vague or uncertain estimate (see p. Funeral expenses include such items as the undertaker‘s charges and the costs of a funeral service.‖ As the court in Leopold explains. or for a burial lot.  Need arm‘s length transaction  Must be legit non-tax business purpose for creation of FLP. §20. one rationale of this limitation is to prevent testators from depleting their estates by transforming bequests to the natural objects of their bounty into deductible claims 56 . If the actual expense is later determined to be less than the estimated amount. However. no deduction is allowed for expenditures that are not essential to the proper settlement of the estate but are incurred for the individual benefit of the heirs. and (d) attorney’s fees incurred by beneficiaries in litigation brought to establish their respective interests in the estate.  Certain Expenses. 560).a question of federal law.  Role of state law: The expense must be an administration expense within the meaning of 2053. DEDUCTIONS. §2053(a)(1) allows a deduction for funeral (not memorial) expenses to the extent allowable by the law of the jurisdiction under which the estate is being administered. Reg. Deduction also allowed if not paid (20. §2053(a)(2) allows a deduction for any item that is allowable as an administration expense under the local law governing the administration of the estate.).  Funeral Expenses.  Administration Expenses.2053-2 provides that funeral expenses include a ―reasonable expenditure for a tombstone. payment of debts. or mausoleum. The regulations provide that the deduction may be based on an estimate of the amount to be paid. 2035(a)(2) and 642(g)  The most common administration expenses are: (a) the executor‘s or administrator‘s commissions. so long as the litigation is ―essential to the proper settlement of the estate. Settlement or court decree can establish amounts.  Only if this second step is also satisfied will the D be taxed on the value of the partnership interest. thus determined. including a reasonable expenditure for its future care.e. legatees or devisees. Funeral expenses may even include a family member‘s expenses in traveling to the funeral and.2053-3(a) provides that such expenses must be ―actually and necessarily incurred in the administration of the decedent‘s estate‖ (i. (b) probate fees. Reg.

 If joint and severally liable can deduct half. and estate trusts.) §2053(a)(4) authorizes a deduction for unpaid mortgages and other debts in respect of property to the extent the value of the property (undiminished by the mortgage or debt) is included in the gross estate  Note:  Any income taxes on income received after the death of the decedent or property taxes not accrued before his death or any estate. QTIPs.  Since H and W separate taxpayers. 2056(a): for purposes of tax imposed by 2001 (estate tax).2053-1(b)(2)(ii)(A)-(B).  Also.  I. which passes or has passed from the D to his SS but only to the extent that such interest is included in determining the value of the gross estate (IV or not). Under Reg. not yet mature. when the loss is not compensated by insurance or otherwise. succession.  Relevance of post-death events: can take into account what happens after death.: if H bequeaths all of his property to W. if the loss is partly compensated. §2055 Unlimited. Ex: 2 years after D‘s death. expenses incurred in the sale of Blackacre are deductible under 2053. 2: Settled for 500k and jury estimated the value of the services were 75k.  Unpaid Mortgages on Property. Can deduct what amounts paid/if amount is ascertainable with reasonable certainty and will be paid (20. Blackacre not included in Ds probate estate but is in D‘s taxable estate under 2040.e. legacy or inheritance taxes shall not be deductible under this section (2052(b)(1)(B))  Rationale: the heirs should be taxed only on the net value of the property that is transferred to them (i.: current. only tax once at each generation after adoption of generation-skilling transfer tax. estate settled claims through payment of 1M because D was negligent.  Tax advantages of owning community property: community property is owned 50-50 by H and W so if H dies first. Losses. storm. all of it is deductible so that H has a taxable estate of zero. the value of the taxable estate shall.    Note: can deduct if actually paid by the estate but exception for claims not more than 500k. each donor spouse can use any of his or her unused gift or estate tax credit (if any) to reduce or eliminate tax.  Ex: D dies owning Blackacre as a JTROS and paid 100% price. All of the spousal wealth will be taxed on W's death (unless W consumes it  Note: There are exceptions to the terminable interest rule for: life estates with powers of appointment..  Primary motivation was to provide equality b/t common law property and community property states.  2053(b): Other administration expenses: deduction for expenses incurred in administering property not subject tot claims. which is included in the gross estate.Ts to avoid estate tx by leaving entire net estate to charity Marital Deduction.  Claim not deductible if  Not bona fide. Ex.2054-1. contested. §20.  What does this mean? Refers to property not in the probate estate under state law.2053-1(d). State death taxes 2058 Transfers for Charitable Uses. (other indebtedness in respect of property included in the gross estate.  