EstateandGiftTaxOutline

I. Introduction
A. InGeneral
1. Estatetaxwasdesignedtobreakuplargeestates.(Inheritedeconomicalpoweris
likeinheritedpoliticalpower.)
2. Whopaystheestatetax?
a. 24billionwaspaidinestatetax,morethanhalfofwhichcamefrom3600estates
(smallestbeing5million).Thisisataxbeingpaidbythewealthiestindividuals.
b. The3600was.0015%ofthepeoplewhodiedin2000.
c. 52,000wererequiredtofileestatetaxes.
d. Thistrulyappliestoonlyasmallamountoftaxpayers.
3. PromotesCharitableGiving
a. Oneofthegoodthingsabouttheestatetaxisthatitforcesthewealthytodecideif
theyaregoingtogivetheirestatetothegovernmentortoacharity.
b. Whenwerepealthistaxwilltheystillleavetheirmoneytocharities?Manywho
havedonethisinthepastweremotivatedbythistax.
c. Thesecharitiesmayprovidejobsfortheirfamilies,buttheIRSwatchesthese
carefullytoensurethattherearearequisitedisbursementsmade
B. NatureoftheTaxWeHave
1. EstateTax
a. thisisimposedonthedecedentsestate(asopposedtoaninheritancetaximposed
ontheheir)
b. Thismustbepaidbeforetherecanbeadistribution
c. Before1981,only50%ofwhatwaslefttoaspousewasexempt.Thischangedin
twoways:
i Itisunlimited
ii beforeyouhadtogiveitoutrightoryouhadtoputitintoatrust(powerof
appointment)inwhichthespousehadthegeneralpowerofappointment
WecreatedtheQTiptrustpropertywillqualifyforthemarital
exclusionifitisleftinatrustsuchthatthesurvivingspousereceivesallof
theincomefromtheestateandthendictatewhereitgoesatthetimeofthe
survivingspousesdeath.Wecanmakeprovisionstothissuchthatthe
trusteecangointotheprincipleofthetrustwhenitisneededforhealth,
maintenance,etc.
d. GrossEstate
i Propertyownedattimeofdeathpassingthroughthewill.
ii TestamentarySubstitutes
LifeInsurance
Pension/Retirement
iii Trustswewillspendalotoftimeonthis(2036,2037,2038)
Raisequestionsofagiftbeinggiveninthelifetimeofthedecedent
Raisequestionsofwhetherornotthisispartoftheestate
Willtherebeadoubletax?

 WhentheGrantorgivestherightoftheincomeofthetrustitisagift.
2036estatewillincludetherightthatistransferredinthetrust(all
ofthepropertyisincludedintheestate).
Thisisnotdoubletaxation,itgivesthegovernmenttheopportunityto
taxtheappreciatedvalueoftheproperty.Webackthisoutwhenwe
credittheTentativeTaxforallgifttaxpayable.
IntheEstateTaxwearetryingtotaxthetransmittalofwealthatdeath
sowedonotwanttolimittowhatthedecedentleavesinhiswill.
Wewillalsotaxtheappreciationonthepropertyyougifted
previously.
e. EstateTaxisdue9monthsafterdeathandyoucangetanautomatic6month
extension(thisdoesnotextendthetimeforpayment).Therearesomethingsthat
letyouextendthepaymentsoveryearsanestatewithacloselyheldbusiness.
Theinterestrateonthispaymentscheduleisaslowas2%.
2. GiftTax
a. Necessarybackuptotheestatetax(wealthierindividualsweregivingtheirassets
awaytoavoidtheestatetax)
b. Thisisimposedonthedonor,thedoneeissecondarilyliableifthedonordoesnot
pay
c. Cumulativeformoftaxationthecalculationisacumulativeprocess,youhaveto
addallpriorgiftswhenyoucalculatethecurrentyearstaxrate(youcreditwhat
youpaybywhatyoupaidinpreviousyears)
d. Howdowegettotaxablegifts?
i Whatissubjecttoagifttax?
ii WhenistheGiftTaxapplicable?Conceptofcompletedgiftthegifttaxis
imposedwhenthegiftiscomplete.Whenisthegiftcompleteforgifttax
purposes?Whenhasthetransferorgivenupdominionandcontroloverthe
property?
Ex.Grantorputspropertyintoatrustandprovidesthatalloftheincome
willgotoYforLifeandthentoX.Thisisfine.(Note>therearetwogifts
inthissituation:GiftofIncomeandGiftofRemainder.Eachofthesegifts
wouldbetaxedseparatelyandcanbecompletedandthustaxedat
differentstages.)
Thereareproblemswhenthereisapowertorevoke.Ifthereisarightto
revoke,agiftwilloccuratthefirstdistributiontoY.Thenifhegivesup
hispowertorevoke,thenthegiftiscomplete.
WhatiftheGrantorretainsonlythepowertochangewhoreceivesthe
income?Thegiftoftheremainderwillbecomplete,buttheincomegift
willnotbe.
iii Whatisthevalueofthepropertytransferred(wewillspendverylittletimeon
thisinthiscourse,butknowthatthisisveryimportantinpractice)?
Dowehaveatransferthatisforlessthanadequatecompensation?What
wastheFMVoftheamounttransferredandwhatwasgiveninexchange
forthisFMV?

 Whenwearedealingwiththirdparties,therewillbeatendencytofind
thatitisnotagift,butwhenitisafamilymember,thereitwillbe
morelikelytobefoundagift.
iv Exclusions
CharitableDonations
MaritalDeductionsnogiftsgivenfromonespousetoanotherincluded
AnnualperDoneeExclusion$11,000.Thisisavailabletousinthe
computationofthetaxablegift.
***Youwanttotakethisoutwhenwecomputetaxablegifts****
Ifyouusegiftsplittingbetweenyouandyourspouse,thenyoucanget
$22,000.
Tuitionormedicalpaymentsmadeonthebehalfofanotherdirectlytothe
institutionprovidingtheservice.NoLimitonthis!!!(Note>thiscannot
beanexclusionifthechilddoesnotgotoschoolthere.)
v
e. GiftTaxisfiledwithyourincometaxreturn.Youdohavetofileareturnifyou
makegiftshirethantheperdoneeexemption.IfyoudonotdothisthentheSOL
willnotrun.
Note>Auditsinestateandgiftoftentakeplacewhenyouhavelimited
partnershipsandwhatnotintheestate
3. GenerationSkippingTax
a. Whopaysthisdependsonthenatureofthegenerationskippingtransfer
i TaxTermination
ii TaxableDistribution
iii DirectSkip
Parentmakesagiftdirectlytoagrandchildorwhentheparentcreatesa
trustwhenthefirstbeneficiaryisthegrandchild
verycostlybecauseitcauses2taxesgifttaxandgenerationskipping
tax
Thatiswhyyouwanttohaveatrustthatdoesnothaveadirectskip.
Addedin1986becausewedidnotwantthegrandparentcouldgoahead
andjustgivethegifttothegrandchildsothatitwouldnotbetaxedtwice
Youwantthetimingofthetaxtobeasmanyyearsafterthecreationofthe
trust.
b. Thisfirstcamealongin1976,butin1986itwassubstantiallyrevisedandtheold
onewasrepealedretroactivelytoitsorigin
c. Whydoweneedthistrusts.
i
Agrandparentcouldplacethepropertyintoatrustwiththe
childasthebeneficiary.Thechildwouldgetalloftheincomefromthetrust
andthenhavethepropertyitselfpasstothegrandchild.Thereshouldbeagift
ofrighttoincomeandgiftofremainder.
ii
Wehaveadoptedasystemtoensurethatsomesortof
federaltaxwillbeappliedasthepropertymovesfromonegenerationto

another.Inthetrustexamplethereisnoopportunityforthepropertytobe
taxedasitmoves
d. Fillsinwherepropertyistransferredandtheestateandgifttaxeswouldnotbe
applicable.
e. Whenthegenerationskippingtaxapplies,itistaxedatthehighestpossibleestate
taxrateforthatyear.
f. Whenyoudevelopanexempttrustanditgoestothegrandkids,thereisno
GST.
i Createthetrustwith1.12mil(orwhatevertheapplicableexclusionaryamount
isforthatyear)ofcorpusandthewholethingwouldbeexemptfromGST(it
wouldbesubjecttogifttax).
ii WhenyoufilethegifttaxyoumakeyourGSTexclusionallocation.Thiswill
beexemptfortherestofitsexistence.
iii Theexemptstatuswillremainnomatterwhattheappreciationoftheproperty
isitcangrowanunlimitedamount.BUTyouhavetomakesureyoudonot
doanythingthatwoulddisturbitsexemptstatus.
iv EstatePlanningwithExemptandNonExemptTrustsyouwouldwantone
ofeach.
ExemptTrust
Theexempttrustistheonethatyoureallywanttopreserveforyour
skipgenerationsyouwantthistogrowsoyouwantitinvestedina
waythatwouldappreciatetheassets.
Youwouldprovidethatthechildwouldreceivedistributionsatthe
discretionofthetrusteethatwaythegrandchildisnotthefirst
beneficiary.
Theexempttrustisdesignedtomaximizedistributionstoskippersons.
NonExemptTrust
Thenyoucanhaveanonexempttrustthisiswhereyougivethe
childmoney.
Youcanhavethisonedistributeincomeandprincipletothechild.
Thenyouwouldwanttogivethechildsomesortofinterestinthetrust
sothatitisincludedinhisestate(becauseyouknowitwontbetaxed
ataratehigherthanthehighest).
Thenonexempttrustisgoingtobedesignedtomaximize
distributionstononskips.
Whenyouhaveanonexempttrust,youhaveaspecialexclusion
tuitionandmedicalexpensesforskippersonswithoutbeing
subjecttoGST
Ifthedistributionwouldbeexemptifpaidbyanindividualby
payingitdirectlytotheinstitution
Nevercreateatrustthathasaninclusionratioofanythingbesides1or0.
Youarebetteroffhavingonethatistotallyexemptandanotherthatisnot
atallexempt.Youalwayswanttohavetwoseparatetrustsonefor
currentincome(nonexempt)andoneforgrowth(exempt).

Note>Eachspousegetstheexemption.Soyoucouldhavetwototally
nonexempttrusts
g. Taxableterminationispayable9monthsafterdeath,DirectSkipandTaxable
Distributionarebothfileswiththeincometax
C. EstateandGifttaxhaveanimportantconnection(neededforthecalculationofthe
estatetax)
1. UpuntiltheTaxreformof1976therewasnoconnectionbetweenthesetwobut
thenweadoptedaunifiedsystemforthepurposeofestateandgiftax
2. Ifhemakesanytaxablegiftspriorto1976,wehavetoaddtotheestatealltaxable
gifts.Thetaxpaidonthegiftswillbecreditedtotheamountyoupay,thisisjustused
tocalculatethetaxrate
3. Workoffofthesameratescheduleforgiftsandestates
4. UnifiedcreditagainsttheestatetaxandUnifiedcreditagainstgifttax(2505)this
canbeappliedtoeithergifttaxliabilityortoestatetaxliability.Thecodehaskeptthe
samecreditforgiftstaxes,butithasgoneuponestatetaxes.
5. EstatePlanninginvolvesbothgiftsmadepriortodeathandtestamentary
dispositions
a. Giftprogramsgivingtheexclusionof11Kperdoneeperyear(thiscanavoidthe
41%taxrateofthefirsttaxablerate)
b. Everypersonhasan$1milexemptionthehusbandandthewife.Sowith
spouseswithatleast$2milyouwanttodraftthewillthatwillnotwastethe$1mil
exemptionfor.Soyouwouldwill$1miltosomeoneelseandthentherestgoing
tothespouse.
i Bypasstrustkeepsthefirstmiloutofthefirstspousewhodiesoutofthe
estateoftheother.(havetomakesurethespouseskeepseparateaccounts)
c. Alwayspreservetheexemptionsofspousesinestateplanning
6. TheUnifiedCredit2010,2505isavailableforeitherestateorgifttax
computation.
a. Whyacreditinsteadofanexclusionbecausetheexclusionbenefitsthehighest
taxbrackets,theothertakesitoffatthelower
b. Howisthecreditcomputed?P.93ofappendix.Anestatehasacreditequaltothe
amountofthetentativetaxfromtheapplicableexclusionamountbasedonthe
applicabletaxrateforthatyear.
c. ForGifttaxesthisisfrozenatthe$1,000,000applicableexclusion.
II. EstateTax
A. 2001DefinitionoftheGrossEstateandValuation
1. 2031DefinitionofGrossEstate
a. Includesthevalueatthetimeofhisdeathofallproperty,realorpersonal,
tangibleorintangible,whereversituated.
b. FairMarketValuethevaluespokenofin2031
i FMVthepriceatwhichthepropertywouldchangehandsbetweenawilling
buyerandawillingseller,neitherbeingunderanycompulsiontobuyorsell
andhavingreasonableknowledgeofrelevantfacts.

ii LiquidassetsFMVcanbedeterminedbyreferencetocomparablesalesin
theopenmarket.
iii Moreproblemswhentheitemisnotforsaleintheopenmarket:
Onlyavailableontheblackmarketdrugshavebeenadvisedbythe
servicetobevaluedatthepriceanultimateconsumerwouldpayinthe
openmarket.
Itemisuniqueandirreplaceableinthemarketrightstoproduceoneplay
andtwomotionpictures.
iv Factorstoconsiderwhendeterminingfairmarketvalue:
Incomeyield
Appraisal
Shouldrepresentthepricethatwouldbeagreeduponbetweentwo
hypotheticalparties,notthepricethattheactualpartiestoatransfer
wouldagreeupon.
Theremustbeasoundbasisfortheappraisalandtheperforming
expertshouldbeabletothoroughlyexplainit.
Courtswilldiscreditexpertswhentheyareunfamiliarwithaspectsof
thepropertyortheiranalysisispoorortheycontradicttheirown
opinionsfromdifferentcases.
Salespricesofsimilarpropertynearthedateofdeath
Bidsmadefortheasset
Generaleconomicconditions.
v 2032AValuationofcertainfarm,etc.,realproperty
aspecialrulethatallowsustoaltertheruleof2031,tovaluepropertynot
atitshighestandbestuse,buttovalueitatitscurrentuse.
Thiswasdesignedtohelpfamilyfarms.
Therearealotofrequirementstousethisspecialrule.
Thiswillignorespeculativevalueanddevelopmentvalue
vi Valuationisusuallyatthemomentofdecedentsdeath,BUT
2032AlternateValuationDate
Allowsustoelecttouseadifferentdateforvaluation6monthsafter
death.
Thisisanallornothingthingyoucannotpickandchooseassetsto
applythisalternatedate.
Thiswasenactedtopreventovertaxationwhenthevaluetakesadive
rightafterdeath.Youcannotusethisunlessitlowersthetax
vii Valuationshouldnotbeeffectedbyeventsthathappenafterdeathunlesssuch
eventswereknownorreasonablyforeseeableatthemomentofdeath.
Thevalueofanilliquidassetcanbedeterminedwithreferencetoanafter
deathsaleoftheasset,howeverthelongertheperiodoftimebetweenthe
deathandthesale,thelessprobativethesaleisoftheassetsvalue.
2. 2033PropertyinWhichtheDecedentHadanInterest
Thevalueofthegrossestateshallincludethevalueofallpropertytotheextentofthe
interestthereinofthedecedentatthetimeofhisdeath.
6

a. BeneficialInterestTheinterestmustbeabeneficialinterest;theburdenisonthe
estatetoprovethatitisnotabeneficialinterest.
i StateLaw
Statelawcreateslegalinterestsandrights.Thefederalrevenueacts
designatewhatinterestsorrights,socreated,shallbetaxed.
Statelawwouldgoverntherelationshipoftheremainderpersontothe
trustproperty;butwhethertherelationshipfixedbylocallawamountedto
aninterestinthepropertywouldpresentapurelyfederalquestion.
ii StateDecrees
Afederalcourtmaydecidewhetherthedecedenthadtitletoaproperty
onlyasatrusteeorwhetherinsteadhadabeneficialinterestinthe
property.BUTitwillapplystatestatutoryandcommonlawprinciplesin
thedecisionofthatunderlyingissue.
ThebeneficialinterestquestioncanberelitigatedinfederalcourtThe
SupremeCourtsaiditwillnotgivefinalitytoastatecourtdecisiononan
underlyingstatelawissue,unlessthelocaldecisionisbythestates
highestcourt.Thefearhereisthatthedecisionwillbemadeinnon
adversarialconditionsthatareconducivetofraudandcollusion.
FederalCourtsaretogiveproperregardtostatedecisionsnotcoming
fromthehigheststatecourt(thiscanbenoregardifthedecisionwas
handeddowninanonadversarialsuit).
b. RoutineInclusions
i
Realpropertysolelyownedbythedecedent
ii
Tangiblepersonalpropertysolelyownedbythedecedent
(factualissueofwhethertheitemwasactuallyownedbythedecedentcanbe
verytroublesome)
iii
Intangibleitemsraisingnoquestionssuchas:
Currencyinthedecedentssafedepositbox
Balanceindecedentscheckingorsavingsaccount(thisdoesnotinclude
jointaccounts)
Anycreditfromonesbrokerageaccount
Stocks,Bonds,CDsownedsolelybythedecedent
Amountsduetothedecedentonnotesarisingoutofthedecedents
lifetimeloansordeferredpaymentsales.
c. IncomeItems
Incomerightsofthedecedentatdeathmustbetreatedaspropertyinwhich
decedenthadaninterestwithinthescopeof2033.
i Salarydueatdeath(Notethiswillbetaxedasincometothedecedentsestate
under691butitisstillincludibleintheestateunder2033.)
ii Bonusespayabletodecedentattimeofdeath
Bonuseswhichthedecedenthadnointerestinatthetimeofdeath,but
wereawardedafterdeatharenotincludedinthegrossestateevenifthey
arepaidtothedecedentsestate.