If family member look at page 555 (b)(2)(ii): not trying to discourage just want to make sure you don‘t get something you shouldn‘t. only 1/2 of the value of the community property is included in his gross estate (other half already being owned by surviving spouse)  Any gift of community prperty is treated as a gift by each spouse of 1/2 of the value of the property.  Rationale. except as limited by subsection b [terminable interest] be determined by deducting from the value of the gross estate any amount equal to the value of any property. This is deductible. YES. unlimited marital ded. the excess over the compensation may be deducted. after these expenses and debts are paid).e.  Under philosophy that marriage is one economic partnership/unit   57 . shipwreck or other casualty or from theft. (-4(c)). §2054 deduction for losses incurred during the settlement of the estate if the loss arises from fire. To be deductible a claim must be  A personal obligation of the decedent that was enforceable as of the decedent‘s DOD  Against the estate (not against a particular share of the estate)  Ex: the last visa bill or property settlement that terminates on wife‘s death or remarriage.probably can deduct for full settlement amount(20. even though not probate property.

)  Might allow common law if the state recognizes it.” Requirement §2056(c) states that an interest in property shall be considered as ―passing from the decedent‖ to his or her surviving spouse if:  The interest is bequeathed or devised to the spouse by the decedent. at the time of the decedent‘s death. gifts.2056©-2(d).  USDA application or similar laws can cause unnecessary taxation if a coupl‘s estate plan has property going from the richer to the poorer spouse so that both can claim the benefit of the unified credit.  Only the net value passes (happens when property subject to lien or mortgage). probate property/intestacy)  The interest is inherited by the spouse from the decedent. would not qualify bc bona fide claim to that property.e.‖ 20.]  Note about deficiency in requirement whoever‘s messing it up might be able to disclaim (see above). The payment must be a bona fide recognition of enforceable rights of the SS in the decedent‘s estate. The clauses should be mirror images. the property passing to someone other than the SS might be sheltered from tax. Can be bequest devise. he or she is still considered the decedent‘s ―spouse. If the individual was separated from the decedent and had filed for divorce. he owns property valued at 10M. (if non-deductible terminable interest.‖ an individual must be validly married to the decedent (at the time of death) under state law in the state in which the decedent died. Under state law. If elective share---only what you take.  Ex: H creates irrevocable trust to pay income to himself and remainder to W. property to O‘s wife. then my H shall be deemed to survive me. Creation of the trust is completed gift of remainder interest property however in H‘s gross estate at death because he retained the right to income for his life 2036(a)(1). held by the decedent and the spouse in joint ownership with right of survivorship.  Property passes from decedent [very liberally construed.  Specifics on the “Passing From the Decedent.  The interest was. And has to be us citizen (because we want to make sure we can get that tax when she dies which we can‘t if she‘s French.  Recipient spouse survives  Whatever state says.  PA is 120 days requirement  Best: will can define survival.. cannot qualify for marital deduction) 58 . W. or  The interests consists of insurance proceeds on the life of the decedent receivable by the spouse.  Terminable Interest Rule. survived with respect to ½ so no property passes and no marital deduction.though uniform simultaneous death act or similar legislation might say each person deemed to have survived with respect to her own property and jointly owned.‖ H: If my…then I shall be deemed to have survived W  Property must be in gross estate (easy)  Without this rule.‖  DOMA means same sex couples excluded even if married in the state legally. When O dies.  4M can qualify  If W signed a prenup waiving rights though. and C gave her money because the right thing to do. C effectively disclaims his interest in 6M and that property is distributed to W  Owen is transferor so in effect he's giving his wife 6 M so she could use marital deduction  Settlement of Disputes: Assume O‘s will doesn‘t provide for a gift to W if C disclaims or predeceases.  The decedent had a power to appoint such interest and he appoints it to the spouse. unless goes into a qualified domestic trust.. Basic steps/ requirements  Decedent must be subject to the estate tax  D must be a citizen or resident of the US or must own property located in the US  Property passes to spouse who is a US citizen  To qualify as a ―spouse. To protect estate planning like this. elective share (c)(3). appointed. couple can include a clause in their wills that determines the order of death.not all the property you could take. joint tenancy. (i.  Consider:  Disclaimers: O‘s will leaves all property to C but if C disclaims any property or predeceases O. After O‘s death W and C agree that W will receive 4M. W would be entitle to half (5M) as elective share.  Language: If my H and I die in circs where order of death cannot be determined.  Incl. Man and woman who are married.