iii Compensationdueforservicesotherthanasanemployeearetreatedthesame
assalary
iv Rentaccruedatdeathonrealorpersonalpropertyownedbydecedent
v Accruedinterestatdeath
vi Dividendsonsharesofstockthatarepayabletothedecedentatthetimeof
deathrightdoesnotariseuntiltherecorddateofthedividend.
d. PartialInterestsinProperty
i SharedInterestinPropertyiftheinterestisonethatthedecedentcanpass
ontoothers,itisgenerallyaninterestinthescopeof2033.
Tenancyincommon
Communityproperty
Note>Thesearesharedintereststhatdonotterminateatdeath,unlike
jointtenancywiththerightofsurvivorship.
ii SuccessiveInterestsinProperty
AownsBlackacreandleasesittoBfor20years.Bothhaveintereststhat
maybetaxedunder2033.
IfBdiesbeforetheleasetermisuphehasaninterestintheproperty
forthenext10yearsandhisgrossestatewillincludethevalueofthe
leasehold.
IfAdiesbeforetheleasetermisup,hehasareversionaryinterestthat
willbeincludedinhisestate.
Theinterestinthepropertycanbebaseduponthehappeningofanevent
aswell.Note>IfthepropertyisAsforlifeandthentoBorBsestate.
TherewillbenothingincludibleinAsgrossestateunder2033,butifB
weretodiefirst,hisestatewouldincludetheremainderinterestinthe
property.
iii Cautions
Theonlyquestionthathasbeenconsideredhereisinclusionunder2033
theseintereststhatmaynotbeincludiblehere,maybeincludibleinthe
grossestateunderanotherprovisionintheCode.
Becarefulwithlifeinterestthatarenotincludibleinthedecedentsestate
thesemaygiverisetogenerationskippingtaxes.
e. InsuranceProceedsUnder2033
i Aninsurancepolicyispropertyandthevalueofthedecedentsinterestis
includableinhisgrossestateunder2033thisappliestotheownershipofa
policyonthelifeofanotherperson.
Note>2042hasspecialrulesforinsurancepoliciesownedbythedecedent
onhisownlife.
ii Ifownerandinsureddiesimultaneously:
Andtheowneristheprimarybeneficiary,thentheSimultaneousDeath
Actapplies.
Andtheownerisnottheprimarybeneficiary,thennothingisincludablein
thegrossestateunder2033.(Thisdoesnotmeanthatitisnotincluded
underanotherprovisionoftheCode)

iii Iftheproceedsarethosereceivedbeforethedeathofthedecedent,thenit
dependsuponthenatureoftheproceedsastowhetherornottheyareincluded
inthedecedentsestate.
Annuityforlifenothingisincluded
iv Areaofcontroversysituationinwhichdecedentisentitledonlytointerest
oninsuranceproceedsforlifeandthentheyaretobepaidtothedecedents
estateuponhisdeath.Thesearenotincludibleunder2033.
f. BusinessInterests
i CorporationsandProprietorships
Corporationsgrossestateincludesthevalueofdecedentssharesof
stock
SoleProprietorshipownershipofallofthevariousassetsofthebusiness
isattributedtothedecedentandincludedingrossestateunder2033.
ii PartnershipInterests
Decedentsshareinthepartnershipisincludedinhisgrossestateunder
2033
Thedecedentisnotviewedasowninganyspecificassetsofthe
partnership,butratherhisproportionateshareofeachoftheassetsofthe
partnership.
Itmaybedifficulttodeterminewhatthevalueofthepartnershipisifitis
notterminateduponthedeathofthedecedent.
Differentpartnershipagreementsmaydictatehowthepartnershipisto
devisethepartnershipinterestofadeceasedpartnertohisestate,butthis
maynotbedeterminativeofitsvalueiftheServicethinksthatitisbelow
themarketvalueofthepartnership.
iii LimitedLiabilityCompaniesdecedentsshareoftheLLCisincludiblein
hisgrossestateunder2033.
g. CompensationforDeath
i SurvivalStatuteRecoveriesundertheseactsforthedecedentspain,
suffering,orrelatedexpensesduringdecedentslifetimeareincludedinthe
decedentsestate.
Note>Survivalstatutesallowaclaimbroughtbyadecedentagainsta
tortfeasortosurvivehisdeath.
ii WrongfulDeathActsrightstorecoverundertheseactsdonotconstitutean
interestinpropertyownedbydecedenttobeincludedinhisestateunder
2033.
3. 2034DowerorCurtesyInterests
a. DowerorCurtesyinterestsshouldbeincludedintheestateofthedeceased.
b. Importantthinghereisthatthisprovisionforeclosestheargumentthata
decedentsgrossestateshouldbereducedbythesurvivingspousesdoweror
curtesyorsimilarinterestinthedecedentsproperty.
B. 2035AdjustmentsforGiftsMadeWithinThreeYearsofDecedentsDeath
1. Introduction

a. TheCommissionerhadlittleluckunderthecontemplationofgifttaxso
Congressexpandedtheruletoanautomatic3yearinclusionruleforalltransfers
inyearsafter1976.
b. Resultifatransferwasmadethatwouldbesubjecttothegifttax,itpushes
incrementsoftheestateintohigherestatetaxbrackets,yieldingaresultmuchlike
anestatetaxonatleastthelifetimevalueofthegift,reducedbythecreditforthe
earliergifttaxpaid.
2. TheFirstProng
a. 2035(a)Inclusion
i
2035(a)(1)requirespropertytobepulledbackintothe
decedentsgrossestateif:
thereisatransferifaninterestinpropertyortherelinquishmentofa
powerwithrespecttopropertyinclusionAND
thetransferorrelinquishmentisonethatwasmadebythedecedentwithin
3yearsofdeathforlessthanadequateandfullconsiderationinmoneyor
moneysworth.
Thissectionisnotapplicabletoanytransfersmadeoutsideofthethree
yearsbeforedeath.
Thetransferdateisthedatewhenthegiftiscompletelooktolocal
lawtodetermine.
ii
2035(a)(2)Thescopeofthissectionisnarrowedto
applyonlyifthedecedenttransfersaninterestorrelinquishesapowerover
either
aninsurancepolicythat,withoutthetransferorrelinquishment,would
havebeenincludedinthedecedentsgrossestateunder2042OR
Theentireamountoftheproceedsareincludedinthegrossestate
becausethatiswhatwouldhavebeenincludedunder2042
Ifyouownapolicyonyourownlife,giveitawaybeforeyouareclose
todeathgiveitawayearly.
Ifyouwanttopurchasemoreinsurance,thenyouwanttotakethe
moneythatyouwouldbuytheinsurancewithandputitinatrustand
havethetrustbuytheinsurance.
(Anirrevocablelifeinsurancetrust)Thereisnowaythiswillbe
includedinyouraccount,becauseyouneverownedthepolicy.
aninterestinpropertyorpoweroverpropertythat,ifnottransferredor
relinquished,wouldhaverequiredanamounttobeincludedinthe
decedentsgrossestateunder2036,2037,or2038.
Note>Thisonlyappliestoestatesofdecedentsdyingafter1981.
Appliesonlyiftheinteresttransferredbythedecedentwasonethat,
haditbeenretainedbythedecedent,wouldhaveenlargedthe
decedentsgrossestateundertheabovelistedsections.
Atransferofpropertythat,haditbeenretaineduntildeath,wouldhave
beenincludedindecedentsgrossestatemerelybyreasonof2033
escapesinclusionunder2035.

10

 Wearetargetingthattheirgiftvalueismuchlowerthanthevalueat
thetimeofdeath.
b. Exceptionstothe2035(a)Inclusion
i 2035(d):bonafidesales
If,inconnectionwithatransfer,thedecedentreceivesfullconsiderationin
moneyormoneysworth,thenthetransferamountsonlytoasubstitution
orexchangeofassets,thegrossestateisnotreduced,andnoestatetaxis
avoided.
Thestatutedoesnotspecifywhatconstitutesadequateconsideration
thestatutealsodoesnotsayforwhatthedecedentmustreceivefull
consideration.
Whenconfrontedwiththeproblemoftheinteresttransferredbeingofa
differentvaluethantheestatetaxinclusionamount,acourtcreatedan
estatetaxownershipconceptrequiringconsiderationequalinvalueto
thepotentialestatetaxinclusion.
PartialConsiderationwhenthereispartialconsiderationthatamount
willreducethevaluethatisincludedunder2035.
Withlifeinsurancepolicies,ifthetransfereepaysthepremiumsafter
thetransferwewouldexcludetheproportionateamountofthose
premiumstothetotalamountofpremiumsmadefromtheproceeds
whenincludingtheminthegrossestate.
ii 2035(e):certaintransfersfromrevocabletrusts
2035(and2038)isinapplicabletoanytransferfromanyportionofa
trustduringanyperiodthatsuchportionwastreatedunder676[the
revocablegrantortrustrule]asownedbythedecedentbyreasonofa
powerinthegrantor.
c. SpecialApplicationsofthe2035(a)Rule
i 2035(c)(1)sometimesmakes2035(a)(2)inoperativeitrequiresall
transferswithin3yearsofdeathtobeincludedinthegrossestateunder
2035(a)forpurposesofapplying303(b)(relatingtostockexemptions),
2032A(relatingtospecialusevaluation),and63216326(relatingtoliens
fortaxes).
ii 2035(c)(2)imposesadualtestforpurposesofmeetingthe35%ofthe
adjustedgrossestatetestof6166(a)(1)
3. TheSecondProng2035(b)
a. TheGiftTaxGrossUpRule
i Thisprovisionrequiresthefederalgifttaxpaidbythedecedentordecedents
estateonanytransfersmadeafter1976bythedecedentorthedecedents
grossestatethisisagrossupofthegifttax.
Soifadecedentmakesagiftof300Kincash,thenpaysagifttaxof
125K,the125Kwillbepulledintohisgrossestateunderthisrule.Thisis
becausegifttaxisexclusiveandestatetaxisinclusivewhenagiftof
300Kismade,thedecedentisreducingthesizeofhisestatebythefull
425K(thegiftplusthetax),butwhenadecedenthasanestateof2Mil

11

thentheestateisreducedbytheestatetaxamountbeforedistributionto
thebeneficiaries.
Itisstillbettertogivethegift,becausehadwenottheentire425Kwould
beincludedintheestateinsteadofjustthe125K.
ii Thissectionisoperativewhetherthegiftissubjectto2035(a)ornot.
iii GiftSplitting
ifthespousemakesagiftandthespouseselectgiftsplitting,thenthe
portionofthetaxpaidbythedecedentwillbeincludedinhisgrossestate
Ifthedecedentpaysallofthegifttaxonthegiftsplittransfermadebythe
spouse,nogifttothedecedentsspouseresultsandthefullgifttaxis
includedinthedecedentsestate
Ifdecedentmakesatransferandgiftsplittingiselectedanddecedentpays
fullamountoftaxonthetransfer,thefulltaxisagainpulledintothe
decedentsestate.
b. GiftsMadewithin3YearsofDeaththetransferoccurswhenthegiftis
completeforgifttaxpurposes.
4. 2043TransfersforPartialConsideration
a. TheAffirmativeRulethevalueoftheconsiderationreceivedbythedecedent
canbesubtractedfromtheapplicablevaluationdatevalueoftheproperty
includedinthegrossestate.
b. Notethishastobeconsiderationformoneyormoneysworth!!
C. 2036TransferswithRetainedLifeEstate
1. ExcludedTransfers
a. SalesforFullConsiderationthissectionisinapplicabletoanytransfersfor
adequateandfullconsideration.
i Inthecaseofaremainderinterest,thenitwillbevaluedusingtheactuarial
tablesinthebackofthebook.
ii Thiscanbepaidwithanote,butithastobetruedebt:
b. PreMarch4,1931Transfers
2. PeriodforwhichInterestisRetained
a. Inorderfor2036toapply,thedecedentmusthaveretainedaninterestinthe
propertyforaspecifiedperiod.
b. ThreefoldTest
i Forthedecedentslife
ii Foraperiodnotascertainablewithoutreferencetothedecedentsdeath
Decedentisentitledtotheincomequarterlywiththerighttoincome
endinginthequarterofdecedentsdeathstaysinthedecedentsestate
Xforlife,thentoDforlife,thentoCevenifDpredeceasesXthiswill
beincludedinhisestatelessthevalueofXsoutstandinglifeestate
becausetheperiodforwhichDhasaretainedinterestcannotbedescribed
withoutreferencetoDsdeath.
iii Foraperiodthatdoesnotinfactendbeforethedecedentsdeath
AretainedinterestforatermofyearsAhasaretainedinterestfor10
yearsthentoB.IfAdiesinthat10yearperiod,itremainsinhisestate.
12

 Havetoreference2702grantorretainedtrustwhereagrantorretains
therighttoincomeforatermofyears.Thisappliestograntorretained
truststofamilymembers.
Ifyouhavethiskindoftrustwedonotapplythenormalvaluation
rulesforthisremainderinterest.
Theremainderinterestisvaluedat100%ofthevalueoftheproperty
atthetimeofthegift.Ifitdoesnotconstituteonesfamily,thenitis
valuedlikenormal.
IfwehaveaGRIT(fixednumberofyears)wepaygifttaxatthe
timewecreatethetrust
Thegoodthingaboutdoingthisisthatyouatleastgettheappreciation
outoftheestate,butyouwillpaymoregifttaxatorigination.
Thisisalsoapplicableifthereisaretainedinterestforlife(butthis
rarelyhappensbecausethiswillbeincludedinthegiftestateandwe
aretryingtogetstuffoutofthegrossestate.
3. NatureofInterestRetained
a. 2036(a)(1)retainedbeneficialinterests
i Invokedifthedecedentretainsthepossessionorenjoymentofortheright
toincomefromthetransferredpropertyorpropertyinterest
ii Requiresaretentionofaninterestintheverythingbeingtransferred
iii Thedecedentsrighttootherproperty,suchasanannuity,inreturnforthe
transferredpropertydoesnottriggerapplicationof2036.(adequateandfull
consideration)
b. 2036(a)(2)retainedcontroloverothersinterests
i Retentionoftherightforlifetosaywhomayenjoytransferredpropertyor
incometherefrom
ii Doesnothavetobeapowerinwhichhecanclaimtheenjoymentorinterest
forhimself
4. BeneficialInterestsintheDecedent
a. PossessionorEnjoymentex.Whenonemakesagiftofavaluablepaintingbut
reservestherighttokeepitforlifeoraresidencebutretainstherighttoliveinit
forlife.
b. RighttoIncome
i Hastobemorethanamereexpectationdecedenthastohavearighttoit
ii Doesnothavetobereceiveddirectlybythedecedenttobearighttoincome.
Ifitisatrustwithincometominorchild,thisisadischargeofalegal
obligation.Thelegalobligationmuststillexistatthetimeofhisdeathifitis
tobeincludedintheestatesoifChildreachestheageofmajority,thenthis
isnolongerindirectincometothedecedentandthepropertywillnotbe
includedinthegrossestateunder2036(likeatrustforatermofyears)
c. EnjoymentRetainedactualretentioncanturnintoaratherpragmaticproblem:
i ImpliedUnderstandingmerefactthatthedecedentcontinuestooccupythe
house:

13

 Wherethefamilymembertransfereedoesnotcooccupy,itlookslike
therehasbeenretentionbythetransferor.
Wherethefamilymembertransfereedoescooccupy,itlookslesslikeit
wasretained.
ii ImpliedAgreementfoundwherethetransferorcreatesaFLPandtransfers
interestsinthepartnershiptootherfamilymembersand,underthePA,the
partnershiporotherfamilymembershaverighttoincome,butthetransferor
divertsallofthepartnershipincomeforthetransferorspersonaluse.
iii DecedenthascreatedatrustwithincometoX,butthetrustee(notthe
transferor)hascompletediscretiontomakeincomepaymentstothedecedent.
5. ControlOverOthersInterest
a. RighttoDesignateRetainedIndirectly
i Transferorgrantspowertotrusteetodesignatewhoshallenjoytheincome
andretainstherighttodischargethetrusteeandnamehimselfasthetrustee
withthesamepower
Whenthegrantorretainstherighttoremovethetrustee(atanytimeand
withoutcause)andnamehimselftrusteewehavemoreconcernthe
powersheldbythetrusteewillbeattributedtothegrantor.Sowehaveto
becarefulaboutretentionofpowersremovingthetrustee.
ii Transferorsreservationoftherighttochangetrusteeswithaprovisionthatit
willnotbethetransferorwillnotbeanindirectretention.
Whenthegrantorhasthepowertoremovethetrusteebutcanonlydoso
whentheyappointanothertrusteeforyearstheysaidthatjusthaving
thispowerwasenoughtoincludetheproperty.BUTthiswaschanged
andtheservicenowsaysthatyoucandothisbecausethereisnopower
giventothegrantortodecidewhogetsincome.
Thereisanexceptiontothiswhenthelistoftrusteesthatcouldbe
chosentoreplacetheoriginaltrusteeincludesarelatedparty(theservice
willraisethisissue).Noonethinksthisistherightresultbecause2036
allowsthegrantortoselectthispersoninthefirstplace.
b. IllusoryControlhewillstillretainthecontrolsufficienttopulltheproperty
intothegrossestateunderthissectionwhenhisrighttodesignateanincome
beneficiarymustbeconsentedtobyanotherperson(underthissectionitdoesnot
matterifthepersonconsentinghasanadverseinterestornot)
c. RighttoDesignateWhoBenefits
i Mererighttodirecttheaccumulationoftrustincome.
OMalleyIftheaccumulationwilleventuallypasstoathirdperson
remainderperson,thenthisisaretainedrighttodesignatewhobenefits.
StruthersIftheaccumulationwilleventuallypasstothebeneficiaryor
herestate,thiscourtheldthatthisisaretainedrighttodesignatewho
benefits.Butreally,thisshouldonlytriggerthe2038powertoalterthe
timeofenjoyment.
ii Righttoinvadethecorpusforanotherthirdpartybeneficiary
GXorXsestateforGsLiferemaindertoYorYsestate
14