Where one occurs.  Some terminable interests are deductible bc no one other than the SS will receive an interest in the property even though they will fail on the lapse of time  copyrights.  Advantage: the trustee can have discretion to distribute income to the SS or accumulate it.  If upon termination the property passes to someone other than the SSnon-deductible. an interest passing to the SS will terminate or fail. terms of years. the support allowance will be a non-deductible terminable interest. Whether the condition actually occurs is irrelevant!  i. annuity. after the termination of that spouse‘s interest. the value of the property will qualify for the marital deduction but it cannot pass from the D to any person other than the SS.e. no deduction shall be allowed…  I. Accordingly. ok for marital deduction. Ask: Is the interest terminable?  Look at the moment of death. children purchase W‘s interest for FMV).e. 2056(b)(1).  Use: when D has stock in a closely-held co. income need not be distributed annually as in a poa or QTIP trust. no marital deduction should be allowed if an interest in property given to the SS might. Also trust property need not produce income and trustee need not make it productive.  2056(b)(1)(A) say not if an interest in property passes or has passed for less than adequate and full consideration from D to any person other than SS and (B) says if by reason of such passing such person (or heirs or assigns) may possess or enjoy any part of such property after such termination of failure of the interest so passing to the SS  i. life estates (unless executor elects for QTIP treatment). that he wants to keep in the family or when a SS has sufficient resources of her own and does not need the income from the trust.  Support allowance: usually paid during probate or for a specific time period. Rationale. then can get the deduction. patents.  Transfers conditioned on survival for 6 months as long as SS survives for 6 months 59 .  Ask: Any exceptions to the terminable interest rule?  Estate trust exception: If D leaves property in trust of the benefit of the SS and at the spouse‘s death the property passes to her estate.// Or contingency and someone else gets the property. including expiration of period of time. doesn‘t matter what happens after (thus.e. who cares if 2 weeks after Hs death. license of limited duration. and similar arrangements are not included in the gross estate unless the remainderman paid full and adequate consideration imomw. if it's fixed and non-contingent. Can H‘s estate take a marital deduction for W‘s interest.  i. accumulated income and remainder to W‘s estate. The terminable interest rule arises from the basic premise of the marital deduction that property which qualifies for the deduction in the estate of the first spouse to die will eventually be taxed in the estate of the surviving spouse. so yes. NO! When would we tax it??  Ex: income to child until she attains 21 then remainder to wife?  Could value with actuarial and value the remainder. If the property that generates the income used for the allowance passes to someone other than the SS. Must ask whether as of the moment of the gift or the D’s death there is any chance that the condition defeating or terminating the interest might occur. pass to someone else without being included in the surviving spouse‘s gift or estate tax base. if it passes to the SS and an interest in the same property passes from the D to another person. If not a terminable interest.  ex: H dies and leaves 4M in trust income to be paid in trustee‘s discretion to W for life. remainder to children.  Does it pass to a third party upon the occurrence of the condition? Ex: H dies and leaves house to testamentary trust: income to W for life.    In general: A terminable interest is one that will fail on the lapse of time. the interest is non-deductible. or on the failure of an event or contingency to occur.e. Any interest in property that is subject to a condition. Give to spouse for 2 years or until she remarries and then to my kids or unless trustee thinks she doesn't need it. Ask: Is the terminable interest of the non-deductible type?  If upon termination the property passes ONLY to the spousedeductible. on the occurrence of an event or contingency.