 RetainspowertoinvadecorpusforZpowerthateffectstheenjoyment
alloftheincomeofthepropertyduringhislifetime.Wewillincludein
thegrossestatetheentiretrust.
Ifhehadlimitedthispower,theamountincludedinthegrossestatewould
belimitedaswell(ifhecanonlyinvade50%ofthecorpus,thenonly50%
isincludedintheestate)
iii Righttoinvadecorpusfortheincomebeneficiary
GXorXsestateforGsLiferemaindertoYorYsestate
ThegrantorretainsthepowertoinvadethecorpusofthetrustforXThe
corpusofthetrustcanbedistributedtotheincomebeneficiaryofthetrust.
Isthisa2036power?Nothisisnota2036powerReg.20.2036only
concernedwithapowerthatwillalterwhoreceivestheincomeorthe
benefitoftheproperty.
WhenGhasthepowertogivethecorpustotheincomebeneficiaryit
doesnotchangewhogetstheincome.Itchangeshowhegetsit,butit
doesnotaltertheidentityofwhoreceivestheproperty.Notincluded
inthedecedentsgrossestateunder2036.
Caution>thiswillbeincludedinhisestate(thoughremainderinterest
only)under2038.
If2036weretoapply,theentirevalueofthetrustwouldbe
includedintheestatebut2038wouldonlyincludetheremainder
interestinthegrossestate.Youhavetoexaminewhosebeneficiary
interestwouldbealteredandvalueofthatinterestisincludedinthe
estate.
6. IndirectInterestsorControls
a. SettlorTrustee
i Itispossibleforthesettlor(transferor)tonamehimselftrusteewithout
invoking2036.
ii Thesettlormustrestricthispowerstocompliancewithareasonablestandard.
Theideabeingthatthetrusteeisnottheinnovatorheissimplycarryingout
directionsfromthetrustinstrument.
Beneficiarysaccustomedmannerofliving
Forthebeneficiaryseducationalneeds
Incaseofsickness
Whenyousaythecomfortofthebeneficiaryyouaregoingtohave
questionsaboutthis.
iii Canthesettlorfreezehistaxliabilitytothevalueofthepropertyatthetimeof
giftandyetworktoenlargehisestateforlifewithoutestatetaxattritionatthe
end?
Whilethisseemstobeagainstthepurposeofthissection,readliterallyit
couldworkthepowertocontrolinvestmentsismerelyfiduciaryanda
restrictedpoweroverenjoymentmeetstheascertainablestandard.
iv GXorXsestateforGsLiferemaindertoYorYsestate

15

 Gnameshimselftrustee(thisalwaysleadstoproblemsitcouldleadto
allkindsofviolationsandwewouldonlywanttodothiswiththe
greatestofcaution)butputslimitationsonhispower.Heisrequired
(note>thisisnotaright,butarequirement)everyyeartogiveZthe
amountneededforhissupportandmaintenanceandtheremainderof
theincometogotoX.
Thereisnodiscretioninthispowerastrusteethisisanenforceable
distribution.Thisisnota2036powerandwillnotcauseinclusionin
thegrantorsgrossestate.Theremustbeascertainablestandards.
b. EnjoymentRetainedinCommercialTransactionswheredonortransfers
propertytoanother,buttheyagreethatthedonorwillusethelandrentfreeforhis
life,thereisaretentionoftheenjoymentoftheproperty.
c. RentPaidbyTransferoragratuitoustransferofrealpropertycoupledwitha
leasebackagreementunderwhichthetransferorpaysrentforcontinued
possession.
i BusinessSetting2036(a)(1)isinapplicablewherethepropertyisbusiness
propertythatisleasedbackforitsfairrentalvalue.
ii NonbusinessSettingTheservicesaystheyarenotgoingtofollowthisrule
whereitisaresidence(thisisameaninglessdistinctionandtheserviceshould
notacceptit)
iii SaleandLeaseBackwillbeincludedinthegrossestateifitdoesnotlook
likeitistruedebtandtheleasebackprovisionsappeartopaythenote.
Youwouldwantaloanwithafixedenddate,amortizingoverthelifeof
thedebt,youwouldwanttocutoutanyprovisioninthewillforgivingthe
debt.Youwillhavetoenforcepaymentoftheloan.
Aloanthathaspaymentsofinterestonly,theparentpayingrentclosein
valuetotheinterest,theparentforgivingaportionoftheprincipaleach
yearequaltotheannualexclusionamountandforgivingthebalanceasa
provisioninthewillmostlikelywillbeseenasagiftwhichiswhatitis.
Installmentsalesaregoodestatefreezedevicesbutyouhavetomake
sureitispuredebt.
d. 2036(b)TransferofStock
i Under2036(b)thedirectorindirectretentionofvotingrightsinacontrolled
corporationisconsideredaretentionoftheenjoymentoftransferred
propertysoastotriggerapplicationof2036(a)(1).
ii ControlledCorporationoneinwhichthedecedentowns,eitherdirectlyor
byattributionunder318,stockpossessingatleast20%ofthecombined
votingpowerofallclassesofstockinthecorporation.(Thisincludesthemere
ownershipofthevotingrights)
7. TransferbytheDecedent2036doesnotapplytotransfersbyotherscreating
rightsinthedecedent,exceptforotherstransfersimputedtothedecedent,suchasby
wayofreciprocaltrustdoctrine.
a. IndirectTransfers

16

Dpays$10KtoXtotransferrealestateoflikevalueintoatrustitisnot
unrealistictotreatDastheonewhotransferredtherealestateintothetrust
eventhoughheneverownedit.
ii Wherethebeneficiariesinanexecutedwillagreedinasettlementtoa
distributionplanspecifiedinanunexecutedthebeneficiarieswillbetreated
ashavingtransferredtheproperty.
b. TransfersbyElectionex.Whenyoumakeanelectiononyourinsurancetonot
receivetheproceedsbuttohavethemaccumulateforyourlifethenpasstoyour
childrenatdeaththisisatransfer.
c. ReciprocalTrusts
i Youhavesiblingswhoeachcreatetrustsfortheothergivingincomeforlife
andremaindertohischildren.WhenSdies,hehasnointerestinthetrusthe
createdandtherighttoincomehewasnotoriginallyhispropertyitjustgoes
ontohischildren.Theproblemisthatifeitherofthesiblingshadcreatedthe
trustforthemselvesthentheywouldhavebeensubjectto2036.Sowetreat
himasifhecreatedalifeestate.
ii Applicationofthereciprocaltrustdoctrinerequiresonlythatthetrustsbe
interrelated,andthatthearrangement,totheextentofmutualvalue,leaves
thesettlorsinapproximatelythesameeconomicpositionastheywouldhave
beeninhadtheycreatedthetrustsnamingthemselvesaslifebeneficiaries.
iii IftheamountsaredifferentRev.Ruling74533theamountthatcanbe
includedineithergrantorsestateunder2036isnomorethanthesmaller
trustattheapplicableestatevaluationdate.
8. AmounttobeIncludedthedateofdeathvalueofthepropertyinteresttransferred
intheproscribedmanner(thetrustcorpus)
a. AccumulatedIncometreatedasifitwasownedandtransferredbythedecedent
forpurposesofmeasuringtaxliabilityunder2036
b. LifetimeRelinquishmentofPrescribedInterestsifthedecedentrelinquisheshis
retainedinterestthenitwillnotbeincludedinhisestateNOTE>2035does
applyhere,soifherelinquishedhisretainedinterestwithin3yearsofdeaththen
itwillbepulledbackinunderthatprovision.
D. 2037TransfersTakingEffectatDeath
1. Introduction
a. 2037drawsintothegrossestatethevalueofsomeinterestsinpropertythatthe
decedenthastransferredconditionallyduringlife.
b. Thesectionappliesonlyif:
i Thepossessionofenjoymentofthepropertyisconditionaluponsurviving
thedecedentAND
ii Thedecedenthasretainedaninterestinthepropertythatmaybringthe
propertybacktothedecedentortothedecedentsestateorbackintothe
decedentspowerofdisposition.(ReversionaryInterest)
2. ExcludedTransfers
i

17

a. Inapplicabletobonafidesaleforanadequateandfullconsiderationinmoneyor
moneysworth
b. DoesnotapplytotransfersmadebeforeSeptember7,1916.
3. TheSurvivorshipRequirement
a. Canpossessionbeobtainedwithoutsurvivingthedecedent?
i Ifyes,then2037willnotapply
ii Ifno,thenitwillapply
b. Ifthereisanalternativecontingencybywhichtheinterestcanbeobtained,thenit
willnotbeincludedunder2037,butifthealternativecontingencyisunrealwill
neverhappenthenitwillbeknockedbackinto2037.
c. Whenthereismorethanoneinterestinthepropertytransferred,asthereoftenis
inthesesituations,weneedtobecarefultofindtheinterestthatiscontingenton
decedentsdeathandonlythatinterestisfallingunder2037/
4. RetentionofReversionaryInterest
a. DefinitionofReversionaryInterest
i Thetermisdefinedtoincludethepossibilitythatthepropertymayreturnto
thedecedenttransferor,aswellasthepossibilitythatitmayreturntothe
decedentsestate.
ii Evenifthepossibilityendswiththedecedentsdeath,thedecedenthas
retainedtherequisiteinterestlongenoughwithinthestatutoryconcept
iii Doesnotincludeapossibilitymerelythattheincomefrompropertyorthe
powertodesignatewhoshallhavetheincomemayreturntothedecedent
(thesewouldfallunder2036)
b. HowtheInterestisRetained
i Pre1949onlyreversionaryintereststhatariseoutoftheexpresstermsof
theinstrumentofthetransfer
ii Post1949boththereversionaryinterestsarisingoutofexpresstermsandby
operationoflaw
c. NegligibleReversionaryIntereststhereversionaryinterestmustexceed5%of
thevalueofthetransferredproperty(itsvalueimmediatelyprecedingdeath.
d. MortalityTablesandActuarialPrinciplesthefactofthedecedentsdeathisto
bedisregardedandtheusualvaluationmethodsaretobeemployed,includingthe
useofgenderneutralmortalitytablesandactuarialprinciples.
e. DecedentsPhysicalConditiontakingthisintoaccountwouldlargelynullify
thisprovision,soitisnottakenintoaccount.
f. Applicationofthe5%Testthisbecomesprimarilyadeterminationofthe
decedentsmathematicalchances,onthebasisofagejustpriortodeath,of
survivingsomecontingency(ies).
g. Baseforthe5%Testindeterminingwhetherthevalueofthereversionary
interestexceeds5%,itistobecomparedwiththeentirevalueofthetransferred
property,includingtheintereststhatarenotdependentuponsurvivorshipofthe
decedent.

18

5. PreDeathTerminationofReversionifthereversionisterminatedbeforedeath
thenitsvaluewouldbezeroandwouldnotbeincludedinthegrossestateunder
2037.Note>itcanstillbepulledinunder2035.
6. AmounttobeIncludedthegrossestateshallincludethevalueatthedateofdeath
ofanyinterestinpropertythathasbeentransferredinsuchawayastotakeeffectin
possessionorenjoymentatorafterthedecedentsdeath
E. 2038RevocableTrusts
1. Introduction
a. Itmightbebetternamedalterabletransfersbecauseallittakesisthepowerto
changetheenjoymentoftransferredintereststoinvokethesection
b. Thetransfersectionsoverlapquiteabit(esp.2036&2038)Whentwoormore
ofthetransfersectionsareapplicable,obviouslytheCommissionerquiteproperly
willapplythatsectionorcombinationofsectionsrequiringthemaximum
inclusioninthedecedentsgrossestate.
2. ExcludedTransfers
a. Abonafidesaleforanadequateandfullconsiderationinmoneyormoneys
worth.
b. TransfersmadebeforeJune22,1936
3. AnyChangeinEnjoyment
a. Whethertheenjoymentofaninterestinpropertytransferredbythedecedent
duringlifeissubjecttoanychangeatthedecedentsdeath.
i Ifthedecedentkeptahandonthepropertyuntildeath,evenbyarightto
acceleratetheinterest,itissomuchakintoatestamentarydispositionthatthe
affectedinterestshouldbesubjecttoestatetax.
ii ExWhereincomebeneficiaryandremaindermanarethesameperson,the
righttoterminatethetrustandturncorpusovertohimimmediately.
b. Whetherthepossiblechangemaybebroughtaboutbythedecedentthroughthe
decedentsexerciseofpower.
i Thiswouldincludeanyrighttoinvasionofthecorpusforthebenefitof
another.
ii Thisalsoincludesanyrightthatwouldmerelychangethetimingofwhena
beneficiaryreceivedtheirinterest.
4. PowerintheDecedentanyofthesepowerswillinvoke2038
a. PowertoRevoke
i Ifdecedentretainstherighttogetthepropertyback
ii Ifstatelawprovidesthataparticulartransferisrevocableifnotspecifically
madeirrevocable,thenunlessthetransferorexpresslymakesthetrust
irrevocable,2038willapply
iii Ifcreditorsofthetransferor,underlocallaw,canreachthecorpusofthetrust,
thenitisrevocableandcaughtin2038
b. PowertoAlterorAmend
i Powergenerallytonamenewbeneficiariesofatrust

19

ii MerePowertochangebeneficialinterestsamongalimitedgroupofpersons
alreadyenjoyingrightsasbeneficiaries
iii Sufficientevenifthepowercanonlybeexercisedbywillandthereisnoright
duringlifetomaketheadjustment.
c. AdministrativePowers
i Mereadministrativeormanagerialpowersovertrustassetsdonotconstitute
powerstoalterbeneficialinterestsinthetrustwithin2038.
ii Whatisconsideredtobeanadministrativeormanagerialpower?
TrusteeGrantorhasdiscretiontoallocatestockdividendstoprincipalor
incomeadministrativepower
NonTrusteeGrantorhasreservedcompleteallocationdiscretionwithno
judicialrestraintnotanadministrativepower(lookingatunbridled
discretion)
Allocationpowersastrustee,iftheyarevalidlyexpressedinsuchawayas
toforecloserestraintbyacourtofequity,theygobeyondtheneeded
flexibility,involveaffirmativeauthoritytotamperwithbeneficialinterests
notanadministrativepower.
iii 2038doeslittlemorethanrequireattentiontobefocusedonanypowerto
determinewhetherunderitstermsandapplicablelaw,itisproperly
consideredafiduciarypowerorwhetheritreallyamountstoapowerto
changebeneficialinterests.
d. PowersofInvestmentanyuncontrolledpowerovertrustinvestmentssuchthat
theremainderpersonsinterestscouldbechangedatdecedentswillorlifetime
interestbeneficiarysinterestcouldbechangedathiswill,thenitisapower
within2038
e. PowertoTerminateexpresslyproscribedin2038andtaxedastotheinterest
thatissubjecttotermination.
f. GiftstoMinorsatransfertoaminorwiththedecedentnamedascustodianwill
resultininclusionunder2038ifdecedentdiesbeforechildreachesmajority.
g. PowerinWhateverCapacitythisbringsinthepowertoremoveordischargea
trusteeatanytimeandtoappointthedecedentastrustee
5. PowersRestrictedbyStandards
a. Apowertochangeenjoymentonlyinstatedcircumstancesdoesnotinvoke2038.
b. AscertainableStandardapowerthatisrestrictedbyanobjectivestandardisnot
apowerwithinthemeaningof2038.
i Decedentspowerastrusteetogiveincometochildinaccordancewiththe
stationinlifetowhichhebelongs.
ii Medicalexpenses,support,education,
c. Therationaleisthatsuchapowerinvolvestheauthoritytoexecuteratherthanto
determineortochangethetermsofthetransfer.
6. PowerExercisableOnlyWithAnother
a. Itdoesnotmatterwhotheotherpersonis,thedecedentspowertoalterorrevoke
willstillinvoke2038whenitmustbeconsentedtobyanotherperson(evenifthe
otherpersonhasaninterestadversetotheexerciseofthatauthority)

20

b. Oneexceptionalcaseifthedecedentholdsapowerthatisexercisableonlywith
theconsentofallpersonshavinganinterest,vestedorcontingent,intheproperty
subjecttothepowerandifthepoweraddsnothingtotherightsoftheparties
underlocallaw(i.e.,aprovisionoflocallawthatwouldallowsuchpersontoalter
thetermsofthetrustinanyevent),thepowerisignored.
7. SourceofthePower
a. Itmakesnodifferencewhenorfromwhatsourcethedecedentacquiredthe
power.However,thereshouldbesomelinkagebetweentherequiredtransferby
thedecedentandthedecedentspower.
b. 2038shouldbeheldinapplicableinsituationswherethedecedentmakesa
complete,absolutetransferand,bytotallyunrelatedconveyance,thedecedenthas
somefiduciarypowerorcontrolatdeath.
8. WhenPowerMustExist
a. Atdateofdeath
b. Willbeconsideredtobethereatdateofdeathevenwhenthereisarequirementof
noticebeforetheexercise,despitenonotice
c. Deferredeffectivedatefortheamendment,revocation,orterminationfromthe
dateofexercise
d. However,ifthereareothercontingencies,2038willnotapply
e. RelinquishmentofthePowerifwithin3yearsofdeaththenitwillbeincluded
inthegrossestate(2038(a)(1)&2035)
9. AmounttobeIncludedAnyinterestinthepropertytransferredbythedecedentif
theenjoymentofsuchinterestwassubjectatthedateofdecedentsdeathtochange
throughoneoftheproscribedpowers.
a. InterestsSubjecttoChange
i
Onlytheintereststhatthepowereffectswillbeincludedin
thegrossestate
ii
Requirementofgivingnoticemakesthissubjectto
adjustmenttheadjustmentexcludesthevalueoftheinterestthatcouldnot
havebeeneffectedbyanexerciseofthepowerifthedecedenthadlived.
b. 2036and2038Compared
i 2036includesthevalueoftheentireproperty
ii 2038onlyincludesthevalueoftheeffectedinterest
F. 2039Annuities
1. GeneralRule
a. Thevalueofamountsreceivedbybeneficiariesbyreasonoftheirsurvivingthe
decedentistobeincludedinthedecedentsestate.
b. ThreeRequirements:
i Underanyformofcontractoragreement
ii Ifundersuchcontract
Anannuityorotherpaymentwaspayabletothedecedent
Decedentpossessedarighttoreceivesuchannuityorpaymentfor
Hislife
Anyperiodoftimenotascertainablewithoutreferencetohisdeathor
21

 Foranyperiodoftimewhichdoesnotinfactendbeforehisdeath
iii Receivablebythebeneficiarybyreasonofsurvivingthedecedent
2. ExceptionsExpressedin2039(a)
a. LifeInsurancePoliciesexpresslyinapplicabletolifeinsurancepolicies(2042
controls).Inthecombinationpolicies,theregulationssaythatifthedecedent
diesafterthereservevalueequalsthedeathbenefit,thereisnolongeran
insuranceelementunderthecontractand2039willcontrol.
b. Pre1931ContractslimitedtoestateswheredecedentdiesafterAugust16,1954
andthenonlytocontractsenteredintoafterMarch3,1931.
3. Qualifications
a. ContractorAgreement
i Theremustbeacontractoragreementincludesunderstandings,
arrangementsorplansorcombinationsofarrangements,understandings,or
plansarisingbyreasonofdecedentsemployment
ii Doesnotincludebenefitpaymentspaidunderpubliclawswheredecedent
hasnovoiceinthedesignationofbeneficiaries;wherebeneficiarieshaveonly
amereexpectancy;salarypaymentstowhichdecedenthadarightto(these
areincludedonthedecedentsfinalincometaxreturn)
b. PeriodforwhichInterestisRetainedthequestioniswhetherthedecedenthada
specifiedrightorinterest
i Forhislife
ii Foraperiodnotascertainablewithoutreferencetohisdeath
iii Foraperiodthatdidnotinfactendbeforehisdeath.
c. NatureofDecedentsInterest
i Payabletothedecedentwherethedecedentatdeathwasactuallyreceiving
paymentswithoutregardtothequestionwhetherthedecedentcouldrequire
theircontinuation
ii Possessedtherighttoreceiveifthedecedenthadanenforceablerightto
receivepaymentsatsomepointinthefuture,whetherornot,atthetimeofhis
death,hehadapresentrighttoretainpayments,i.e.,itisnotnecessarythat
hehavemettheconditionsatthetimeofhisdeath
iii Ifthepaymentstothedecedenthavenotcommencedatthedecedentsdeath,
2039willnotapplyunless,atdeath,thedecedentsrightstofuturepayments
arenonforfeitable.
d. NatureofBeneficiarysInterest
i sameasthedecedents
ii Righttopaymentisbyreasonofsurvivingthedecedent
4. AmounttobeIncludedthevalueoftheamountsreceivablebybeneficiariesby
reasonofsurvivingthedecedent.
a. Valuation
i Annuitiesundercontractsissuedbycompaniesregularlyengagedintheir
issuancecostofcomparablecontractsissuedbythecompany
Whatitwouldcostatthedateofdeathtoacquireapolicyforthesurvivor
withbenefitssuchasexistunderthecontractinquestion.
22

ii Whenitisnotissuedbyacompanyengagedinissuingthesecontractsvalue
isdeterminedinaccordancewithappropriatevaluationtables.
b. PercentageRestriction
i theamountactuallyincludableinthedecedentsgrossestateunder2039isto
bedeterminedbyreferencetothefollowing2factors:
Thevalueofwhatispayabletothesurvivors
Theportionofthepurchasepriceoftheannuityorothercontractsthatwas
paidbythedecedent
ii Theamounttobeincludedisonlysuchpartofthevalueoftheannuityor
otherpaymentreceivablebybeneficiaryasisproportionatetothepartofthe
purchasepricecontributedbythedecedent.
Portionspaidbythedecedentsemployerwillbeconsideredaspaidbythe
decedent.
5. PrivateAnnuities
a. Notanannuityinthecontextofemploymentorboughtfromacompanyinthe
businessofsellingannuities.Thisisarelatedpartysellingthepropertyin
exchangeforanannuity.
b. TheFMVoftheannuitymustequaltheFMVoftheproperty.
i Usuallywhenyouaretryingtomakesurethatthisisadequateconsiderationit
isunworkablebecausethepaymentistoolarge.
ii Alotoftimestherearenotothersourcesofincomewithwhichtomakethe
annuitypaymentssoyouhavetorelyontheincomeofthepropertythatwas
exchangedfortheannuity.
c. Abetterplanwouldbetogiveawayportionsofthepropertyonayearbyyear
basis.Thesearediscountedintheirvalue.Soyougivea20%interesttoyour
childanditwillbediscountedbecauseitisnotworthasmuchasjustaportion
youcouldworkitsothateachgiftequalinvaluetotheannualexclusion.
6. ExemptAnnuitiestheexclusionsunderthissectionwererepealedunderTax
ReturnActof1984forallestatesofdecedentsdyingafter1984.
G. 2040JointInterests
1. Introduction
a. Therearefourpossiblerules
i Ifdecedentsinterestandthatoftheothercoownerswasacquired
gratuitouslyeachcoownerwillbetaxedatdeathforhisratableshare
ii Ifthedecedentswealthcreatedallofthejointintereststheentirevalueof
thepropertyisincludedinthedecedentsgrossestate
iii Ifthedecedentsinterestwascreatedgratuitouslybytheothercoowner
thereisnothingfromthispropertyincludedinthegrossestateofthedecedent
iv Iftheboththedecedentandthecoownercontributedtotheacquisitionofthe
propertytheportionofthepropertyequaltothedecedentsshareofthecost
ofacquisitionisincludedinhisestate
b. SpecialRulein2040(b)forjointtenanciesinwhichthecoownersarespouses
2. FormsofOwnershipCovered

23

3.

4.
5.

6.

7.

a. JointTenanciespropertyisheldbydecedentandanotherorotherswitharight
ofsurvivorship
b. TenanciesbytheEntiretyjointtenancywheretheonlytenantsarehusbandand
wife
c. JointBankAccountsspecificallyincludedinthestatutewherethedepositis
payabletoeithercoownerorthesurvivor
Some2040Misconceptionsmustbesetaside:
a. Itisimmaterialthatjointlyownedpropertyisnotpartifadecedentsestatefor
purposesofprobateoradministration.
b. Thevalueofthedecedentsinterestinthejointlyheldpropertypriortothe
decedentsdeathisbynomeansthemeasureofwhatistobeincludedinthe
decedentsgrossestate.
c. Theestatetaxtreatmentofpropertyownedbythedecedentandanotherasjoint
tenantsisnotaffectedbythefactthatthecreationofthetenancywastreatedasa
giftforgifttaxpurposes,exceptwithregardtothepossibleavailabilityofacredit
forgifttaxpaid.
AmounttobeIncludedthevalueofthejointlyheldproperty,excepttotheextent
thatthesurvivingtenant(s)contributedtothecostoftheproperty.
SurvivorsContribution
a. theamounttobeexcludedasthesurvivorscontributionbearsthesameratioto
theentirevalueofthepropertyastheconsiderationfurnishedbythesurvivor
bearstotheentireconsiderationpaidfortheproperty
b. AmountExcluded=(survivorsconsideration/entireconsiderationpaid)*
entirevalueoftheproperty
PropertyAcquiredbyGiftFromOthersuponthedeathofoneoftheowners,the
propertyistreatedforestatetaxpurposesjustasifeachownerhadcontributedan
equalpartofthepurchaseprice(valueincluded=valueofproperty/#ofowners)
PropertyPaidforbyCoowners
a. TheTracingRequirement
i Onlycontributionsfromseparatefundsofthesurvivoraretakenintoaccount
undertheexclusionaryrules.
ii Acontributionoriginatingasincomefrompropertyacquiredgratuitously
fromthedecedentconstitutescontributionfromthesurvivorsseparatefunds.
Whatisincomeforthesepurposes?
Dividendsfromstock,rentfrompropertyclearlyincomewhen
contributingtotheacquisitionofaseparateproperty
Gainsfromthesaleofpropertyusedtopurchasejointlyheldproperty
incomeconstitutingseparatefunds
Appreciatedpropertyusedascontributionnotincomeandwillbe
consideredcontributedwhollybythedecedent
b. AdditionsandImprovements
i Theregulationsstatethatthetotalcostofacquisitionincludedthecostof
capitaladditions.
ii Threeapproaches
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 Applicationoftheregulationsliterallytheexactdollaramountactually
contributed
Allocationtoeachofthecoownersapartoftheappreciation
commensuratewiththecoownerscontributionspriortotheappreciation.
Reductionofthecashcontributionmadebythesurvivingownerfromthe
totalvalueofthepropertytoarriveatthevaluetobeincludedin
decedentsgrossestate
iii Thefirstandthirdapproachesshouldbothberejectedandthesecondone
shouldbeapplied.
8. BurdenofProof
a. Theburdenofshowingoriginalownershiporcontributiontothepurchaseprice
bythesurvivorfallsupontheestate.
b. Inthecaseofabankaccountyouhavetoshowcontributionbythesurvivorand
nosubsequentwithdrawals.
9. TerminationPriortoDeath
a. Creationofatenancyincommonneardeathonlyhalfofthepropertywouldbe
includedinthedecedentsestate.
b. Ifthedecedentandthesurvivingcoownertransfertheentirepropertytoa3rd
party,thennoneofitwillbeincludedinthegrossestateregardlessofwhether
ornothelivesfor3yearsafter(giftofpropertynotaninterestinpropertysonot
includableunder2035,butthegifttaxassociatedwithdecedentsportionofthe
giftwillbeincluded)
c. Ifdecedentandcoownertransfertotrustandretainalifeinteresthalfofthe
propertywillbeincludedinhisgrossestate.Rationaleatthetimeofthetransfer
thedecedenthadonlyonehalfinterestinthepropertyunderlocallaw,whichis
allthedecedentcouldhavetransferred.
10. The2040(b)Exception
a. GeneralRule
i (b)(1)providesaflatrulethatofthepropertyjointlyownedisincludedin
theestateofthepredeceasingtenantinthecaseofaqualifiedjointinterest
ii (b)(2)qualifiedjointinterestthecoownersarehusbandandwife
b. Exceptions:
i Inapplicabletoqualifiedjointinterestscreatedpriorto1977
ii InapplicablewherethesurvivingspouseisnotaU.S.citizen
Ifnoncitizenbecomesacitizenpriortothefilingofthedecedentstax
returnandisaU.S.residentatalltimesafterdecedentsdeathandpriorto
becomingacitizenthen(b)(1)willapply
Totheextentitisincludedintheestatethespousecantransferthe
propertytoaQDOTanditwillqualifyforthemaritaldeductionand
QDOTtreatmentresultinginthepostponementofdecedentspouses
estatetax.
c. Onethingtobeconcernedwithhereisthatyoudonotwanttohavetoomuch
propertytobeheldjointlybecausethentheremaynotbeenoughtofundthe
creditsheltertrustalljointlyheldpropertywillgotothespousequalifyingfor

25

themaritaldeduction.Youwanttomakesurethateachspouseownsenough
propertyindividuallytofundthecreditsheltertrust.
H. 2041PowersofAppointment
1. Introduction
a. Neverappliestoaretainedpowerthisisreservedfor2036,2038
b. Onlyappliestoapowerconferredtotheownerbyanotherpersonorgroupof
persons.
c. Thereisacomparableprovisioninthegifttaxareasee2516
2. Powerswithin2041arightthatmaybeexercisedeitherduringlifeorbywill,not
necessarilyboth,todirectwhoshallbecomeownerofthepropertysubjecttothe
power.Includes:
- righttoconsumetheprincipalofthetrust
- unrestrictedrighttosubstituteoneselffortheexistingtrusteeofatrust,ifthe
trusteehasapowerofappointment
b. RelationshiptoOtherSections
i 2041neveroperatestoexcludefromadecedentsgrossestatethevalueof
propertythatisincludableunderothersections
ii Doesnotapplytopowersreservedbythedecedenttohimselfwhichare
withinthescopeofothersections
c. PowersthatOverlapInterestsIfdecedenthadanactualownershipinterestinthe
propertyitwillbeincludedinthegrossestateunder2033.
3. DefinitionofaGeneralPowerapowerisgeneralifitisexercisableinfavorof
thedecedent,hisestate,hiscreditors,orthecreditorsofhisestate.(onethatcanbe
exerciseddirectlyorindirectlyinfavorofonesownbenefit)
4. ExceptionstoGeneralDefinition
a. PowerLimitedbyaStandard
i 2041(b)(1)(A)ifapowermaybeexercisedonlyinaccordancewithan
ascertainablestandardrelatingtothedecedentshealth,education,support,or
maintenance,itisnottreatedasageneralpowerofappointment.
Ifitisanascertainablestandardnotrelatedtooneoftheabove,thenitis
notsufficienttolimitthepower
ii CriticalQuestionwhetherthepowerislimitedbyanascertainablestandard.
b. Post1942PowerswithAnotherPerson
i Powerheldwiththecreatorofthepowerthepropertywillbebroughtinto
thecreatorsestateunder2036or2038
ii Powerheldwithanadversepartysomeonewhohasasubstantialinterestin
theappointiveproperty,whichinterestwillbeadverselyaffectedbyan
exerciseofthepowerinfavorofthedecedent
iii Powerheldwithanequallyinterestedpartyifadecedentspowerto
appointforhisbenefitcanbeexercisedonlyinconjunctionwithoneother
personinwhosefavorthepowermayalsobeexercised,onlyofthe
propertywillbetreatedassubjecttoageneralpowerofappointmentinthe
decedent.

26

c. JudiciousUseofPowerscongresshasleftconsiderableroomforthejudicious
useofpowersofappointmentinplanningatsubstantialtaxsavings.
5. TreatmentofPre1942Powersgivesrisetoestatetaxinclusiononlyifthepower
isageneralpowerandthedecedentexercisesthepower.
a. ExerciseofPower
i Nonexerciseofapre1942powerisnottaxable
ii Thepowermustbeexercisedbywillorinsomeothermannerakinto
testamentarydispositioninordertocauseestatetaxliability
iii Ifapre1942powerisexercisedbyadispositionofatypethatwouldbe
caughtby20352038ifanactualtransferofpropertywereinvolved,estatetax
liabilityresults.
b. FailuretoExercisethestatuteexplicitlystatesthatfailuretoexerciseshallnot
bedeemedanexercise
c. CompleteRelease
i Acompletereleaseshallnotbedeemedanexercise
ii Whatconstitutesacompleterelease?
Therearenogoodguidelinesintheregulationssoinactionseemstobethe
safestroute
d. PartialReleaseofPre1942Powerswhenageneralpowerispartiallyreleased
suchthatitisnowalimitedpower,theexerciseofthelimitedpowerwillbe
consideredanexerciseofageneralpower
6. TreatmentofPost1942Powersseveraltestsdeterminewhetherthevalueof
propertysubjecttopost1942generalpowerofappointmentinthedecedentmustbe
includedinhisgrossestate:
a. Possession
i Didhehavepossessionofthepoweratthetimeofhisdeath?
ii Itisirrelevantthathewasunderlegaldisabilitytoexerciseitatalltimesafter
thepowerwascreatedmerepossession.
iii Conditionalpowerofappointmenttriggeringevent:
Decedenthasnopoweroverthetriggeringeventnopossessionofthe
poweratdeath
Decedenthaspowerovertheoccurrenceofthetriggeringevent
possessionofthepoweratdeath
iv GivingNoticeasaRequirementofExercisevalueofthepropertytobe
includedinthegrossestatewillbediscountedfortheperiodrequiredtoelapse
betweenthetimeofthedecedentsdeathandthetimethepowercouldhave
beenexercised.
b. Exercise
i Apredeathexerciseofthegeneralpowerinatestamentaryfashionrequires
inclusionofthevalueofthepropertysubjecttothepowerinthegrossestate
ii Ifthepowerisexercisedthroughthewillinclusionofthevalueofthe
propertysubjecttothepower
iii Exercisethatinvolvesadispositionthatwouldbecoveredby20352038ifit
weretransferredinthetraditionalway