Needs to not be a standard. But trust can designate that she gets power to appoint either during life or death. I leave everything to my Spouse so long as she survives me for 6 months. the term specific portion only includes a portion determined on a fractional percentage basis  For b5 only the right to income and right to appoint specific portion must be over the same property.  Time period cannot exceed 6 months.. if W doesn‘t survive for 6 months.  Right to make the property productive.  If W dies after 2 months. H dies in 2011 and leaves everything to W. will qualify. (20. then she will receive the property. Since the general power of appointment will cause the property subject to the power to be included in the gross estate of the surviving spouse at her death under §2041. the kids pay tax! If no survivorship provision. she would not be treated as the owner of the trust income. And administrative powers must not deprive SS of beneficial enjoyment of the trust income -5(f)(4).  Trustee can‘t have discretion to accumulate/withhold income unless provision that SS can compel. 20.5M of remaining assets and W has not made any prior gifts and has no assets. 20.  Reason: won't have 2 probate proceedings close together. the trustee must have the power to dispose of that property and invest in income-producing assets.  The general power of appointment must be exercisable by the spouse in favor of herself or her estate. I. If she does. 1M to wife if she dies within one year. Can‘t have ascertainable standards because even though can require distributions.  Differs from QTIP: she can appoint to anyone..wife is alive and gets it--nope. 2056(b)(10): For purpose of paragraphs 5. If 2 months after the h's death  Requirements:  Spouse must in fact survive by the requisite time period. no contingencies on ability to appoint). which is exercisable by SS alone and in all events (unlike regular power of appointment).2056-(b)-5(f)(5). -5(f)(5).  Right to income must be real: SS must be entitled to all income from the trust or a specified portion. if state law interprets a reasonable interval to be annually. remainder subject to W‘s IV or testamentary gpoa. 20. Not a terminable interest.can provide that the property will not pass to SS if both D and S die as a result of a common disaster. etc. subject to 6 month survivorship condition.  Note: can't be fixed dollar amount that's why it matters how draft.  Payable annually or at more frequent intervals: if it doesn‘t say in trust.6.E. SS and only SS must have power to appoint the property (must need not consent.2056)b)-5(f)(2).2056(n)-5(f)(1))... 60 . 2056(b)(3): interest passing to SS shall not be considered as interest which will terminate if the death will cause termination or failure only if occurs within period of 6 months after death or common disaster or . (7). and 7(B)(iv). including someone other than herself.5M to children. SS must have power to appoint trust property to herself during her life or to her estate at death 2056(b)(5). Property must produce income.more than 6 months.  Power of appointment requirement.  Alone and in all events. OK if she‘s trustee. if it‘s nonincome-producing. (8).  Should every estate include a 6-month or common disaster survivorship clause? NO!  Assume H has used up his transfer tax exemption nd has 3.. 2056(b)-5(f)(5). -5(g)(3).2056(b)_5(e). (20..  Power of appointment trust §2056(b)(5)  Income to W.. there is no reason not to permit the transfer to qualify for the marital deduction even though the spouse‘s life estate is a terminable interest. the 3. property would have passed to wife and been sheltered by her exemption.  Exception.

On her death (per 706).  Note unproducitive property ok again as long as SS has power to demand that the trust property be made profitable. If there is a poa. this would not be deductible.  QTIP trust.take smaller  Stub income..2056(b)-5(g): can‘t just safeguard property without giving spouse the express enjoyment. Thus.. If we didn't have the exception.  Power to appoint during spouse’s life.. Must provide beneficial enjoyment  Ex: H dies and leaves 4M in trust income to W for life remainder pursuant to W‘s power of appointment... needs the right to control by self. qualifies for marital deduction. Only fraction or percent not amount. The decedent‘s executor may elect to treat only a portion of the property as QTIP.  Why have one? Flexiblity. for instance. Very similar to outright ownership. under §2044(a). (could have spendthrift provision). Interest terminates? Yes.thus the QTIP trust.  No person has a power to appoint any part of the trust property to anyone other than the SS during her life  The executor elects QTIP treatment. the income is earned between the last distribution date preceding the SS‘s death and the DoD..  Must meet strict requirements.wants to start a charity for cats. Doesn't fit with economic partnership but does fit ith idea that we only tax at one generation. when he dies jst look at the contingency  Note if has poa over ½ then ½ qualifies here.2056)b)-5(f)(8). Doesnt matter if she became incompetant or not. the executor may decide not to make a QTIP election for that portion of the property equal to the decedent‘s remaining applicable exclusion amount  However. Same as GPAT trust. and hence the full value of the property— not merely the life estate—qualifies for the marital deduction. Might want a co-trustee to help manage it. [doesn‘t matter if she never gives anything to kids (2056b5f7). non-tax disadvantages: available to creditors. lots of divorces..  Under §2056(b)(7).  Specific portion. Same as above. Can decide down the road to leave it all to charity. 2. if W doesn‘t exercise. Downside is they get remarried to the poolboy and he gets everything and kids get nothing or cinderlla circumstancs. also that she could change her mind and decides not to leve it to the kids but to poolboy or something not nefarious. if a return is not timely filed. must be exercisable only in favor of the spouse. The election must be made on a timely filed return or. . 2056b-5c5 ex. a life estate in a ―qualified terminable interest property‖ (QTIP) will not be treated as a terminable interest.vastly male. whole shebang qualifies. Must be subject to SS‘s power to appoint 20.  Right to income. it woudln't get taxed.  Power to appoint at or after spouse’s death. If there Is a power to appoint the trust property after the spouse‘s death it can be in anyone and it can be limited.. Who goes to on death? To kids.  61 .she can no longer control it. Requires  The SS be entitled to all the income (or a specific portion of it) payable annually or more frequently.  the decedent‘s executor elects on the estate tax return (Form 706.  Ex: what if provision that if she becomes incompetent then all to kids? doesnt qualify becaus automatically goes to kids. Her power to pull out corpus for another distinguishes from qtip.. on the first return that is filed after the due date  Note: Partial QTIP Elections. DOES qualify under 2056 b5. §2056(b)(7)(B)(i)(III).. remainder goes to kids.20. No on needs power to appoint here.. Schedule M) to treat the property as QTIP. the value of the underlying QTIP property will be included in the spouse‘s gross estate upon her death  If meets these requirements. Different because terminable interest that goes to someone else other than surviving spouse and if we didn't have this rule..

[credit shelter or by-pass trust] will be in D‘s taxable estate and because it is funded with an amount equal to the exemption equivalent. Again. either: (1) the marital bequest is expressed as a fractional share of the residuary estate. Reduces amount of work have to do.  Applicable Exclusion Amount Trust.  portability basically says we will save that exemption. Under a fractional share clause. The following is an example of a fractional share formula clause: ―If my spouse survives me.  Marital Deduction Formula Clauses.2056(b)-7(d)(4) provides that the stub income need not be subject to a spouse‘s power of appointment in a QTIP trust. Can elect to use it. Thus. Or they both own about 5M of property in any state. and after taking into account the federal unified credit  Fractional Share Clause. I give to my spouse a fractional portion of my residuary estate. or $5M. What are arguments against portability? Some will argue that one of the good things is that it forced spouses to share assets during life so everyone had to have enough proeprty in own name to take advantage of exemptions. the husband and wife are each regarded as owning onehalf of the value of the couple‘s community property. leaving the residuary estate to pass to the credit shelter trust. the income is earned between the last distribution date preceding the SS‘s death and the DoD.  When a married couple owns more than the exemption amount. this amount will also escape estate tax. determined as follows: the numerator of the fraction shall be an amount equal to the minimum marital  62 . either: (1) the marital bequest is expressed as a general bequest of assets having an ascertainable dollar value.  Example.everyone owns half and everyone takes advantage of own exemption and optimally property goes to kids on second death  Equal ownership: Suppose that husband and wife live in a community property state. Husband dies. after taking into account all other property passing to my spouse under this will or outside this will that is includible in my federal gross estate and qualifies for the federal marital deduction. Thus. §2056(b)(7) allows an unlimited marital deduction for the value of QTIP property passing from the husband to the wife.  There are 2 formulas for computing the amount of the marital bequest and the credit shelter bequest:  Pecuniary Clause.Stub income.  The remainder of the property should be left to the SS in a a manner that qualifies for the marital deduction…so one that qualifies as a QTIP or GPAT for the benefit of his wife and contribute the remaining $$ to that trust. qualified payments of tuition and medical expenses and family limited partnerships to minimize estate tax impact.  Example. one spouse who earns or inherits the property can keep it all in his name.  Before portability what would be best? split up assets.  