27

c. Releasealifetimereleaseofthepowerwillbeequivalenttoanexerciseofthe
power
d. DisclaimerorRenunciation2518providesarulefordisclaimersthatallowsan
individualwhoisgivenapost1942generalpowerofappointmenttoavoidany
taxconsequenceswithrespecttothepower.
e. Lapsereleaseofageneralpowerincludesthelapseofthepowerduringthe
doneeslifetime,subjecttosomeimportantexceptions
f. TheFiveorFiveRuletheexceptiontothegeneralrulethatalapse=release
i Thegeneralruleisinapplicableifthepowerthatlapsedwassuchthatduring
anycalendaryearitsexercisewaslimitedto$5Korto5%ofthevalueofthe
propertyoutofwhichtheexerciseofthepowercouldhavebeensatisfied,
whicheverisgreater.
Ifthelapseexceedstheseamounts,itistobetreatedasareleaseonlyto
theextentoftheexcess
5%ofthevalueatthetimeofthelapse
Ifthedecedentspowerislimitedtoonlypartoftheproperty,thenonly
thatpartisusedtomeasurethe5%exclusion.
ii Thefailuretoexercisethepowerthatfitswithinthisexceptionwouldhaveno
resultingestatetaxconsequence.
iii Youwouldwanttomakesurethatthepowerexpiresinashorttimebecauseif
thedecedentdiedwhilethepowerwasunexercisedandthelapsehadnot
occurredthenitwouldbeincludedinhisestate.
iv Onewaytosetuponeofthesetrusts:
Wehavealistofbeneficiarieswhomaymakeannualnoncumulative
withdrawalsofthegreaterof5Kor5%,BUTweneverexpectthemto
makeanyofthesewithdrawals.
Thiswaywearepassingwealthusingtheannualexclusion,andbuilding
upthetrusttopasstofuturegenerations.Youcanmakethegiftuptothe
amountoftheannualexclusionforeachofthebeneficiaries
7. AmounttobeIncludeditisthevalueofthepropertythatthedecedentcouldor
didappointthatisbroughtintothedecedentsgrossestate
I. 2042Insurance
1. Introduction
a. TwoBasicInclusionaryRulesTheproceedsofinsurancepoliciesona
decedentslifearetobeincludedintheinsuredsgrossestateiftheyare:
i ReceivablebytheexecutorOR
ii Receivablebyotherbeneficiariesandthedecedenthadanyincidentsof
ownershipinthepolicyatdeath.
b. Thissectiononlyappliestodecedentsownershipofalifeinsurancepolicyonhis
ownlife.
c. Thissectionisnotnecessarilyexclusive.
2. WhatisInsurance?
a. Inordertobeinsurancethepolicymustincludethedistributionorshiftingofthe
riskofprematuredeath.
28

b. Conventionalpolicieswhichguardagainstdeath(accidentalornot)andadouble
indemnityofalifecontract.
c. Deathbenefitspaidbyfraternalbeneficialsocietiesoperatingunderalodge
system.
3. AmountsReceivablebyorfortheEstate
a. MeaningofExecutor
i receivablebytheexecutortheyarepartofdecedentsgrossestatefortax
purposes.
receivablebyorforthebenefitoftheestate
whennominallypayabletoanotherbeneficiarywhoislegallyboundto
usetheproceedstodischargetheestatesobligations,suchastaxes,debt,
orothercharges.
ii executortheexecutororadministeroftheestateor,ifnoneisappointed,
thenanypersoninactualorconstructivepossessionofanypropertyofthe
decedent.
b. SimultaneousDeathIftheprimarybeneficiarydiesatthesametime,thenitwill
gotothesecondarybeneficiaryandwhetherornotitisincludedwilldependupon
whoisthesecondarybeneficiary.
c. IsInsuredsWealthTransmittedyes,itissomethingthatisownedbythe
decedentthathappenstoincreaseinvalueonthedateofhisdeath
4. AmountsReceivablebyOtherBeneficiaries
a. Incidentsofownership
i Fullownershipisnotrequired
ii HouseWays&Meanslistedsomeincidents(notexhaustive):
Therightoftheinsuredorhisestatetotheeconomicbenefitofthe
insurance
Thepowertochangethebeneficiary
Thepowertosurrenderorcancelthepolicy
Thepowertoassignit
Thepowertorevokeanassignment
Thepowertopledgethepolicyforaloan
Thepowertogainfromtheinsureraloanagainstthesurrendervalueof
thepolicy
b. ReversionaryInterestthisisanincidentofownershiponlyifthevalueofthe
reversionaryinterestexceeds5%ofthevalueofthepolicyimmediatelybeforethe
decedentsdeath
i Includesapossibilitythatthepolicy,ortheproceedsofthepolicy,may
returntothedecedentorhisestate,ormaybesubjecttoapowerofdisposition
byhim.
ii Becarefulofultimateandindefeasiblerightsconferredbythepolicyonthe
decedentandanyremainderinterestinthepolicy.
c. EffectofPolicyTerms

29

Theexpresstermsofthepolicygenerallydeterminetheincidentsof
ownership,butwheretheseareunclear,thecourtswilllooktothesubstance
ofthetransaction.
ii Theburdenofproofisontheestateofthedecedenttoshowthatthereareno
incidentsofownershipwhenthetermsindicatethatthereare.
d. BuyandSellAgreementsusuallythesecollateralagreementswillprovidea
surrenderofallrightsbythedecedentandthusnoinclusionunder2042
i Whenatransferforvalueismade,thebuyerlosestheexemptionforincome
taxpurposesforexampleifXhadaninsurancepolicyonhislifewiths
estateasthebeneficiaryandYboughtthepolicysuchthathewouldbecome
thebeneficiary,hewouldnothavetheincometaxexemption.
ii 4Exceptions:
transferstotheinsured
transferstoapartneroftheinsured
transferstoapartnershipofwhichtheinsuredisamember
transferstoacorporationinwhichtheinsuredisakeyshareholder.
iii Note>inordertopurchaselifeinsuranceonapersonyoumusthavea
relationshipwiththatpersonrenderinganinsurableinterest.
e. IncidentsinContext
i iftheoriginoftheinsuranceissuchthatsomeformofwealthtransferbythe
decedentisevident,veryslender20362038rightsshouldberegardedas
incidentsofownership,but
ii ifthepolicyisnotgeneratedatallbythedecedentswealthorisdisassociated
fromthedecedentbyaprioroutrightgift,thenthestronger2041typerights
shouldberecognizedasincidentsofownership.
f. EconomicBenefitcourtsusethistonarrowthemeaningofincidentsof
ownership
5. IncidentsIncidentallyHeld
a. ShareholderinaCorporation
i Wherecorporationisthebeneficiaryandthedecedentisacontrolling
shareholder,thentheincidentsofownershipwillbeattributedtothe
corporation
ii WheretheCorporationisnotthebeneficiaryandthedecedentaslegalor
equitableownershipofmorethan50%ofthecombinedvotingpowerofthe
stockofthecorporation,thecorporationsownershipattributeswillbe
attributedtothedecedent.
b. PartnershipsInsuranceonPartner
i IncidentsattributabletothePartnership
Whentheproceedsarepayabletothepartnership
ii IncidentsattributabletothePartner
Whentheproceedsarepayabletoathirdperson(partnersspouse)
Ifunderthepolicythedecedenthastherighttochangebeneficiaries
6. AssignmentofGroupTermInsurance
i

30

a. Anemployeemayeffectivelyassignanonconvertiblegrouppolicyifthe
employeeassignsallofhisrights.
b. Noincidentofownershipintheemployeesconversionprivilegeatemployment
termination.
7. AmounttobeIncluded
a. InGeneralthefullamountreceivableunderthepolicy
b. InclusionofOnlyaPortionofProceedstotheportionofthepolicyoverwhich
incidentsofownershipextend
8. PolicyPurchasedwithCommunityPropertyFunds
a. Onlyoftheproceedsaretobeincludedinthedecedentsestate(thesurviving
spouseownstheotherhalf.
b. Wherethesurvivingspouseisnotthebeneficiary,willbeinthedecedents
estateandthesurvivingspousewillhavemadeagiftof
9. Relationof2042toOtherSectionsDefiningGrossEstate
a. TheTransferSectionsGenerally
i 2037mightbeapplicableifthereisalifetimeinterestinthepolicy
transferred,butitisdifficulttoseehowthiswouldproduceamoreonerous
taxresultthan2042,sothegovernmentusuallydoesnotresorttothis
ii 2036notlikelytoberesortedtobecauserarelywilldecedentevenwanta
lifetimeinterestinlifeinsurance
iii 2038thiswouldsatisfytheincidentsofownershiprequirement
iv 2039thisisexpresslyinoperabletoinsurance
v 2041thiswillbetreatedasanincidentofownership
b. NearDeathTransfers
i 2035(a)appliesonlywheredecedentactuallyheldantransferred2042
incidentsofownership.
ii 4possibilities:
Transfersmorethan3years
Beneficiarypaysallpremiumsposttransfernothingincludedin
decedentsestate
Decedentcontinuestopayallpremiumsnothingincludedin
decedentsestate
Transferswithin3years
Beneficiarypaysallposttransferpremiumstheprorataamountof
theproceedsattributablebythedecedentspayments
Decedentpaysallposttransferpremiumsallofitwouldbeincluded
10. PlanningAspects:
a. Thisisanassetthatwetypicallywanttodivestourclientofincidentsof
ownership.Weshouldbeabletodothiswithoutanyfederalestatetaxes.Ithasa
muchhighervalueonthedateofhisdeaththanitdoeswhenheisalive.Youcan
giveitasagiftatalowervaluewhenheisalive,butupondeath,ifitisstill
owned,thenitisincludedinhisestateatfacevalue.
b. IrrevocableLifeInsuranceTrustwewillusethistrusttokeepitoutoftheestate
oftheinsured,theinsuredsspouse,andmaybethechildrenoftheinsured.
31

Hewouldtransferanylifeinsurancepoliciesthatheownstothetrustwhole
life,term,evengroup.
ii Hemakesthepoliciespayabletothetrustbuttherearestillrisksof
inclusionunder2035the3yeartimeframeweareconcernedwith.Ifthe
transferwaswithinthreeyearsofhisdeath,theniftheywouldhavebeen
includedunder2042.
iii TherewillbeagifttaxonthetransferofthepolicypolicyvaluedatCSV
J. Valuation
1. GeneralMethods
a. IncomeApproach
b. MarketApproach
c. AssetbasedApproach
d. Combinations
2. ValuationDeterminedbyAgreement2703
a. Wedonottakeaccountofbuysellagreementswhenwevaluethebusinessfor
estatetaxpurposestheywillbebindingonthemembersonly.
b. Courtswillusuallygivedeferencetotheagreementifbonafidebusiness
transferagreementANDthetermsofthisagreementarecomparabletoother
arrangementsbetween3rdparties.
c. Thefailuretouseaformulawillleadtothebeliefthatthiswillnotbeanexcepted
agreement.
3. AdjustmentsforDiscount
a. DiscountforMinorityInterest
b. DiscountforLackofMarketabilityThiscanbearguedwhetherornotyouhave
controlofthecompany.Ifyouhave51%therestillmaybeadiscountbecause
thereisnomarketforthepercentageshare
Note>Thereisawiderangeforthediscountstobeapplied.
Thereisarequirementofanappraisaloftheinterestoftheentityweneeda
valuationofthepartnershipinterestinthebusiness.
- Thistakesaccountofanyandallrestrictionsthatmaybeinthepartnership
agreement.
- Theservicedoesnotlikethesediscountsandtheyhavetriedtogetlegislationto
limitthediscounts.
c. OtherSignificantDiscounts
i Fractionalinterestdiscountthiscanbeinpercentagesharesofcommercial
property,timberland,etc.Thisworkswellthepracticeofassetprotection
ii Blockageandmarketabsorptiondiscounts
iii Capitalgainsdiscount
iv Securitieslawdiscount
v Environmentalhazardsdiscount
vi Keypersondiscount
vii Litigationdiscount
d. CombinationofPremiumsandDiscounts
e. NonbusinessAssetsheldinFLPS

and
FLLCs
i

32

AFLLPorFLLCcanbeusedtosheltersomeofthepropertythatwouldnot
necessarilyfallintodiscountsbyforcingthemtobediscounted.Theseentities
willrestricttherightsregardingtheproperty.
ii Useofthiscanreducethesizeoftheestatebyabout40%.Somepeopleraise
thequestionofwhetherornottheformationofthepartnershipitselfcreatesa
gifttosomeonebutwho???
iii Whenyouputthispropertyintooneoftheseentities,thenyouhavetovalue
theentity,nottheparticularproperty.Youhavetobecarefulonhowyoudo
thisyouhavetorespectthepartnershipform.
Alloftheassetsneedtobetitledtothepartnershipandtheincomeshould
gotothepartnershipasopposedtothepartner.
iv TheservicedoesnotliketheseandhasmadeitclearthatcertainFLLPshad
togotothenationalofficeforauditing:
Substantialamountofmarketablesecurities(weallknowwhattheseare
worth,byputtingthemintheseentitiesthedecedentisjusttryingthe
avoidestatetax),
Partnershipscreatedwithinashorttimebeforedeath
makesitlooklikethisisjustadevicetomitigatetheestatetax
theyaretryingtoarguethatthepartnershipagreementitselfisabuy
sellagreementthatshouldnotbeusedinthevaluationoftheproperty,
Powersofattorney
v AnyofthesewillgeneratemoredifficultyinanIRSaudit.Theservicehasnot
hadalotofluckwitharguingthesecases.(CaseinTexasaboutapartnership
formedVERYclosetodeaththecourtfoundthatthiswasokay)
4. 2701Certainkindsofinterestsinpartnershipsandcorporations
a. Corporations
i Apersonwhoowns100%ofcorporationyouwouldrecapitalizewith
commonandpreferredandwewouldcreateaclassofpreferredstockthathas
avalueof100,000.Thenwewouldgiveawaythecommonstocktothe
youngerfamilymembers.Theolderfamilymemberwouldretainthefrozen
capitalandgiveawaythegrowthportionofthecorporation.
ii Thesetransactionsarenolongerworthwhileunderthiscodesection.
iii Thevaluationprinciplethatisappliedisthat
Thecommonstockwillneverbeworthlessthan10%ofthecorporation
and
Thepreferredwillnotbeworththeentireamount.
iv Thestatutemakesyouguaranteearegularrighttopayment.
v Thesearenotworthdoinganymoretoocostly.
vi Onlyapplythissectionifthetransferorretainsthefrozeninterestandgives
awaythepartthatgrows.
b. SowhatwesetupisapartnershipthathasacorpasaGPandallofthemembers
oftheLPhavethesameinterestinthepartnership.Andthisrulehasno
application.
5. 2704TreatmentofCertainLapsingRightsandRestrictions
i

33

a. Ex:Contributed50MofoilandgaspropertyinanLPandtookbackanLP
interestwithcertainrestrictions.TheLPrightsallowedhimtoforcetheLPto
givebacktheproperty,butupondeaththisrightterminated.Whatwasincludedin
theestatetheLPinterest,buthowshoulditbevalued?Andshouldbelookat
themomentbeforedeathorthevalueatthemomentofdeath.Thecourtsaidthat
thevaluethatpassesisthatvaluerightbeforedeath.
b. Invaluingpartnershipinterests,weignorerestrictionsthatlapseuponthedeath.
Thisincreasesthevalueofthepropertyatthetimeofthegiftoftheproperty.
6. 2032.AlternateValuationDate
a. Wearegivenanalternatevaluationdatethisisanelectiveprovision
b. Providesforanalternativevaluationdateof6monthsafterthedateofdeath
c. Wecanonlydothistoreduceestatetaxliabilitythiscannotbeusedtotrytoget
ahigherbasisintheproperty.
7. 2032A.ValuationofCertainFarm,Etc.,RealProperty
a. Introduction
i Normalvaluationsaysthatweusethebestuseforthevalueoftheproperty.
But,thisprovisionallowsustovaluethepropertyatitscurrentuseinsteadof
itshighestandbestuse.
ii Thisprovisionwasbroughtinthe70stohelptheestatesofpersonswhoown
familyfarms(therewasalotofspeculationinlandduringthistimeandthe
valueswereskyrocketing)
b. QualificationsforSpecialUseValuationinGeneral
i anactivebusinessthedecedentwasamaterialparticipantinatleastfiveof
eightyearspriortohisdeath
ii itispassingontoaqualifiedheirandthatpartyisgoingtobeamaterial
participantintheactivebusiness.
iii Onlyallowedtousethisifitisasubstantialportionoftheestate:
50%ofthevalueofthegrossestate
realpropertyitselfhastoconstituteatleast25%ofthegrossestate
iv Thisislimitedtoareductionof850K.So,whenyouvaluethepropertyatits
highestandbestuseandthenitscurrentuseisvaluedmorethan850Kless
thanthat,youarelimitedtothe850.
c. ElectionandAgreement
i Thisisanelectiveprovisionyouhavetoremembertomakethiselection.
ii Youhavetocomplywithalloftherequirementsforthevaluation,nowitis
morelikesubstantialcompliance.
Therearecertainstatuteauthorizedmethodsofvaluation.
d. Recapture
i TheTenYearPeriod
Youareatrisk(for10yrperiod)thatthetaxwillberecapturedifcertain
thingsoccurandtheservicewillimposethevaluationthatwouldhave
beenappliedifthiselectionwasnotapplied.
ii MeasuringtheRecaptureTax
iii LiabilityforAdditionalTax

34

iv BasisAdjustmentforAdditionalTax
8. 6166DefermentofEstateTaxes
a. Youcanelect6166(onlyestatetaxattributabletobusinessvalueincludedinthe
estate)todeferthepaymentofestatetaxforabout15yearsthenyouwillonly
payinterestontheestatetax,thenyoupaytheestatetaxininstallmentsforthe
next10years.Theinterestrateisfixedat2%plus45%ofthecurrentmarketrates
b. Thepurposeofthisistonotputtoomuchburdenontheestatewhenthedecedent
dies.
c. Thissectionalsohasprovisionsthatifyoudisposeofthepropertythenthetax
payablewillbeaccelerated.Thisappliestotheentirevalueofthebusinessnot
justtherealestateportion.
K. 2053Expenses,IndebtednessandTaxes
1. Introduction
a. Wetakethesedeductionstogetdowntothevalueoftheestatethatisreally
availablefordistribution.Thisgetsusdowntothetaxableestate.(also2055,
2056)
b. 2053thisisabouttheexpensesnecessaryincarryingoutthedistributionofthe
estate.
c. Wewouldlookatallofthedebtsthatheowedatthetimeofhisdeathwanting
thosetobeappropriatelytakencareof.Ultimatelywewillbedistributingassets.
d. Wewanttoidentifyclaimsoftheestateandtotalamountofdebt.
e. Technicallyallowstheexpensesoutlinedunder(a).Thelanguageafterthattalks
aboutexpensesallowableunderstatelaw.
i CriticalQuestion:Istheexecutorauthorizedtopaythesethingsoutofthe
estate?Hecanonlyusetheprobateestatetopaytheseexpenses.
ii Alloftheitemsthatpassoutoftheprobateestatewillhavesome
administrativeexpensesitmaybenecessarythatsomeoftheseexpensesbe
paidfromotherpartsofthegrossestate.
f. But,(b)makesitclearthatifwehavesimilarkindsofexpensesthatwouldbe
deductibleiftheyrelatedtoprobateassets,wewillbeabletotakethedeductions
fortheexpensesrelatingtothenonprobateassets.
g. LimitationAmountsactuallyexpended
i Therewilloftenbeexpenseswellbeyondthefilingwecanestimatethese
executorfees,accountingfees,attorneyfees,etc.
ii Ifyouneverpaidtheestimatedamountsyouareobligatedtogobackand
amend.
2. FuneralExpensesveryliberally,includessendingsomeoneandthebodytothe
burialplot.Itdoeshaveareasonablenesslimitationforsomeitemssilvercasket
examplefromthebook.
3. AdministrativeExpensesThecollectionofthedecedentsassets,determining
whatotherclaimsexists,payingoffthoseclaims,anddistributingtheassetsofthe
estate.Thisraisesseveralquestionsastothescopeofwhatisnecessary.
a. Wehavetodrawthelinewithwhatisnecessaryandwhatisnotifthewillis
ambiguoustheremaybemoreexpensesthataredeductible.Thereisaprohibition
35

ofpayingattorneyfeesforthebenefitofthebeneficiary,butwhenthereisa
disagreementorambiguityinthewill,thenthismightbenecessaryandthus
included.
b. Theservicesaysthatcannotdeductalltheadministrativeexpensesarbitrarily
becausetheyareineffectincreasingthevalueofthemaritaldeductionwith
propertyacquiredafterdeath.
i Thedeductibleadministrativeexpensesarelimitedtothevalueofthe
propertysubjecttoclaims.
Thatpartofthegrossestatethatunderlocallawwillbeartheburdenof
suchexpenses,claims,andcharges,reduced,however,byanycasualty
lossdeductionallowedunder2054.
ii Theadministrativeexpensesrelatetotheassetsoftheestatesuchthatit
shouldbedeductibleontheincometaxpurposes.
c. Expensesassociatedwithsellingcertainassetsoftheestateisthisnecessaryfor
theproperdistributionoftheestate.
d. Interestforborrowingfortheestateisthisnecessaryfortheproperdistribution
oftheestates
i Wherewehavehighlyliquidassetsavailable,thenyouprobablyshouldnot
borrowandtheinterestexpensewouldnotbedeductible.
ii Whereyouhaveabusinessinterestincludedintheestateorilliquidassets
thenborrowingmightbenecessary.
iii Thepaymentoftheinterestisaproperpaymentfortheestatetomakeandcan
bededucted.BUTrememberthisisaninterestexpensedeductionaswell.
Youhavetomakeachoiceastowhichdeductionyouwantestatetaxor
incometax.
Thelogicalthingtodowhenyouhaveanestatethatwillnothaveany
estatetaxyouhaveareducedtozeroestatetaxplan,thenyouwillwant
tousethesedeductionsforincometaxpurposes.
.
iv
e. InvestmentExpensesthereareargumentsforandagainstthesebeingdeductible
expenses.
f. Expensestomaintainpropertymaintenanceofthepropertyforpreservation
untilthedateofdistributionisdeductiblebutyoucouldnotdeduct
developmentexpenses.
4. DebtsandClaimsAgainsttheProperty
a. Itmustbeafiledclaiminorderfortheretobea2053deduction.
b. TheServicepositionisthatthisisnotsomethingthattheexecutorshouldpayit
canonlybeclaimsforwhichaproperclaimhasbeenfiled.
c. RevenueRuling6047youcannotdeductaclaimthatwillnotbepaidbecause
thecreditorfailedtofile.
d. 2053(c)(1)(a)ConsiderationforclaimsAnyclaimmustbesupportedby
considerationformoneyormoneysworth.

36

Aseparationagreementwithaspousethegivingupofrightsofsupportis
adequateconsiderationorifitisbasedonjudgmentororderofthecourtthen
itissufficient.

ii
e. Whenaclaimisuncertainyoucanprobablygetanextensionfortheestatetax
filingbecausetheamountcouldbesignificantforexamplealitigationclaim
thathasnotyetbeensettled.
5. Mortgagescanbedeductedwithoutfilingtotheextentofthevalueoftheproperty
thatisincludedinthegrossestate.Theaccruedinterestissomethingowedatdeath
sothereisnoquestionthatthisisa2053(a)deduction.
6. SubsequentEvents
a. Thereisamomentthatwevalueallofthepropertyinthedecedentsestate(DOD)
andthatsamemomentiswhenclaimsarevalued.
b. Butthereisanextentthatwewilltakeintoaccountsubsequenteventsthateffectthe
claimsagainsttheestate.
i Theexampleoftheformerspousewhohasanrighttopaymentsuntilherdeathor
remarriageandshedieswithinthe9monthfilingtimeshouldwetakeherdeath
intoaccountforvaluingthisobligation?
ii Courtsaresplitontheseissueswhenweknowthereisanobligationtopaythe
onlyquestionisthevalueoftheasset
c. Subsequenteventsshouldnotbetakenintoaccountinthevaluationofthedebt
EXCEPTwhenthevalidityofthedebtisquestionableatthedateofdebt.
d. Thecourtsstrugglewiththeseissuestherecanbealotofmoneyinvolved.Givesan
exampleofa5thCircuitcaseInreSmith(???)Itisthevalueoftheclaimatdeath.
L. 2054Losses
1. 2054isverymuchliketheincometaxcasualtylossdeduction.
a. Priortofilingtheestatetaxreturnwemighthaveaneventthatcausesacasualty
loss.
b. Wearelookingforeventsofacatastrophicnature.
c. Thisalsoincludestheft.
d. Welooktotheincometaxrulestodeterminewhatthecasualtyis.Wealsolookto
theincometaxrulestodeterminewhatthelossis.
e. Ataxpayercanonlytakeoneofthetwoprovisionsifhisestateclaimedthe165
deductiononhisfinalincometaxform,thenhecannottakethisdeduction.
2. FMVbeforetheeventFMVaftertheevent=casualtyloss.Thisislimitedtothe
FMVbeforetheevent.
3. Alternativevaluationwilltakeintoaccountthereducedvaluesothatyouwillnotbe
abletotakethisdeductionifyouhavechosenthealternativevaluationdatewhich
wasafterthecatastrophicevent.
M. 2055CharitableDeductionsthisislimitedtothevalueofthepropertytransferredto
charity,butitisunlimitedinthesensethatitisnotsubjecttopercentagerestrictionssuch
asareapplicabletotheincometaxdeductionforcontributionstocharity.
1. QualifiedRecipients
a. InGeneral
37

Thecharitablecontributionmustgettothecharitybywayofbequest,legacy,
devise,ortransferbythedecedent.
ii Therewillnotbeadeductionwhenthedecedentswillfailstoidentifya
particularqualifiedrecipient.
iii Policy
Charitableorganizationsperformservicesthatareusefultothenation,
servicesthatmightotherwisehavetobepaidforoutoftaxrevenues.
Generallytakeoneoftwoforms:
Exemptionoftheorganizationfromtax
Adeductionfortaxpayercontributionstotheorganizations
b. 2055(a)Organizations
i TheUS,theseveralstatesandtheirpoliticalsubdivisions,andtheDistrictof
Columbia
ii Corporationsorganizedandoperatedexclusivelyforreligious,charitable,
scientific,literary,oreducationalpurposes
iii Trustsandcertainfraternalorganizationsbequestsonlydeductibleifthey
aretobeusedsolelyforcharitableandrelatedpurposes.
iv VeteransOrganizationsincorporatedbyanactofCongressandtheirlocal
chaptersandposts
c. Weseemoredonorscreatingtheirownprivatefoundationsthatarequalified
charities.
i Thiscarrieswithitsomeexpenseyouwouldwantatleast1milinorderfor
thistobeworthit.
ii Thereisalotofcompliancethatisrequiredwiththese.
Iftheprivatefoundationisnotincompliancetherewillbeapenalty.
Theseareheavilyregulatedthereisalotoffilingthatisrequired.
iii Thesecanhelpfamilymembersifyounameanadultchildtorunthe
foundationtheywillbeentitledtoasalaryandanynecessarytravelbenefits.
PrivateFoundationshavetodistributeacertainamountoftheassetsevery
year.
2. TransferstoCharity
a. OutrightTransfersdecedentleavescashorotherpropertyreasonably
confidentthatestatewillgettheexpecteddeduction
b. IndirectTransferswhenthetransferoccursasaresultofawillcontest,an
assertionofanelectiveshare,orareformationofawill,inamannerthat
otherwisequalifiesforacharitabledeductionandifitiscondonedbythelocal
courts.(ifitlookslikeitissimplyacollusiveefforttoqualifypropertyforthe
deductionitwillnotbeallowed.)
c. Disclaimersifyouhavethelifetimeinterestinapropertywhoseremainderisto
gotocharity,youcanmakeaqualifieddisclaimeroftheinterestandgetthe
charitablededuction.
d. PropertyOverWhichDecedentHadaPowerthereisadeductionforproperty
thatisbroughtintotheestatebymeansof2041whenthepowerisexercisedin
favorofaqualifiedorganization.
i

38

e. LifetimeTransferspropertythatisbroughtintothetrustunder2036willqualify
forthecharitabledeductionifthepropertygoestoaqualifiedorganization(ex
lifetimetransferofresidencetotheRedCross,reservingtherighttoitsusefor
life,thepropertyisincludedinthegrossestatebut2055canbeusedtooffsetit)
3. TheAmountofDeduction
a. InGeneraldateofdeathvalueofthepropertyistheamounttobededucted
b. ExpensesofanEstateAffectingtheDeduction
i DeathTaxesyouhavetotakeoutwhatevertaxeswerepaidoutofthese
bequestsinordertodeterminethecharitablededuction.Thedeductionhasto
betheamountthatthecharityactuallyreceived.
ii AdministrativeExpensesandClaimsamountofdeductionisreducedtothe
extentthatanyofthesepaymentsweremadeoutofthepropertypassingtothe
charity.Note>Transmissionexpensesv.ManagementExpenses
ManagementExpenseswouldhavetobepaidevenifthedecedentwasstill
aliveandthuswouldnotreducetheamountofthededuction.
4. SplitInterests:MixedPrivateandCharitableBequests
a. Background
i Theseallowthedecedenttotakecareofhissurvivorsandtakeadvantageof
thecharitablededuction
ii Theconcernhadbeenthattherewouldbemanipulationoftheinvestment
policyyouwanttomakesurethateverythingwasproperlyvalued.
b. PresentLawonlyallowedincircumstancesinwhichthevaluationuncertainties
arisingoutofthebeneficiariesincomerightsandthetrusteesinvestment
discretionareminimalornonexistent.
5. QualifiedRemainderInterests
Note>Inorderforaremaindertrusttoqualify,itmustmeetalloftherequirementsof
onetrustandnotmixandmatch.
a. TheCharitableRemainderAnnuityTrust
i AnnuityTrustRequirements
Afixedamountatleastannuallythatcannotbelessthan5%normore
than50%oftheinitialFMVoftheassetsthatgointothetrust.
Annuitymustbeforthelifeoftheannuitantorforatermofyearsnotto
exceed20years.
Theremaindermustgoinwholeorinparttoaqualifiedorganizationor
heldintrustfortheorganizationsuse.
Thevalueoftheremaindermustbeatleast10%oftheinitialFMVofthe
propertyplacedinthetrust.
ii TheAmountoftheDeductionthenetFMVofthecorpusofthetrustlessthe
valueofthenoncharitableinterestinthetrust.
b. TheCharitableRemainderUnitrust
i UnitrustRequirements
afixed%oftheannualFMVoftheassetsinthetrustthatcannotbeless
than5%oftheannualFMVoftheassets
Mayhavemultiplenamednoncharitablebeneficiaries
39

 Eachnoncharitableinterestmustnotextendbeyondthatbeneficiaryslife
oratermofyearsnottoexceed20years
Noothernoncharitableinterests
Theremaindermustgoinwholeorinparttoaqualifiedorganizationor
heldintrustfortheorganizationsuse
Thevalueoftheremaindermustbeatleast10%oftheinitialFMVofthe
propertyplacedinthetrust
ii TheAmountoftheDeductionthenetFMVofthecorpusofthetrustlessthe
valueofthenoncharitableinterestinthetrust
c. ThePooledIncomeFunddonorcontributesmoneytothefundwhichis
commingledwithmoneyfromotherdonorsandthecharityinveststhemoney.
i PooledIncomeFundRequirements
AnnualFixedPayout%determinedbythecharity
Whenthedoneedies,themoneygoestothecharity
Thevalueoftheremainderinterestiswhatqualifiesthisfund.
ii TheAmountoftheDeductionthevalueoftheentireinterestcontributed
lessthevalueoftheincomeinterests
6. CharitableLeadTruststhequalifiedorganizationgetsthefirstinterestwiththe
remainderinterestgoingtoanoncharitableparty
a. Thereisnoimpositionoftheminimum5%interest
b. MustbeeitherAnnuityorUnitrust
c. Notlimitedto20years
d. Thereisnoincometaxreductionbecausethecharitabledoneewillbeexempt
fromincometaxandtheincomeisforthetrustandwillnotbeincludedinthe
donorsincome.
e. ThesecanbeusedtotakeadvantageofcertainGSTprovisionsitwillnot
becomeapplicableuntiltheleadterminates(soyouneverknowCongressmay
repealtheGSTbythetimetheannuityinterestforcharityterminates).
f. Theseareusedmostlybyverywealthyindividualsifinlifeitisprobably
becausetheygivealottocharityandarerunningintopercentagelimitationsand
ifindeathitisprobablytotakeadvantageofGSTprovisions.
g. Theleadinterestiswhatqualifiesthesetrusts
7. ExceptionstotheSplitInterestRules
a. RemaindersinResidenciesandFarms
b. AnUndividedPortionoftheProperty
c. AQualifiedConservationContribution
i Thesearemostbeneficialduringlifethereisanimmediateincometax
reduction170
ii Atdeathyougetacharitabledeductionforthevalueoftheeasementandyou
canmakeanelectionabouthowthispropertywillbevalued2031(c)this
electionwillreducethevaluetobeincluded.Thisallowsyoutoexcludea
portionofthepropertyaswellastakethecharitabledeductionThisiskindof
likeadoublebenefit.
d. WorksofArtandTheirCopyright

40

e. CharitableGiftAnnuity
N. 2056MaritalDeductions
1. Introduction
a. Themaritaldeductionisunlimitedithasnotalwaysbeenthisway,butitisnow.
ItstartedwhenCongresswastryingtoequalizethecommunitypropertystates
andtheothers.
b. Themaritaldeductionismeanttobeataxdeferraltool.So,wewanttoallowa
deductionforitemsthatwillbeincludedintheSurvivingSpousesestate.
c. Themaritaldeductionisgenerallymandatorybutitishardtoimaginewhen
someonewouldnotwanttousethis.
2. GeneralDescriptionTwoBasicFeatures
a. Deductionallowedforanyinterestthatpassesatdeathorthatpassedduringlife
fromadecedentspousetoasurvivingspouse
b. Mustbeadeductibleinterest:
i Itisincludedinthedecedentsgrossestate
ii Itisnototherwisedeductibleundersomeotherestatetaxdeductionprovision.
iii Itisnotaterminableinterest.
3. InterestsPassingtoaSurvivingSpouseAninterestshallbeconsideredaspassing
ifitgoestothesurvivingspouseinthefollowingmanners:
a. Bywillorinheritance(2055(c)(1&2))thisincludesadeductibleinterestthat
goestothesurvivingspouseafterasettlement.
b. Dower(2055(c)(3)thestatutorysharemustbeclaimedbyatimelyfilingunder
statelawtoqualify
c. Transfers(2055(c)(4))anytransferduringlifewillbeconsideredashaving
passedtothesurvivingspouseitdoesnotmatteristheSSwasthedecedents
spouseatthetimeofthetransfer,butitdoesmatterisSSwasspouseatthetime
ofdeath.
d. Jointlyheldproperty(2055(c)(5))thedeductionwillbeallowedforthevalueof
thepropertythatwouldhavebeenincludedinthedecedentsestateatthetimeof
deathtenancybytheentirety.
e. PropertySubjecttoaPower(2055(c)(6))ifdecedenthadapoweroveran
interestandasresultofexercising,releasing,ornonexerciseofthepower,theSS
receivestheinterest.Thegivingofthepowerdoesnotinitselfconstitutean
interestinthepropertypassingtothespouse.
f. Insurance(2055(c)(7))insuranceproceedsthatarepaidouttoSSathedeathof
thedecedent.Thedeductionhingesuponwhetherornottheproceedswere
includableinthedecedentsestate.
g. OtherPassingProblemssupportpaymentswillmeetthepassingrequirements
ifitpassestheterminableinterestrule.
h. DisclaimersmaritaldeductionisforeclosedforaninterestthattheSSdisclaims
causingittopasstosomeoneotherthanSS
4. TheGrossEstateRequirementCanenterthecalculationofthemaritaldeduction
onlytotheextentthatitisincludedindeterminingthevalueofthegrossestate.