Portability from 2010 Act: a deceased spouse dying in 2010 and after can (in effect) transfer his or her unused exemption equivalent amount to his or her surviving spouse. Leads to imbalance. with the balance passing to the credit shelter trust. (2010). But with portability. the fractional share formula clause is designed to produce an estate tax of zero while taking full advantage of the decedent’s remaining applicable exclusion amount.  Family can also use annual exclusion gifts. or (2) the credit shelter bequest is expressed as a fractional share of the residuary estate. I give to my spouse an amount equal to the minimum marital deduction necessary to eliminate (or reduce as far as possible) the federal estate tax on my estate. leaving the residuary estate to pass to the marital deduction trust. with the balance passing to the marital deduction trust.  Each should leave an amount equal to the exemption amount in a trust for the benefit of the survivor but that trust should not qualify for the marital deduction. leaving community property worth $10M. The following example of a pecuniary formula clause describes the amount of the deductible marital bequest needed to produce an estate tax of zero while taking advantage of the unified credit: ―If my spouse survives me. Under a pecuniary clause. 20. The dollar value allocated to the pecuniary trust is determined so as to take full advantage of the decedent’s remaining applicable exclusion amount and produce an estate tax of zero. it is important to structure their estate plans so that the property is sheltered in each estate by the unified credit. or (2) the credit shelter bequest is expressed as a general bequest of assets having an ascertainable dollar value. no tax will be due because of the unified credit.

Credits. was 5 M. the executor must allocate the expenses related to each property based on these percentages  Second. In contrast. succession. for instance.  Credits. It was repealed in 2001. In general. so long as the beneficiaries do not retain a general power of appointment over the property. this planning technique cannot be implemented with fractional share bequests because a fractional share of each property will be allocated to both the marital deduction trust and credit shelter trust  Unequal ownership: It is impossible to know which spouse will die firs and if the poorer one does.25239f)-1(f) (Ex 10/11). Doing so will not cause the property to be in her gross estate because her spouse will be treated as the transferor. or accession tax. A credit is subtracted from the tentative amount of tax and reduces tax liability dollar for dollar Note: estate tax is a flat tax so deduction benefits al TPs the same. and the denominator of the fraction shall be an amount equal to the value of my residuary estate  Disadvantages of Fractional Share Bequests. property that is expected to appreciate should be placed in the credit shelter trust since that property (including the appreciation) will never be taxed to the beneficiaries. after taking into account all other property passing to my spouse under this will or outside this will that is includible in my federal gross estate and qualifies for the federal marital deduction. (f)  If the rich spouse doesn‘t want to lose the benefit of the trust property. In 2010. However. 63 .‖ This is the amount that the decedent can pass free of tax. A fractional share of each piece of the decedent‘s prop must be allocated to each trust based on the fractional share percentages. reduce the amount of tax and therefore usually provide a greater benefit  The following credits are allowed against the tax otherwise payable:  Unified Credit. There are 2 disadvantages associated with fractional share bequests  First. The unified credit in §2010 provides a credit for the amount of tax on the ―applicable exemption amount.  If don‘t want to cede control can ive property in trust and gift will qualify for the marital deduction as long a he has right to income for his life and trust is either GPAT or QTIP 2523(e). as a practical matter. but returned in 2011  Credit for Tax on Prior Transfers. the benefit of the unified credit is lost to his estate. fractional share bequests eliminate some of the planning that can be done with property that is expected to appreciate in value. Coordinate with the 2505 gift tax credit so that a decedent cannot transfer more than the applicable exemption amount whether during life or at death. and after taking into account the federal unified credit. This can be remedied by giving the poorer souse an amount equal to the exemption amount during his life. property placed in the marital deduction trust will be taxed (including the appreciation) upon the surviving spouse‘s subsequent death.  2011 provides a credit for the amount of any state estate inheritance. Thus. fractional share bequests may create considerable administrative difficulties. though. for example.deduction necessary to eliminate (or reduce as far as possible) the federal estate tax on my estate. §2013 provides a credit for estate taxes paid on prior transfers of property to the decedent by a person who died within 10 years before the decedent‘s death. 25. she can retain a secondary life estate.

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