41

5. TheValuationofInterestsPassingmustbeundertakenwiththevaluationmethod
andthevaluationdateadoptedforvaluingthegrossestate.
a. TaxesonSurvivingSpousesInterestifinterestspassingtoaSSsharethe
economicburdenofanydeathtaxes,stateorfederal,thevalueofsuchinterests
mustbediminishedaccordinglyincomputingthemaritaldeduction.
b. EncumbrancesonSurvivingSpousesInterest2056(b)(4)(B)
i Mortgages
Ifdecedentispersonallyliableforachargeagainstaproperty,theentire
valueofthepropertyisincludedindecedentsgrossestate,butonlythe
valueofthedecedentsequityinthepropertywillbeincludableasa
deduction.
Thisisbecauseitwouldotherwisecauseadoublededuction2053
operatestoreducethevalueofthepropertyforindebtednesswhetheror
notthedecedentwaspersonallyliable.
ii Administrativeexpenses
Themaritaldeductionisreducedifadministrativeexpensesarededucted
under2053.
Themaritaldeductionisalsoreducedbytheamountofadministrative
expensesthataredeductedundertheincometaxasaresultofa642(g)
electionandarepaidoutofthemaritalsharebutarerelatedtononmarital
property.
iii Assumptionofanobligationabequesttoaspouseconditionedonthe
spousesassuminganobligationoperatestoreducethevalueoftheproperty
passingtothespouseforpurposesofthemaritaldeduction.
6. FormulaClauses
a. TypesofClausesdeterminingthefundingfortheCreditShelterTrustandMarital
Trust:
i FractionalBequestaspecificfractionisgiventoeachtrustand.
ii PecuniaryBequestaspecific$amountislefttoonetrustwiththeotherto
receivetheresiduary
iii FormulaFractionalBequestThefractionisafixedformulawiththe
numeratorastheamountyouwanttofundtheparticulartrustandthe
denominatorastheresiduaryvalueoftheestate.
iv FormulaPecuniaryBequestThepecuniarybequestisdeterminedbysaying
thattheamountgoingtothetrustisthesmallestamountnecessarytotakefull
advantageoftheunifiedcreditwhentheformulaisforthemaritaltrustor
maximumamounttotakefulladvantageoftheunifiedcreditwhenthe
formulaisforthecreditsheltertrust.
b. SpecialProblemwithaPecuniaryBequesttoaSurvivingSpouse
i Apecuniarymaritaldeductionbequestusingdateofdistributionvalueshifts
postdeathappreciationfromthesurvivingspousetotheresiduarylegatees,
whoarealsocalledontoabsorbpostdeathshrinkage.
Theestatemustrecognizethegainfortheappreciatedvalueofproperty.

42

 Alternatively,iftheestategoesdowninvaluethemaritaltrustportionwill
bedisproportionatelylarge.
ii Ifthepreresiduarytrustisthecreditsheltertrustusingthedateofdistribution
valuesthenthecreditshelterwillgetonlythe1mil(orstatedamount)and
thenyourmaritaltrustwillhavealloftheappreciation.Alotoflawyersuse
thismethodbecauseitiseasiest.
iii Ifthepecuniarybequestissatisfiedusingtheestatetaxvalueoftheproperty,
thenyoucouldfundthemartialbequestwiththeassetsthathavedepreciated
invaluethiswaythecreditsheltertrustcouldtakeadvantageofany
appreciatedassets.
Rev.Ruling6419IfyouhaveaPreresiduarymaritalbequestthatisa
pecuniaryformulaandtheexecutorisauthorizedtofundthetrustwith
propertyatestatetaxvalue,thenyouhavetomodifyyourfundingmethod
Minimumworthyoucanfundatestatetaxvalue,howeveryoumust
alsolookatthevalueofthepropertyfundingthemaritaltrustatthe
dateofdistributionandtheyhavetobeatleastthesameamountasthe
maritaldeductiontakenontheestatetaxreturn
Aggregatesharingfairlyrepresentativeoftheaggregate
appreciationoftheestate.
Youhavetoadoptoneofthesefundingoptionsoryoulosethemarital
deductionmoststateshaveadoptedasavingstatutesothatpeoplewill
notlosetheirmaritaldeductioniftheydonotstatehowtheywantit
fundedinthewill.
Thisisdesignedtopreventthefundingofthepreresiduarypecuniary
bequestwithalldepreciatedassetsandwillstilleliminatetherecognition
ofgainsandlosses.
c. OutdatedFormulaClauses
7. TerminableInterestRule
a. GeneralRuleandPurpose
i Nondeductibleif:
Theinterestisterminable;
Thedecedenthasalsogivenaninterestinthepropertytoanother;and
Ontheterminationorfailureofthespousesinterest,theotherpersonmay
comeintopossessionorenjoymentofthepropertybywayofthatpersons
interest.
ii Seekstoassurethatthereisatransmissiontaxwhenthepropertyis
transferredtoothersbyallowingamaritaldeductiononlywherethenatureof
theinterestpassingtothespouseissuchthat,ifretaineduntildeath,it
unquestionablywillbetaxedinthespousesestate.
b. IdentifyingTerminableInterests
i Alegallifeestateorlifeinterestisatrust.
ii Aninterestisterminableifitwillfailorterminateuponalapseoftime,the
occurrenceofacontingency,oronthefailureofaneventorcontingencyto
occur.
43

 widowsallowancemustvestatthedateofdecedentsdeathtobe
considerednonterminable
SurvivalClauserenderstheinterestterminableevenifthespouse
survivesbecausetheinterestisdeterminedbasedonthefailureofanevent
tooccur.
c. OtherElementsoftheTerminableInterestRule
i Nointerestinthepropertyhaspassedgratuitouslytoanother
ii Nootherpersonwillacquirethepropertyonterminationofthesurviving
spousesinterestbyreasonofanyinterestthatpersonmayhave.
Musthavepassedtotheotherpersonfromthedecedentforlessthan
adequateandfullconsiderationinmoneyormoneysworth.
iii Themaritaldeductionislostonlyifallthreeelementsoftheterminable
interestrulearepresent.
d. TheExecutorPurchaserProvisionifthedecedentdirectstheexecutorto
purchaseaterminableinterestforSS,thisisaterminableinterestthatisnon
deductible.However,SScanvoluntarilypurchaseaterminableinterestwith
moneyleftoutrighttoher.
e. TheTaintedAssetRule
i Totheextentabequestcanbesatisfiedoutofassetsthatwouldnotqualifyfor
themaritaldeduction,itissosatisfieditisenoughthatthebequestcouldbe
satisfiedoutoftheproceedsofsuchassetsinordertorunafouloftherule.
ii ThisproblemcanbeavoidedbystipulatinginthewillthattheSSsbequest
cannotbesatisfiedwithanondeductibleinterestortheproceedstherefrom.
8. TerminalIntereststhatdoqualify
a. CommonDisasterandRelatedProvisions
ThestatutoryprovisionisthataninterestpassingtoaSSisnottobeconsidereda
terminableinterestifitwillfailonlyupon
i TheSSsdeathwithin6monthsafterthedecedentsdeath
ii TheSSsdeathasaresultofcommondisaster,causingthedeathofthe
decedentaswell
iii Theoccurrenceofeitherofsucheventsif,inanyevent,suchfailuredoesnot
infactoccur.
b. LifeInterestswithPowers2056(b)(5)
i Thesurvivingspousemustbeentitledforlifetoalloftheincomefromthe
entireinterestoraspecificportionoftheentireinterest,ortoaspecific
portionofallincomefromtheentireinterest
Incomeisdeterminedusingtrustaccounting
Theregulationshavebeenmodifiedsothatwecanusethetotalreturnfor
thepayouttoSS
ii Theincomepayabletothesurvivingspousemustbepayableannuallyorat
morefrequentintervals
IncomemustbecurrentlydistributabletoSSanymandatorydelayin
receiptoftheincomewillrendertheincomenoncurrent

44

iii Thesurvivingspousemusthavethepowertoappointtheentireinterestor
thespecificportiontoeithersurvivingspouseorspousesestate
WhereSShasonlythepowertoappointtohercreditorsthiswillnot
satisfythisrequirement
IfSScanappointalsotoanotherperson,theexerciseofherpowerinthis
waywillresultinestateorgifttaxandwillthusnotrenderthetrust
invalid.
iv Thepowerinthesurvivingspousemustbeexercisablebythesurviving
spousealoneand(whetherexercisablebywillorduringlife)mustbe
exercisableinallevents
AnyrequirementthatanotherpersonjoinwithSSinexerciseofthepower
willdefeattheexception.
Tomeetthealleventstestthepowermustariseuponthedeathofthe
decedentandbeexercisable,forexample,beforetheestatemakes
distributionofthepropertysubjecttothepower;butitispermissiblethat
actualdistributiontotheappointeebedelayed.
v Theentireinterestorspecificportionmustnotbesubjecttoapowerinany
otherpersontoappointanyparttoanypersonotherthanthesurviving
spouse
c. InsurancewithPowers2056(b)(6)
i Theproceeds,oraspecificportionoftheproceeds,mustbeheldbythe
insurersubjecttoanagreementeithertopaytheentireproceedsoraspecific
portionthereofininstallments,ortopaytheinterestthereon;andallora
specificportionoftheinstallmentsorinterestpayableduringthelifeofSS
mustbepayableonlytoSS
ii Theinstallmentsorinterestpayabletothesurvivingspousemustbepayable
annually,ormorefrequently,commencingnotlaterthan13monthsafter
thedecedentsdeath
iii SSmusthavethepowertoappointalloraspecificportionoftheamountsso
heldbytheinsurertoeitherthespouseorthespousesestate
iv ThepowerinSSmustbeexercisablebythespousealoneand(whether
exercisablebyawillorduringlife)mustbeexercisableinallevents
v Theamountsorthespecificportionoftheamountspayableundersuch
contractmustnotbesubjecttoapowerinanyotherpersontoappointany
partthereoftoanypersonotherthanSS
d. ElectionwithRespecttoLifeEstateforSurvivingSpouse2056(b)(7)
ThisdispositionofthepropertypassestotheSSonlyaterminableinterestthat,
whencoupledwiththeinterestsgiventoothers,wouldnotqualifyforthemarital
deductionabsentsomeauthoritypermittingustopretendthatthespouseisthe
ownerofthepropertyfortransfertaxpurposes.QTIP
i Thepassingrequirementitmustbeincludedinthedecedentsgrossestate
andpassfromthedecedent.

45

ii Thequalifyingincomeinterestrequirement
IncomeInterest
Musthavearighttoallincomepayableannuallyormorefrequently
commencingatthedecedentsdeath
Spendthriftclausesmaybeallowable
Anannuityinterestisnotaqualifyingincomeinterestexcept:
Anannuitythatisincludedindecedentsgrossestateunder2039
oriscommunitypropertyincludedunder2033,andispayableonly
toSSduringherlife.
Anannuitythatisnotincludedunder2039fordecedentsdying
before1992.
PowersoverPropertyDuringSSslifetime
NorestrictiononSSoranyoneelsehavingapowertoinvadeexcept
thatitbeonlyforSSsbenefit
Anyonecanhaveanongeneralpowerovertheremainderexercisable
onlyatorafterSSsdeath.
Wewanttomakesurethatthepropertywillbeincludedinthegross
estateofSS.
iii Theelection
ThisisoperativeonlyifanelectionismadebytheexecutorontheEstate
TaxReturn
Ifyouareonlyelectingthisforaspecificportionofthepropertythe
portionmustbeexpressedasapercentageorfractionalshareof
identifiablepropertypassingfromthedecedent.
iv Jointandmutualwills
e. SpecialRulesforCharitableRemainderTrustsTheterminableinterestruledoes
notapplytoaninterestinaCRATorCRUTthatpassesorhaspassedtoSSfrom
decedent,ifSSistheonlynoncharitablebeneficiary.
f. InterrelationshipoftheTerminableInterestExceptionstheremaybeanoverlap
betweenthe(b)(5)and(b)(7)trustsmakingyouthinkthatbothwouldworkjust
remember,youcannottakedoubledeductions.
9. TheNonCitizenSurvivingSpousemustuseaQDOTforanydeductiontobe
allowedforanoncitizenspouse.
O. Credits
1. 2010UnifiedEstateTaxCredit
2. 2011CreditforStateDeathTaxthisisgoingawayanditwasrarelyafullcredit
anywayunlessitwasjustapickuptax.Thiscanbeincludedinthecreditsheltertrust.
3. 2012creditforgifttaxpaidongifttaxpaidongiftspaidpriorto1977.Gifttax
paidongiftssince1976aretakenoutwhencalculatingtheestatetaxpayable
includedinthecomputationoftheestatetax.
4. 2013availableinestatesofpersonsdyingthatisincludedintheestateofsomeone
dyinginthepast10years.Alsoavailableifitisincludedinanestateofsomeone
dying2yearsafterD.Thesewillberemainderinterestsandretainedlifeestates,etc.

46

5. 2014creditforforeigntax
6. 2015postponementonthepaymentofestatetaxoncertainremainderinterest.
III.GiftTax
A. 2501:ImpositionofaTax
B. 2511:TransfersinGeneral
1. DirectGiftsoutrightgiftofpropertycash,car,stock,etc.
2. IndirectGiftsExgifttoacloselyheldcompany.Ifyouhaveacloselyheld
companyandyoucontributepropertytothecorporation,itwillbetreatedasagiftto
theextentoftheinterestinthecompanyoftheothershareholders.Thiswillnot
qualifyfortheannualexclusionbecauseitisnotapresentinterestashareholder
cannotgettoitrightaway.Alsoincludesgiftsintrust,giftsmadethroughstraw
persons,dischargeofindebtedness,belowmarketinterestrateloans(orthefreeuse
ofmoney),gratuitousservices,giftsmadebyincompetents
3. PropertyInterestsCovered
a. Remainders
i Whenthedonorgivestheremainderinteresttoapersonthenthevalueofthe
giftisthevalueoftheinterest
ii Ifthepersonisrelatedthenthevalueoftheremainderinterestisdetermined
under2702.
iii Contingenciesgoonlytothevalueoftheremainderthereisstillagift,it
willjusthavealowervaluethanonethatdoesnothaveacontingency.
iv Youcanmakeagiftofacontingentremainderorcontingentreversionary
interestthatyouown.Againvaluewillbelowdependingonthelikelihood
ofthecontingency.
b. UncertainInterestsjustbecauseitisuncertaindoesnotmakeitanylessagift
itwilljusthavealowervalue.
c. InsuranceandAnnuities
i Apurchaseofapolicyforthebenefitofanother,thetransferofanexisting
policytoanother,orthepaymentofpremiumsonanexistingpolicyownedby
another,mayallconstitutegiftsiftheonemakingthepurchasetransferor
paymentretainsnocontroloverthepolicy.
ii Ifhehasanyindiciaofownershipatthetimeofhisdeath,theproceedswill
alsobeincludedinhisgrossestate.
4. WhenaTransferisCompletewhenthedonorhasrelinquishedalldominionand
controloverthetransferredproperty
5. RevocableTransfersthisisthegreatestcontroladonorcanretainovertransferred
property.Youmustlooktoeachinterestinpropertytoascertainifthedonorhas
retainedanypowertorevokeeachinterestisdeterminedonitsown.Oncethedonor
terminateshisrighttorevoke,thenthegiftiscomplete.
6. PowertoChangeBeneficiariesanypowerheldbythedonorovertheproperty,
evenifitdoesnotincludetheabilitytotransferthepropertyforthebenefitofthe
donor,leavesthegiftincomplete.Thegiftwillnotbecompleteuntiltodonor
relinquishesthispower.

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7. PowertoAlterTimeorManner
a. Ifthedonorhasthepowertoaccumulateincomeinatrustinwhichtheincome
beneficiaryandtheremaindermanarethesameperson,thenthegiftiscomplete
whenthetransferismade.
b. IfthedonorhasthepowertoaccumulateincomeinatrustinwhichAisthe
incomebeneficiaryandBistheremainderman,thegiftoftheremainderis
completeuponissuance,butbecauseincomeinterestisalterableitisnot
complete.
8. DonorsPowerExercisableOnlywithThirdPersons
a. Iftheonewhomustconsenthasnoeconomicinterestinthepropertyinterest
subjecttothepower,thenitisnotacompletegift.
b. Iftheonewhomustconsenthasanadverseinterestintheexerciseofthepower,
thenitisacompletegift.
9. PowersHeldOnlybyThirdPerson
a. Generally,aslongasthedonorhasnotretainedanycontrolovertheproperty,this
isacompletedgift.
b. Ifthethirdpartyisrequiredtodistributeincometothedonorasnecessaryforhis
support,thisisanascertainablestandardandwehaveacompletedgiftonlytothe
extentthevalueothecorpusexceedsthevalueofthedonorsrighttosupportand
maintenance.
c. Ifthetrusteehasthepowertodistributeathisdiscretion,thenaslongasthedonor
hasnocontrol,thenwehaveacompletedgift.But,ifthedonorscreditorshave
accesstothecorpusorincomeofthetrust,thenitisnotacompletegift.
d. Ifthedonorhasanycontroloverthedistributionswhatsoever,thenitisnota
completedgift.
C. 2702:ValuationforTransfersofInterestsinTrust
1. TheGeneralRule
a. 2702merelyeffectsthevaluationofremainderintereststhisonlyapplieswhen
thetrustorremainderinterestistobenefitfamilymembersandaretainedinterest
inthedonor.
b. 2702(a)(2)Valuationofretainedinterest:
i ingeneral,anyunqualifiedinterestwillbevaluedatzero
ii valueofanyretainedinterestwillbevaluedunder7250
2. Exceptions:
a. Ingeneral
i Ifsuchatransferisanincompletegift
ii Ifsuchatransferisatransferofaninterestintrust,allofthepropertywithin
thetrustisapersonalresidence
iii Totheextenttheregulationsprovidethatsuchatransferisnotinconsistent
withthepurposeofthissection.
b. QualifiedInterest
i Consistsofarighttoreceivefixedamountspayablenotlessfrequentlythan
annuallyGRAT

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ii ConsistsofarighttoreceivefixedpercentageoftheFMVoftheproperty
GRUT
iii NoncontingentremainderiftheotherinterestareeitheraGRAToraGRUT
Thesepreventtheportionretainedbythegrantorbeingovervalued.
3. TheJointPurchaseRule2702(c)(2)
a. Iftwoormorepersonspurchasepropertysuchthatonepersonpurchasesthe
incomeinterestandtheotherpurchasestheremainderinterest,thenitwillbe
consideredasifthepersonbuyingtheincomeinterestisbuyingtheentire
propertyandgivingtheremainderinteresttotheotherwiththeremainderbing
valuedat100%oftheproperty.Theamountpaidinbythedoneewillbe
considerationlikeapartsalepartgift.
b. Thepurchaseofaremainderinterestfromarelatedpersonwillbetreatedthe
sameway.
c. Theremainderinterestsinthesetwosituationswillnotbecaughtby2036.
D. 2512:ValuationofGifts
1. Timingthevalueofthegiftisdeterminedatthedateofthegift(thedateof
completion)
2. PremiumsandDiscountsforInterestsinProperty
a. PremiumsforControlIntereststhisapplieswhenthedonortransfersa
controllinginterest,butitdoesnotapplywhenthedonortransfersaminority
interestthatwillgivethedoneecontrolwhenitisaddedtohisothersharesofthe
company
b. DiscountsforFamilyLimitedPartnershipsWhenwelookatthegiftproperty
value,wewillnotlooktothefactthattherestoftheinterestsinthepartnership
arefamily.
c. Discountswetakediscountsforminority,marketability,andnocontrol.This
canbeahugeestateplanningtooltogetthepropertyoutofyourestatewithout
usingallofyourunifiedcredit.Thediscountwillbehigherifitisanactual
businessorrealestate.
3. ConsiderationforaTransfertheamountbywhichthevalueoftheproperty
exceededthevalueoftheconsideration
a. Mustlooktoseeifitwasabonafidebusinesstransactionwithoutdonativeintent.
b. Theburdenisonthetransferortoshowthatthereisnodonativeintent.The
donativeintentispresumedundergifttax.
4. OtherReceiptsforMoneysWorththedoneepaysthegifttax
a. NetGiftthegiftismadeontheconditionthatthedoneepaythegifttax.The
giftisthevalueofthepropertylessthegifttaxpaid.
b. Thisisapartgiftpartsaleandtherewillbeagainrealizedbythedonortothe
extentthatthegifttaxexceedsthedonorsbasisintheproperty.Heisallowedto
lookathisentirebasisunlessitisagifttoacharitableorganization,inwhichcase
hehastoallocate.
E. 2514:PowersofAppointment
1. GeneralPower

49

a. Thebasicruleisthatthegeneralpowerisonethatcanbeexercisedinfavorofthe
possessorofthepower,thepossessorsestate,thepossessorscreditors,or
creditorsofthepossessorsestate.
b. Exceptions:
i Ascertainablestandardapowerthatisexercisableinfavorofthepossessor
asneededforhissupport,medicalexpenses,educationalexpenses
ii Pre1942Powersiftheyareexercisablewithanotherperson
iii Post1942Powersiftheyareexercisablewithanotherpersonifthatperson
is
Thecreatorofthepower
Apersonwithanadverseinterestinthepowerbeingexercised.
Apersonwithanadverseinterestinaportionofthepropertysubjecttothe
poweronlyinrespecttothatportionoftheproperty
2. ReleaseorDisclaimer
a. Areleaseofapowerisconsideredasatransfer,butaqualifieddisclaimerisnot.
b. Aqualifieddisclaimermustmeettherequirementsof2518mustbemet.
i Cannotbedisclaimedafterithasbeenaccepted
ii Generallymustbewithin9monthsofcreationofthepower
3. LapseofPower
a. ingeneraltreatedasarelease
b. 5or5Powerappliestolapsehereaswellandifthepowermeetsthe5or5rule
thenitwillnotbeconsideredarelease.
F. DisclaimersandTransfersBetweenFormerSpouses
1. 2516CertainPropertySettlements
a. Ifyouenterintoanagreementanddivorceoccurswithina3yearperiodstarting
oneyearpriortotheagreement,thefollowingtransfersmadepursuanttothe
agreementwillbetreatedasaforadequateandfullconsideration:
i Insettlementofmaritalorpropertyrights
ii Toprovidereasonablesupportofissueofthemarriageduringminority(Child
Support)
b. 2043tellsusthatthegivingupofmaritalrightsisnotfullandadequate
consideration
i Exceptions(thefollowingareforadequateandfullconsideration):
Givingupofrighttosupport
Ifitisatransfermadepursuanttoadecreeofthecourt
ii 2516,ontheotherhand,allowsagivingupofmaritalrightsthatissubjectto
theagreementsowhathappensifoneoftheotherpartiesdiesbeforethe
transferhasoccurred?Inordertogetthemaritaldeductionithastofallunder
oneofthefollowing:
Itwasatransferindischargeofsupportobligations
Itwasorderedtobetransferredbythecourt
Itfitsundertheprovisionof2516
2. 2518Disclaimers

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a. Purposetoallowapersontodisclaimagiftnooneshouldhaveagiftforced
uponthem.
b. Thisgivesusuniformityfordeterminingdisclaimersforestateandgifttax
purposes
i Otherwiseeachstatewouldbedifferentaccordingtotheirpropertylawsso
itispossibleforyoutohaveeffectivelydisclaimedthegiftaccordingtostate
law,butnotforestateorgifttax
ii Ifyoudonotdisclaiminaccordancewith2518anditpassestothethird
person,itwillbetreatedasagiftfromhimtoanotherperson.Ifthedisclaimer
iseffectiveforstatepropertylaw,lookunderthewilltoseehowtheproperty
wouldhavepassedhadtheinitialbeneficiarypredeceasedthedecedentand
thisiswhogetsthepropertyyouhavegivenagifttothatperson.So,you
mayhaveadisclaimerunderstatelaw,butnotundertaxlaw
c. ElementsofanEffectiveDisclaimer:
i irrevocableandunqualifiedrefusaltoaccept
ii inwriting
iii writingmustbereceivedwithin9monthsofcreation
iv personhasnotacceptedanyinterestofthepropertyoranyofitsbenefits
v passeswithoutanydirectiononthepartofthepersonmakingthedisclaimer
andpasseseithertothespouseofthedecedentortosomeoneotherthanthe
disclaimingperson(itisokayifthespouseisthedisclaimerandbyreasonof
thedisclaimersomeinterestinthepropertywouldgotothespouseitwill
stillbeeffectivenooneelsecandothis,justthespouse)
d. Thespouserulehelpsuswithestateplanning:
i HandWownthebulkoftheirpropertyasjointtenants.Weplannedtheir
willswiththecreditsheltertrustandaQTIP,butHdieswith90%ofproperty
injointtenancy.Thespouseneedstodisclaimanamountnecessarytofund
thetrustthiscanbedoneusingaformula.
ii Thismayalsobeusedtoincreasetheamountofthemaritaldeductionifyou
haveajointtenancywiththeson,youwouldhavethesondisclaimsothatthe
maritaltrust(QTIP)willbesufficientlyfunded.Note>childcanonlydisclaim
whattheyareinheriting(soyouhavetoconsidertheamountthatisincluded
inthegrossestateofthedecedentv.theamountattributabletotheson.
G. 2503:TaxableGifts
1. AnnualExclusion$11,000peryear,perdonee
a. PurposeoftheAnnualExclusionsothattherewouldnotbeaneedtokeeptrack
ofallthesmallgiftsthataremadeduringtheyearthisamountislargeenough
sothatitshouldtakecareofChristmasandweddingandothergifts.
b. IdentificationofDonees
i Giftsintrusttransfersintrustconstitutegiftstothebeneficiaries;asingle
transfertoatrustmayqualifyforseveralannualexclusionslimitedonlyby
thenumberofbeneficiariesandthefutureinterestrule.

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ii Giftstootherentitiesgifttocorporationsisagifttotheshareholders,butit
runsafoulwiththenofutureinterestrule.PartnershipsandLLCsindirect
giftstothemembers.
iii Giftbyanentitydeemedtobefromeachoftheshareholdersandgoes
towardtheirannualexclusionforthatperson
iv Giftstocharitableorganizationsasinglegifttotheentity
v StrawpersonifyoumakeagifttoAandagifttoastrawpersonwhothen
makesagifttoAonegiftandonly11,000willbeexcluded
vi Jointdoneesgenerallyagifttotwopeoplesoyougettwoannualexclusions.
Theproblemarisesintenanciesbytheentiretywhenthespouseshave
differentlifeexpectanciessuchthattheproportionatevalueoftheproperty
willbedifferentyouhavetofindthevalueforeachdoneeandtheyeach
onlygetthe11,000exclusion.
2. FutureInterestsDisqualifiedforExclusionremoteorcontingentfutureinterests
inpropertymaybeverydifficulttovalueandtheultimatedoneesmaybedifficultto
identify.
3. DefinitionofFutureInterestsonethatislimitedtocommenceinuse,possession
orenjoymentatsomefuturedateortime.Immediaterighttouse,possessionor
enjoymentisthetest.
a. SeparateInterestsTestedwhenyouhaveagiftthatismadeupofseveral
interests,theyareeachtheirowngiftandyouhavetoseparatealloftheinterests
andtesteachofthemontheirowntodetermineifitisafutureinterest
b. NonIncomeProducingPropertyifagifthasnovalue,thenitwillhaveno
valuefortheexclusionifvaluationisprevented,thenexclusionisprecluded.
c. PowersAffectingPresentInterestsifthereisapowertoinvadethepresent
interestforthebenefitofsomeoneotherthanthatbeneficiary,thenthereisno
annualexclusionbecausethegiftcannotbevalued.
d. BriefPostponementofEnjoymentanypostponementofenjoymentdefeatsthe
exclusion.Ifthereisagiftofincome,theincomemustbeassuredandnotthe
mereauthorityofthetrusteetodistributeincome.
e. RighttoEnjoymentSufficesallweneedistherighttothepossessionor
enjoyment,theredosnothavetobeactualpossessionorenjoymentgiftofa
trustwithgeneralprovisiontoaccumulateincome,butbeneficiaryhastherightto
drawdowntheincomeorcorpusastheywish.
f. CrummeyPowersaninterestwillhavethestatusofpresentinterestifthedonee
isalsogivenCrummeyPowers.
i Powersgiventobeneficiariestodemandoutrightownershipofpropertyheld
intrustthisispremisedonthetheorythatthepresentrighttopossessis
equaltopossession.
ii Crummeypowerssaythateachbeneficiarycanwithdrawhisproratashareof
thegiftmadetothetrust,butweusuallydonotwantthemtoexercisethese
powerswhentheyaregranted.Thispresentstheproblemoflapsesowe
restrictthepowerto5or5Rulesothattherewillbenogifttaxliabilityonthe
partofthebeneficiary.

52

iii IrrevocableLifeInsuranceTrust(ILIT)
Inthecreationofalifeinsurancetrust,weusewithdrawalpowersfor
distributionssothatthereisanimmediaterightapresentinterestforthe
annualexclusion.
Alifeinsurancetrustwillnothaveanythingtodistributeforawhile,butif
thebeneficiarieshavethepowertoinvadethenitisokaythuswegive
themCrummeyPowers.
Wedonotwantthebeneficiariestoexercisetheirpowersoweaddthe5
or5restriction,butthereisafurtherproblemherewhenthepolicy
premiumsarebeingpaidthedonorwillnotgettotakefulladvantageof
theannualexclusiontotheextentitismorethanthe5or5restrictionof
theirpower.SowecreateHangingPowers.
HangingPowersonlyallowsthepowertolapseforthe5or5andthe
otheraccumulates.
Themorepowerholdersyouhave,thebetterbecauseitreducesthepro
ratashare.Thesepowersgoonlytothepeoplewhoarebeneficiariesofthe
trust.Wedonotwanttogivethispowertopersonswhohavenoother
interestinthetrustthecourtshavenotruledonthis,buttheservicehas
saidthatthesepowerswillbepresumedtobeillusory.
iv Theservicehastried(unsuccessfully)tolimitthesepowers:
Cannotbeillusorybecauseoflackofknowledgeorunreasonabletime
withintoexercisetheright,
Holderofthepowermusthaveasubstantialeconomicinterestinthe
propertycourtshavenotletthisfly
Shouldnotberecognizedwhereitisshownthattherehasbeena
prearrangedunderstandingthattherighttowithdrawalwillnotbe
recognized
g. QualifiedTuitionProgramsandEducationSavingsAccounts
i QualifiedTuitionProgramsyoucangetupto5timesyourannualexclusion
perbeneficiaryandthenyouspreaditoutoverthenext5years.Itistreatedas
apresentinterestandthereisnotaxablegiftwhenitisdistributedtothe
beneficiary
ii EducationSavingsAccountsyouareonlyallowedtocontribute2,000per
yearperbeneficiary,soyoudonothaveproblemswiththeannualexclusion.
Itistreatedasapresentinterestandthereisnotaxablegiftwhenitis
distributedtothebeneficiary.
iii Note>Anytransferofbeneficiariesthatisnotafamilymemberorisina
generationbelowtheoldbeneficiary,itwillbeataxabletransfer.
4. GiftstoMinorsifitisadirectgiftitwillqualifyfortheexclusion,ifitisan
indirectgiftlookto2503(c)
5. SpecialStatutoryRuleforMinorDonees
a. FirstRequirementthepropertyandtheincometherefrommaybeexpendedby
orforthedoneebeforethedoneereaches21

53

thetransfertermsaresuchthatthepropertyanditsincome
areproperlyexpendablefortheminordonee
b. SecondRequirementthepropertyandincomenotsoexpendedwillpasstothe
doneewhenthedoneereachesage21,ortothedoneesestateorpursuanttothe
doneesexerciseofageneralpowerofappointmentifthedoneediesbefore
reachingthatage.
6. MedicalExpensesandTuitionunlimitedamountsoftuitionandmedicalexpenses
foranynumberofdoneesisallowedbutitdoeshavetobepaiddirectlytothe
institution.
7. WaiverofSurvivorshipBenefitsnottreatedasagiftwhenwaivedbeforethe
participantsdeath.
8. LoansofQualifiedArtworknottreatedasatransferifloanedtoaqualifying
organization.
9. GiftTaxReturnsgenerallymustbefiledintheyearthegiftwasmade.
IV. GenerationSkippingTax
A. 2611.GenerationSkippingTransferDefined
1. ThreeTypesofGenerationSkippingEvents:TaxableTermination,Taxable
Distribution,DirectSkip
2. CertainTransfersExcluded:
a. MedicalandTuitionExpensesthatarenottreatedasataxablegiftunder2503(e)
b. Transfersthathavealreadybeentaxed
B. 2612.TaxableTermination,TaxableDistribution,DirectSkip
1. TaxableTerminationtheterminationofaninterestinpropertyheldintrustsuch
thatthepropertygoestoaskipperson.
2. TaxableDistributionanydistributionfromatrusttoaskipperson
3. DirectSkipatransferofaninterestinpropertytoaskipperson
C. 2613SkipPersonandNonSkipPersonDefined
1. Anaturalpersonwhoisassignedagenerationwhichistwoormorebelowthe
generationassignmentofthetransferor
2. Atrust,ifalloftheinterestsinthetrustareheldbyskippersonsandtherearenonon
skippersonswhoholdaninterest(interestbeingapresentinterest)inthetrustorwho
willhaveadistributionfromthetrust.
D. 2651GenerationAssignment
1. Transferoryou,spouse,brothers,sisters,fornonfamily:12olderand12
younger
2. 1stGenerationchildren,niecesandnephews+spouses,fornonfamily:morethan
12to37younger
3. 2ndGenerationgrandchild,greatniecesandnephews+spouses,fornonfamily:
morethan37to62younger(25yearincrements)
4. 3rdGenerationgreatgrandchild,etc.
E. WhenyouhaveaGenerationSkippingtransfer,youwillbetaxedonthattransferin
additiontoyourgifttaxforthetransfer.Youaretaxedonthepropertyinterestthatyou
transfertothatperson.
i

54